Get to know EBITDA, Goodwill, and the “Big 3” optometry practice valuation Eye care practice valuation
Selling your eye care practice is a huge decision. Many practice owners find there are a wide range of options to choose among, but also that the whole idea of selling can be complicated. Practice owners might want to pursue new ventures, spend more time with family, or simply lower their stress levels. Meanwhile, the want to leave on a high note and ensure the business goes to a caring ownership team.
Assessing the valuation of your practice can seem like an overwhelming endeavor – after all, you put years of your life into it. Are you feeling like you are in the dark about practice valuation as you contemplate a buy-in, buy-out, sale, merger, or exit strategy?
Optometry practice valuation can feel like a blizzard of numbers or a black box, no matter which side of the transaction you’re on, observes Daniel Bernick, JD, MBA of The Health Care Group. Learning some valuation basics can give you the tools you need to choose an appraiser, talk knowledgably with consultants and lawyers, and make business decisions with more confidence, Bernick says.
At its heart, however, valuing a small practice does not have to be that complicated, and most small business owners don’t need or want to make it complicated.
Why Would You Need an Eye Care Practice Valuation?
First of all, let’s start out with why you want to value your practice in the first place, because while the idea of simplifying your life, spending more with grandkids, or pursuing hobbies is nice, there are actually many more reasons than that why you would want to assess a value for your eye care practice.
There are several common reasons why business owners would need to or want to evaluate the worth of their practice:
- When you want to sell your business
- When you are looking to merge or acquire another business
- When you are looking for business financing or investors
- When you are establishing partner ownership percentages
- When you are adding shareholders
- When you are entering divorce proceedings
- In certain tax situations
Each of these cases could entail a different valuation method, and it’s important to realize that not all valuation methods are created equally.
6 Ophthalmology Practice Valuation Methods – Plus the 1 You Should Use
There are many different ways to value a business. Here we will present six common methods that you should be aware of.
- Market value valuation method: This is among the most subjective methods as it determines the value of your practice by comparing it to similar practices that have recently sold. This only really works well, of course, if you can access enough market data on competitors in your particular geographic area. If so, this method might be useful for determining what your practice might be worth, although it is unlikely you would want to base the entire transaction off it.
- ROI-based valuation method: A return on income business valuation method evaluates the value of your company based on your profit and what kind of return on investment an investor could potentially receive for buying your practice.
- Discounted cash flow valuation method: Also known as the income approach, this method values a business based on its projected cash flow.
- Capitalization of earnings valuation method: This method calculates a practice’s value based off its future profitability based on cash flow, annual return on investment, and expected value.
- Multiples of earnings valuation method: Similar to number 4 above, this method calculates a businesses’ maximum value by assigning a multiplier of its current value.
- Book value valuation method: This method looks at your balance sheet to calculate the value of your equity, and this represents your practice’s worth. It may be helpful if your business has good assets but low profits.
The Business Valuation Method You Should Probably Use: The Big 3
While each of these methods has a time and place, according to Bernick, most eye care practices will want to use a much more efficient and much simpler method. Also called the asset-based valuation method, calculating your value comes down to numbers from three categories. They include:
- Hard assets: Also called tangible assets, this includes equipment, physical improvements, your building or real estate (if you own it), inventory, supplies and software.
- Accounts receivable: Money that is owed to your practice by patients or insurers.
- Goodwill: Patient base, charts, phone numbers, your practice’s good name and its familiar location, your workforce, and “all systems go” for future earning potential. Goodwill is an intangible asset(something of value that is not material or physical).
What Is Goodwill?
Goodwill, as you might expect, is the most elusive concept to grasp, but it is very real, say attorneys Robert Wade and Robert Landau of Wade, Goldstein, Landau & Abruzzo, P.C. “Goodwill typically exists where there are barriers to entry into a given industry such that it is worth one’s while to pay someone, over and above the cost of hard assets and accounts receivable, to get into an existing business,” they explain.
As stated, goodwill is an intangible asset that accommodates for the excess purchase price of another company. It can include proprietary or intellectual property, or things like brand recognition – items which are not easy to put a price tag on.
A simple formula for calculating goodwill after a sale is complete is by subtracting the fair market value of liabilities from the fair market value of assets, and then subtracting that figure from the purchase price. Under generally accepted accounting principles, companies are required to estimate the value of goodwill on their financial statements at least once a year.
Some folks may try to downplay or even ignore the value of goodwill if they have a “gloom and doom” view of the health care market because of reimbursement cuts and consolidation in the market. But goodwill is still significant in most ophthalmology transactions, experts say.
When it comes to eye care practice valuation, you may hear or see the term “EBITDA” kicked around. EBITDA is an abbreviation that stands for “earnings before interest, taxes, depreciation, and amortization.”
EBITDA has a number of uses, primarily to measure operating profitability. A company’s EBITDA shows its net income before a number of factors — by removing things like taxes and interest payment, you can get a clearer picture of the operational performance of a business.
You can further use EBITDA by dividing it by revenue to produce a figured called EBITDA margin, which can illustrate a company’s operating profitability.
It’s important to realize that while calculating EBITDA can indicate your practice’s financial well-being, the expenses being stripped away are nonetheless important.
Ultimately, Valuation Comes Down to the Will of the Market
As anyone who has ever sold anything on eBay can tell you, you can value a business all you want, but what it actually sells for depends on two very simple things: A willing buyer and willing seller. In the end, to reach a successful sale, either party may have to compromise on their figures if the market does not support them. If you absolutely need to sell your eye care practice, you probably can’t afford to be stubborn with your numbers.