Financial performance key
The primary driver of practice valuation is financial performance. Unfortunately, this is an area that many ODs do not fully understand, and they are often disappointed in the valuations determined for their offices. Without getting into detail on EBITDA and calculations, here is a quick look at two practices with different financial performances.
Practice 1. Total collections are $1 million, and total EBITDA for the practice is $240,000. If we assume that the doctor will be paid $150,000 in salary after the sale, it leaves $90,000 in earnings. With a multiple range of 4 to 7 times of $90,000 in earnings, the practice valuation would be between $360,000 to $630,000.
Practice 2. Total collections are $1 million and the total EBITDA for the practice is $350,000. If we assume that the doctor will be paid $150,000 in salary after the sale, it leaves $200,000 in earnings. With a multiple range of 4 to 7 times the $200,000 in earnings, the practice valuation would be between $800,000 and $1,400,000.
As you can see, the range of possible purchase prices can be dramatically different based on the financial performance of the practice. Both examples above would typically be in the 4 to 5 times multiple range unless the buyer has a strategic need to buy the practice.
All the other factors mentioned earlier will also impact the final purchase price.
Increase your practice’s value
It is critical to start early to build the value of the practice by working to improve all value drivers. When I work with practices, we use a “foundation of eight” value-building principles that are areas to consider and help increase the worth of a business (See box). John Warrillow mentions these eight principles in his Value Builder System, a guide for selling any business.1
These areas of driving value are not unique to optometry but are universal across all small businesses. By focusing on areas that help drive value, you will naturally increase financial performance and enhance the other factors taken into consideration when determining the final purchase price.
Ultimately, your practice is worth what someone is willing to pay. Instead of asking, “What is my practice worth,” the question you should be asking is, “What am I doing to increase the value of my practice?”
1. Warrillow J. The Value Builder System. Available at: http://valuebuildersystem.com/. Accessed 5/14/18.