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You have been successfully running your practice for a number of years and now it is time to transition it to someone else. This can be a daunting process as you wonder “Where do I start? and how does the process work?” You are also likely asking yourself the very important question – what is my practice worth?
Selling your practice is one of the single biggest decisions you will make. Balancing your need for sufficient funds in retirement with your desire to see your practice continue will add complexities to the process. However these complexities can be managed and surmounted once you obtain a clear understanding of the valuation process and what your practice is worth.
When selling your home, would you put it on the market without knowing its value? Probably not, you would likely engage a real estate agent to assist you to maximize the price obtained. At MNP we have highly qualified professionals that can assist you in managing your practice transition plan.
The value of your Practice is driven by the cash flow generated, the assets it owns and a number of other considerations. To assess the value drivers, MNP starts by gathering financial information and having in depth discussions with you so that we can fully understand the practice operations. Some of the items we need to examine, include:
Practices are often valued using a cash-flow based approach as there is commonly significant value in excess of the assets owned by the practice. In a simplistic sense, fair market value (FMV) is maintainable cash flow times a multiple. When you compare this value to the assets owned by the practice, the difference is commonly referred to as goodwill. While the historical operating results of the practice can be used to determine the maintainable cash flow, the determination of the correct multiple is based on the professional experience and judgement of the valuator. Multiples do not transcend industries and they may not be directly comparable within the same industry. The reason is that each practice has different risk factors. For example, old equipment versus new equipment, young patient listing versus older patient listing, sole practitioner versus a practice with multiple associates.
Goodwill is the value over and above the value of the net assets owned by the practice that a potential purchaser is willing to pay for a business. To maximize the price obtained from a potential purchaser you need to be able to identify why your practice has goodwill. Goodwill in a practice can be attributed to:
Goodwill must be commercially transferable for it to have value to a potential purchaser. If the goodwill leaves with the owner when he /she retires, then a buyer will not be willing to pay for it. Dental and veterinary practices typically have a lot of goodwill. Therefore to maximize the price obtained you may need to sign a non-compete agreement – this will prevent you from selling the business and opening up competition next door. It’s also possible you may need to provide financing to the purchaser for a period of time.
If you are thinking of selling there are a number of other considerations such as whether you want to sell 100% of the practice or a portion? Will you continue to work in the practice for a period of time after the sale? Selling a portion of the practice and working in the practice for a period of time can decrease the risk to the purchaser and increase the value of your practice.
You also need to determine whether you are selling shares versus assets or a combination of both. If incorporated, does the sale of your shares in the corporation qualify for the capital gains exemption? Sellers typically like to sell shares (may qualify for capital gains exemption) and purchasers typically like to purchase assets (obtain increased asset base that they can save tax on). The ultimate transaction price will be influenced by the negotiation strengths of each party.
Engaging an experienced and qualified Chartered Business Valuator to assist you in determining the value of your practice is key to maximizing the price received upon sale. MNP has extensive experience working with professionals to value their practices and can discuss ways to maximize the value you can obtain in a sale or succession transaction.
Nadine Wightman, CPA, CA, CBV is a Partner with MNP’s Valuation & Litigation Support group in Saskatoon. Nadine delivers valuation reports and valuation consulting services owners of private companies, insurance companies and professionals in a wide range of industries. Nadine can be reached at 306.665.6766 or [email protected]
Related Topics:Dentists; Valuations; ExitSMART™
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