How much is your practice worth?
By Chad Fleming, O.D.
There was a recent blog post on Inc.com, a magazine for growing businesses, regarding the necessity of a business appraisal. The author's argument was that most buyers do not put much stake in a valuation. True, a business valuation is needed for estate planning, for buying a partner out, for cases of divorce and by a lender's request. When those situations are not the case, the value of a business is based upon the buyer's desire to purchase the practice.
I have had the privilege of working with many optometrists in buying and selling their practices. Unfortunately, I have seen sellers receive a high valuation, and they find themselves unable to attract a buyer. It continues to be a buyer's market.
For example, if an optometry practice on the East Coast has gross collections of $400,000—an average of the last three years—and the practice has not sold for the past 12 months, then is that practice appraisal of $280,000 valid? The author would say the optometry practice appraisal is valid but not reflective of the current market, therefore not practical. I would agree with this and pose the question: Is it necessary to have your optometry practice appraised prior to selling it? An optometry practice appraisal can be expensive and many times irrelevant by the time the practice has an interested buyer and seller. When considering the numerous formulas that have been utilized in practice valuations, why not forgo the academic formulas and look at the market?
It appears, in recent history, that practices are being sold for between 55 to 65 percent of the previous three years' average gross collected. Why not start with this number and negotiate from there? There are many successful practice transitions that have occurred and are continuing to occur without the expense of an optometry practice appraisal. The two parties have agreed that most formulas and the current market put the practice between the 55 to 65 percent range.
If you are purchasing or selling a practice and you do not agree upon this range, then it becomes imperative that you have a mediator who values the practice and brings the two parties together. If a practice valuation is necessary, do yourself a favor and split the cost of the appraisal to receive the most objective results.