How Do You Determine the Value of an Audiology Practice

Question

What are the basic parameters that are used to determine the value of an audiology practice?

Answer

Of course any buyer will request a specific set of information to evaluate and value an existing audiology practice. Assuming the goal is maximum valuation and return on investment for the selling audiologist, at least 3 years before one desires to retire and sell his or her practice he or she should begin to prepare the practice for sale. Ten things to know or have to prepare a practice for sale and maximum valuation include:

1. Three years of accurate financial data in the form of a profit and loss (P&L) statement. The P&L should include gross revenue, which represents total practice charges (revenue) before adjustments; all write-offs; net revenue, which is total practice revenue after write-offs and also equals bank deposits; expense detail by category (personnel, marketing, operational, owner/officer compensation, etc.); and finally net profit, which is net revenue minus all expenses. Practice valuation can be based on gross revenue, net revenue and/or an adjusted net profit, which can include earnings before interest, taxes, depreciation, and amortization (EBITDA) or earnings before interest and taxes (EBIT). Additionally, certain owner expenses are typically normalized, which should work to the seller's benefit.
   
   
2. Three years of most recent tax returns.
   
   
3. Year-to-date P&L no greater than 60-90 days out.
   
   
4. Product returns: track hearing aid returns by revenue and units in percent.
   
   
5. Write-offs and adjustments: track third party payor adjustments, non-collectable revenue, and bad debt.
   
   
6. Practice mixes: includes things such as private pay to insurance mix in percent; new to repeat sales mix in percent; service to product sales mix in percent; and audiologist owner revenue generation as a percent of total revenue to audiologist employee revenue generation.
   
   
7. Practice debt and liabilities: minimize as much as possible as transaction funding is typically on a debt-free basis meaning all debt will be paid out of your earnings and therefore reduce cash in hand. Debt works against the seller.
   
   
8. Profit: maximize net profit in your last 3-4 years by increasing revenue and decreasing write-offs, adjustments, and expenses.
   
   
9. Community demographics: the buyer will likely know them, so it is important the seller know them too, especially if they work to your practice's advantage. Community demographics can alter your practice valuation.
   
   
10. Be prepared to remain practicing as an employee of the buyer. The required time varies significantly between buyers, but it is not uncommon for a buyer to request the prior owner remain with the practice for 6 months to 3 years. This means an employee agreement including negotiations for salary and benefits such as health insurance, license fees, time off, etc. will be part of your negotiations. It is also common for a buyer to request the seller sign a non-compete agreement.

Although not all buyers require all of the detail listed above, what one is paid for his or her practice will depend at least in part on the seller's ability to justify his or her asking price. It is one thing to "want" a million or more dollars for your practice and yet another to justify such a purchase price. There is little room for emotion during negotiations. Organization, detail, and objective data work to the seller's benefit and will assist in achieving a maximum practice valuation.

Kathy Foltner, AuD, is CEO of AuDNet, Inc. She also teaches courses in Practice Management and Basic Business at Rush University Medical Center and PCO. Dr. Foltner can be reached at kfoltner@aud-net.com or 312-593-1787. Visit www.HowToHear.com or www.NowIHear.com for more information.

For more information about AuDNet, visit the AuDNet Audiology Online Web channel.