Question
What are the most common ways to establish the "worth" of a practice in order to work with a prospective buyer? I have heard about - price per file, price based on an average of X years of income, etc. Where are the best resources for this sort of information?
Answer
According to Drullinger (2006) there are two method of practice valuation. Book valuation and historical precedent valuation. A book valuation is the adding up of the assets that practice owns, equipment, building, furniture, computers, inventory, files, etc. Each of these items are valued and considered as a component of the value of the practice. This book valuation generally favors the buyer, not the seller.
This type of valuation works very well for ice cream shops, gas stations, and convenience stores, but it not a very good method for Audiology practice. Although it is necessary to value items within the practice, the biggest asset the practice has is goodwill sometimes also called blue sky, defined as an intangible asset, such as brand recognition or employee morale or patient loyalty. This makes the historical precedent valuation much more necessary. This is a professional evaluation of not just the assets of the practice but a number of factors that deal with the growth, length of time in practice as well as all the accounting factors that prove specific values, then a number or multiple is assigned.
A good reference for this issue is Seminars in Hearing, January 2006 that I edited. The chapter by Randy Drullinger outlines the specifics of practice valuation and the steps to a fair evaluation for both parties.
Drullinger, R.A. (2006). Practice Valuation: The Buying and Selling of an Audiology Practice. Seminars in Hearing, 27(1), 57-76.
Robert Traynor, Ed.D., MBA is President and Audiologist of Audiology Associates of Greeley in Greeley, Colorado. Additionally, he teaches in two Au.D. programs, a basic hearing aids course for PCO and the Business course for the University of Florida. He has presented academic audiology and product lectures in over 40 countries including the United States and is a co author of a forthcoming book, Strategic Practice Management due Summer 2007. Dr. Traynor is also a Contributing Editor for Audiology Online.