The value of a practice may vary significantly from buyer to buyer, depending on each buyer's own analysis of the value of the business. More importantly, assumptions about what the future may hold will also differ and lead to differing conclusions about value. The value in the hands of two people may be completely different because of what each of them plans to do with the business.
In fact, the same is true for valuations completed by valuation professionals. Value may vary between valuation professionals for a number of reasons including:
- The data used
- The methodologies used
- The weight placed on the various methodologies; and
- The overall interpretation of the data.
As the purchaser of a business, you need to feel comfortable that the returns you're getting for your investment are sufficient for you to take on the risk of business ownership vs. other investments you could make.
Ultimately, value lies in the future benefits to be derived from business ownership. Not its history or most recent financial results (adjusted or otherwise).
The primary method for valuation used in the valuation of most professional practices is DCF analysis. This is because it focuses the user's mind on the expected future earnings and benefits from business ownership. However, often 'rule of thumb' methods are surrogates for that type of analysis. Caution needs to be exercised that you do not rely on the rule of thumb method without considering the business outlook for the practice.
Another important factor to consider when valuing a business is the amount of involvement from the owners. If the owners of the practice are active in both a professional and management role, then this will require replacement and consideration should be given to replacement salaries for them. The buyer should definitely take the replacement salaries into consideration, as the buyer's return on investment isn't calculated until after the management salaries are paid. This is common in both the capitalisation of future maintainable earnings and the DCF methodologies. Alternatively, if salaries are not taken into consideration, the discount rate should be adjusted accordingly.
Ultimately all these factors affect the return you'll receive on the investment, and this return must be compared to the return of alternative investment options and the associated risk.
As a purchaser, you need to feel comfortable with the overall return you'll get for your investment in the business-that will produce the correct valuation for you.
For valuation advice on health practices, contact Medici Capital on 03 9853 7933.
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