Whether you're buying or selling a practice, it behooves you to get a professional appraisal. Here's why.
By Richard S. Kattouf, O.D.
Q I'm in the negotiation process of purchasing a practice. The seller refuses to have the practice professionally appraised. He's a great person, but I'm not confident with his personal evaluation and I don't want to hurt his feelings. What should I do?
Dr. T. K. Frantz, Via e-mail
A: Purchasing a practice may be the largest single business transaction of your life. Would you purchase a house without having it professionally appraised?
Many buyers allow emotion to play a role in their decisions. The fact that the seller is a "nice person" and you don't want to "hurt his feelings" has nothing to do with the fact that this is a business transaction.
Appraisals are important
Don't bid on a practice without having a professional appraiser analyze the practice's profit-and-loss statements, tax returns and bank statements. The seller can't use the excuse that this information is confidential. Consultants and others who appraise practices keep all information strictly confidential.
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The goodwill value of the practice is where the seller has established equity. An appraiser bases his analysis and calculations on factors such as location, years of practice, favorability of lease, reputation in the community, active patient records, the seller's willingness to become a private contractor, retention of staff, collection procedures, cost of goods, percent of salaries to gross, practice growth and net income, just to list a few.
Without the expertise of a professional appraisal, the seller could significantly undervalue the practice or the buyer could greatly overpay. The following two cases prove the points I just made:
Benefiting from proper advice
A senior doctor was grossing $540,000 in a 40-year-old solo practice. He was overpaying his staff and felt his practice value would be diminished so he decided to ask the buyer for $110,000.
The buyer hired me for management consulting services just before closing the sale so I could develop a buy-sell agreement. In studying the profit and loss statements, tax returns, inventory, furniture inventory and accounts receivable, I calculated that the practice value was $270,000.
Had the senior doctor hired me before the sale, I would've taught him how to get his percent of salaries to gross into proper ratio, which would've raised the value of the practice to $365,000. The buyer got a tremendous bargain at $110,000.
Be prepared to insist
A young O.D. who'd been an associate for four years hired me to represent him in buying into the practice, which was grossing $810,000. The senior had a firm asking price of $720,000 and never had a professional appraisal.
At first the seller tried to persuade the buyer that there was no need for a consultant because they were friends and could do the appraisal on their own. The seller even refused to give me any requested financial information until I made it clear that the buyer wouldn't negotiate without the appraisal. The fair market value was $490,000, which gave the seller a fair value and saved the buyer $230,000.
Business is business
You must keep in mind that purchasing practices is business. Emotions and friendships are not part of the equation.
Dr. Kattouf is president and founder of two management and consulting companies. For information, call (800) 745-EYES or e-mail him at email@example.com. The information in this column is based on actual consulting files.