Your practice is incredibly valuable to you. “Well, Nathan” – you may say – “of course it is!” But have you ever thought of why it’s valuable?
You spend most days pouring your blood sweat and tears into it: hours and hours of patient care, planning, administration, dealing with staff, and worrying about industry trends and your competition. You know your practice is valuable to because of what you put into it, the same way we know parents value their children because of the energy they expend raising them.
As a consultant, though, I have a different answer to this question. To me, your practice is valuable for three reasons:
- the INCOME it provides you over and above what you’d earn as an employee
- the CONTROL you have as an owner: you get to say how things get done!
- the EQUITY that you can sell when you’re ready to retire
For many owners, control is reason enough
And when it comes to balancing the value of the income versus the equity, I can also tell you that, your practice is almost certainly worth more as a source of income than for the value of the equity. Most practices will sell for about 2 ½ to 3 ½ times the owner’s current income, once you take taxes into account. Think of that as the price to earnings ratio.
Let’s consider two examples, a $700,000 single-OD practice and a $1,200,000 practice with a full-time associate, assuming the sale price for both is 2/3 of their revenue:
Let’s assume this seller can get a 5% long-term rate of return from investing the proceeds the sale. For ease of use, let’s round up and say the sale nets $350,000 after taxes. 5% a year is only $17,500, nowhere close to the income stream the owner is receiving.
In a larger practice the spread is even more pronounced, even though the price to earnings ratio is better. Remember that Practice Net is defined as all the pay and benefits to all the ODs in a practice, so we’ll deduct the associate OD’s comp first.