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Buying and Selling an Audiology Practice: The Basics

Buying and Selling an Audiology Practice: The Basics
Granville Y. Brady, AuD Jr, FAAA
January 31, 2011
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Introduction

Small businesses account for almost 75% of all companies in the United States. The idea of being your own boss is perhaps second only to home ownership as a characteristic of the American dream. As audiologists, being the captain of the ship is an easy idea to grasp. After all, as licensed professionals with advanced training, it is only logical that we ought to plan our patients' care. Yet too many audiologists remain wage earners who work under the direction of another person, usually a non-audiologist.

Before an audiologist decides to open a practice, there are a number of processes that must be contemplated. Why would anyone open a business? The answer to that is easy: to make a profit. If you cannot make a profit, then you are simply trading one set of working conditions for another. Most audiologists would answer that having free time and flexible scheduling are also important. One thing that separates an entrepreneur from an employee is that the entrepreneur can make his or her own schedule. This often translates into 60 or 80-hour weeks, which brings up another point. When asked what is the most important quality an entrepreneur can have, many business owners would reply that good health is a must.

Entrepreneurs are not always successful, however. They may be too trusting and may be cheated by an unscrupulous employee. Entrepreneurs also tend to dislike too much down time. They want to be busy because being busy allows for them to make a profit and develop their business acumen. All of this leads to an image of someone who likes to be in control. As clinicians, we want to be in control of the patient's care and work independently.

Historically, audiology training programs, unlike other professional schools, have rarely taught business skills. When business courses are offered, they are designed to teach the basics of opening a practice. Skills such as accounting, marketing, and personnel management are vital to all professional occupations, including audiologists. But most educational programs do not teach about how to buy and sell a practice.

An audiologist who is interested in buying a practice has few guidelines available. For the audiologist who desires to sell a practice, the same dilemma exists. Quite often the question, "How much can I get for my practice?" goes unanswered. Guidance is available from financial managers and business brokers who may not be familiar with an audiology practice. Often this advice lacks the specificity needed for estimates of the value of a practice that the seller (and buyer) require to make an informed decision. Sometimes a seller will use the "rule-of-thumb" approach in evaluating the practice, which bases the practice's value on approximately what others have paid for similar businesses. Rule-of-thumb is not a reliable way to value a practice because, like real estate, the market has changed. The practice might be worth more or less than what others have paid for similar businesses.

The purpose of this article is to identify the elements needed to evaluate a practice for sale and to give the seller and buyer information that will enable each to make an informed decision. In addition to evaluating a practice, this article will provide information about what steps an owner needs to take to prepare a practice for sale and what steps a buyer should take to prepare for ownership.

Common Goals

At first glance, it might seem as if the practice seller and prospective buyer have distinctly separate goals when negotiating a sale. In reality, both have very similar goals. Both seller and buyer want to see the practice succeed and will do their best to achieve that goal. The potential buyer is seeking to invest in a practice that will yield maximum profits. The seller wants to obtain the most value for his or her investment in time, money and labor. Both parties need to have someone well-capitalized to purchase the office and, ideally, both should be entrepreneurs. Neither seller nor buyer wants to see the other fail.

Basics: Questions the buyer needs to ask

Since the potential buyer desires to break even and show profitability as soon as possible, there are some key questions he should ask before tendering an offer to purchase the practice. The old adage "location, location, location" is as true for an audiology practice as it is for any other type of business. Does the location invite patients? Is there parking and adequate lighting? Is the neighborhood safe? Would I refer my parent to this office? Are there other professional practices in the area that can be potential referral sources?

Another issue that the potential buyer should explore is whether or not the location is in a redevelopment zone. A call to the municipal zoning board can yield that information. Redevelopment zones can be a problem in the future if the existing structures or businesses are fated for another use. The audiology office might have to relocate- something no audiologist wants to do!

Is the office owned or leased? Most audiology practices are leased, so the potential buyer needs to know what the lease terms are. It is usually preferable to have a long-term lease with a landlord who is willing to change the lease holding to the new owner. The potential owner should have the lease terms in writing.

Other issues such as the stability of the area, the socioeconomic makeup of the region and the possibility for expansion should be considered. Finally, is it convenient for the new owner to commute to the location? Unless the owner is familiar with the area, he or she should take a drive from home to the office during rush hour. An hour commute each way now might become intolerable after 20, 25 or even 40 years in practice. Buying a practice is not like taking a job. The new owner needs to ask, "Can I see myself working here in 25 years?"

Basics: Questions the seller needs to ask

Before negotiating a sale, there are some questions the seller needs to ask. Does the potential buyer have enough clinical experience to work independently? Does he or she look like a person who could manage an independent office with all of the tasks entailed in running a private practice? Is the potential buyer someone to whom I could entrust my patients? Does the potential buyer seem credit worthy? There are deep emotional issues involved when an audiologist sells a practice. The practice is not "just a business." It is, in some cases, the culmination of a lifelong profession where the owner has developed personal as well as professional relationships. Selling a practice is like moving from a family homestead. The old owner often feels a separation anxiety that the new owner needs to recognize.

One issue needs to be resolved before closing the sale. The offer of the existing owner to stay on and work the practice with new owner might look enticing. But the new owner should be aware that keeping the former owner on might cause conflicts. New owners have their own management style and the old owner might resent changes that are considered revolutionary. To avoid friction, it is probably better in most cases to allow the new owner to help with a "break-in period" of no more than three months (See Appendix A).

Preparing for the sale

Before the practice can be offered for sale, the owner should prepare an investor packet to give to prospective buyers. Since the investor packet contains proprietary and confidential information, the seller should qualify all interested parties and require that anyone who receives the packet must sign a nondisclosure agreement not to divulge the information to a competitor or use it to compete with the seller (Refer to Appendix B).

The investor packet should include the following documents:

  • Practice description
  • Services provided
  • Profit & Loss—3 years
  • Add backs to net profit
  • Inventory of clinical equipment
  • Number of hearing aids sold and source of sales
  • Percentage owner/employee hearing aid sales
  • Insurance plans accepted
  • Owner's resume
In addition, the seller should be prepared to show a qualified buyer three to five years of corporate income tax returns for the practice.

Explanation and Rationale for Investor Packet Documents

The owner needs to be as forthright as possible about how the practice is organized and the extent to which it is profitable. Unless the practice for sale is the result of the death or disability of the owner, buyers want to be sure that they are getting a viable business for their investment. The owner also has a stake in making sure the documents reflect an accurate financial picture so that the asking price is justifiable.

A written depiction of the practice should be completed and supplied to potential buyers or recruiters. The practice description should be comprehensive and include any audiological, vestibular, consulting, hearing aid and aural rehabilitation services that are offered. Below is an example of a fictional practice description:

Audiology Practice of
Jane Doe, Au.D. (fictitious)

Description of Practice for Sale


This is a two-office, full-service audiology practice in the same location for 27 years. Both offices are in medical/professional buildings located in northern Illinois. The region is home to approximately 4 million people and is situated in the Chicago metropolitan area. Income levels range from moderate to very high with a widely varying age group offering challenges for the right practitioner.

Comprehensive audiology, hearing aid and vestibular services are available to pediatric through geriatric patients. Services include: comprehensive audiological examinations, hearing aid evaluations, hearing aid fittings and follow up, comprehensive otoacoustic emissions, tympanometry, evoked auditory potentials, videonystagmography, and auditory processing disorder (APD) evaluations.

Patients with diagnoses of presbycusis, otitis media, noise-induced hearing loss, acoustic trauma, acoustic neuroma, tinnitus, vertigo and balance problems receive a full range of diagnostic tests. Candidates for amplification are fitted with quality low, mid and high-level digital hearing instruments from several well-respected manufacturers.

The practice currently has two Doctors of Audiology (Au.D.) including the owner. The owner has been a licensed/certified audiologist for 35 years and the associate has been in practice for 6 years. Staff includes a full-time office manager who is a licensed hearing aid dispenser (BC-HIS), a part-time office assistant in the Evanston office, and a full-time receptionist in the downtown office.

Offices are leased in medical/professional buildings in high-traffic areas.

The practice has had an increasing level of revenue throughout the life of the business and is generating income exceeding $950,000. There is no debt.

The seller offers the buyer the following attractive features found in quality audiology practices including:

  • Consistent profit margin (sales/COGS) above 65%
  • Length of time in marketplace
  • Higher percentage of private pay versus third-party pay patients
  • Comprehensive audiology services to all age groups
  • Strong referral base of physicians and managed care insurers
  • Increased revenue growth throughout the life of the practice
  • High percentage of private pay hearing aid sales generated by employee
  • High percentage of existing patients returning for hearing aids
  • Low percentage of accounts receivable
  • Low return rate for hearing aids less than 1%
  • Excellent reputation in the community
  • Excellent potential for growth in commercial/retail market
Income Statement

The income statement or Profit and Loss (P&L) statement is a key document. P&L statements should be provided for at least three years and upwards of five years when possible. This allows the potential buyer to determine how profitable the operation has been historically. An analysis of a P&L history gives information about trends in the practice. If, for example, the practice has had a spike in business the last year, it could signal a red flag that the owner is trying to pump up sales (and value) by mining his patient data base and giving the impression that the business is more viable than it really is. The P&L statements should be reviewed against the income tax reports to check for any discrepancies in reported income against what is reported on the P&L statements.

Add backs

Add backs to net profit are those expenses that would not ordinarily be incurred by the new owner. For many small practices, the owners take certain "perks" to offset taxable income. For example, a generous automobile allowance, salaries to family members who are not fully employed in the practice, and the owner's higher-than-usual salary are some examples of expenses that result in a lower net profit. As will be discussed later, taking the net profit and multiplying it by a variable often determines the value of a practice. In the case of a practice where add backs drain a high percentage of the net profit, the true value of the practice cannot be established.

Another example of an add back that would not be considered by a new owner is an employee-paid pension. If the practice owner has a defined benefits plan, up to $80,000 could be plowed back into the pension as pretax income that would severely restrict the net income. (Brady & Braskett, 2009).

The following list of add backs is included as an example of what might be found in a practice that has a low net profit. In reality, the "true" net profit with add backs is much higher.



Thus, the "true" net income with add backs is considerably higher that what was reported for tax purposes. None of the expenses would be considered inappropriate for a practice grossing in excess of $850,000 annually. Of course, if the practice grossed much less and the add backs were much higher, than the potential buyer might be suspicious of the amount reported. A review of three to five years of corporate tax returns should be completed to look for any discrepancies between the amounts reported and the amounts collected. Tax return information will also show that taxes have been paid. Ask to see copies of liability insurance (malpractice), worker's compensation and state and federal income taxes paid.

Equipment

Although the value of an audiology practice is not usually asset based (i.e., the value of the assets are not considered a basis for the sale price), the clinical equipment should be included in the prospectus. As every audiologist knows, buying new equipment can be an expensive proposition. If the practice has new or nearly new equipment that has been calibrated, the value of the practice is greater than for a business that has little equipment or equipment that is obsolete. Likewise, the type of equipment is a consideration. Income from hearing aid sales is the most lucrative part of most practices, and equipment related to hearing aids is probably the most valuable asset to a new owner. The audiometer and booth should be in good working order. Programming equipment and software should be up-to-date. A good real-ear system is vital for a best practices protocol where hearing aid fitting is involved. Equipment for vestibular testing and evoked potentials might be of value to the audiologist interested in and capable of doing advanced electroacoustic measurements. If the new owner is interested in working with children, a pediatric test system including VRA equipment, toys and APD programs may be useful. Unless the equipment is fairly new, it has probably fully depreciated and is not going to add much asset value. The exception, of course, is a practice that owns the office space. However, commercial real-estate values have plummeted in certain parts of the country, so the asset value of the office might be less than it was historically. When purchasing the office or building, the potential owner should obtain a thorough building inspection and title search.

Hearing Aid Sales

Given that most of the profit from an audiology practice is derived from hearing aid sales, the potential buyer must carefully scrutinize the income from hearing aids. The first question to ask is, "How much income is grossed from hearing aid sales?" This is followed by, "What is the average asking price for hearing aids?" The profit margin for hearing aid sales should be around 65% or higher. If the selling price yields a profit margin of 50% or lower, then the owner is either selling too low or buying the hearing aids (cost of goods sold) too high. In some cases, the practice is undervalued and the potential for greater income by raising prices is good. If, however, the demographics show that the selling prices cannot be raised, then the new owner should think about how much work it would take just to break even.

The owner should be prepared to give a breakdown of the amount of revenue derived from private sales and from third-party or patients on entitlement programs like Medicaid. If the ratio of third-party cases is too high, then the income from this type of payor affects the asking price. Practices that depend upon too many third-party cases are subject to greater volatility than practices that have a solid private-pay base.

The owner should also know how much revenue employees bring in. If a key employee is the largest producer and decides to leave the practice when the new owner takes over, it could negatively affect future revenue. If most of the revenue is obtained by the owner's sales and the owner is able to transfer loyalty to the buyer, then the likelihood of a continued revenue stream is high.

Sources of Revenue

The source of revenue is a key factor in determining the value of a practice. This is often referred to as "good will." In the reality of today's market, patients who use the Internet have replaced much good will. Practices that accept insurance are likely to have more patients than practices that rely on advertising alone. Insurance participation is the future of medicine, and the audiologist who shuns insurance is not going to compete very long. The owner should be able to show the insurance programs accepted for audiological examinations, as well as a list of physicians and other referral sources that use the services.

Records and Billing

Finally, the patient records should be in order. If the practice is computerized, a list of all active patients along with their billing history should be available for inspection. The potential buyer should be able to select records at random to check for their completeness. Billing records should also be checked to determine how well the practice is collecting payments. A payment rate of 95% or greater should signal an efficient operation. If too many cases are bad debts or are written off as uncollectable, the potential buyer should be concerned about the effectives of the business aspect of the practice. No matter how good the owner is clinically, if collections and billing falls behind, the practice will not be profitable.

Getting down to business: How much do you want? How much am I willing to pay?

Evaluating an audiology practice can be tricky. It is advisable for the owner to seek the advice of an accountant or attorney well-versed in selling a professional practice. The accountant or attorney will go through much of what has been discussed in this course. In looking to evaluate a business, there are several methods commonly used.

Asset value is used when a business has a large inventory or valuable equipment: Large companies prefer printing with expensive presses; automotive repair and other manufacturing businesses commonly require expensive equipment, inventory and plant facilities. Since none of these are part of an audiology practice, unless the practice manufactures hearing aids, asset value is not usually a basis to determine asking price.

Liquidation value takes into account the value of the fixed assets if the business were forced to sell within a year. Most audiology practices are viable at the time of sale and are not valued by this method

The comparable selling price of a similar business is another way of determining value. Some corporate audiology businesses and manufacturers use this approach when making an offer. It takes into account the amount of wholesale business a practice does compared with similar operations. While using a standard measure, it does not take into account other types of income from diagnostic testing, the value of equipment or source of business. Since no two practices are exactly alike, it is too broad an approach for most small audiology practices. This approach is similar to assessing real estate values based on comparables or "comps."

Income multiple uses a formula multiplier to arrive at a value based upon the net income of the practice. It takes into account the owner's profit, the owner's benefits (add backs) and cash flow. Since nobody can predict future earnings, a historical review of the owner's income (salary and benefits) is needed before the buyer can reasonably expect to make the same amount after taking over the practice. The income multiple formula looks at:

Practice value = (Pre-tax profits + owner's salary + add backs from perks + interest income + depreciation) - (allowance for capital expenses)

The total is then multiplied by a factor of one to three times to arrive at a fair asking price. Richard Parker (2010) refers to this number as "Owner Benefits" which is the amount that the business has generated, historically. Although it is not predictive, if the practice has a good track record, it is reasonable to believe that the new owner would generate about the same amount of income.

A multiplier is used to arrive at a selling price that is one to three times the Owner Benefits. For practices that are essentially one owner, the multiplier is lower since the theory is that the seller is the corpus of the business, and that the patients will leave when the owner leaves. This can be countered by having the owner stay on for a short time, host a patient open house, and have the owner introduce the buyer to his or her key referral sources. In cases where an employee buys the practice, the value is increased since many patients are already familiar with the audiologist-employee.

A greater multiplier can be used for practices with a strong history of profitability and increases in revenue. For example, a practice with more than one employee, multiple offices and revenue increases of 4-6% annually would be valued at 2-3 times the Owner's Benefit. Whereas a small, one-office practice with a single practitioner might have a multiple value of 1 times Owner's Benefit. As the Owner's Benefit increases, so does the multiplier. For example, an Owner's Benefit of $200,000 might be have a multiplier of 3 times, but a practice with an Owner's Benefit of $500,000 could be worth 4 to 5 times the multiple.

Examples of Income Multiple

Practice 1


Let's look at two practices. Practice 1 is a one-lease office, one-man operation that opened 18 years ago. Revenue has been stable but slow to grow. About half of patients are third-party entitlement cases. Owner's Benefit is $134,100:



Using a multiplier of 1.5, the value is about $201,000

Practice 2

Practice 2 is a two-office full-service audiology practice with two full-time Doctors of Audiology, one full-time office manager (owner's wife) and two part-time receptionists. The practice was opened 22 years ago and has shown consistent growth in revenue averaging 3-5%. Owner's Benefit is $351,651



Using a multiplier of 2.5 the value is about $879,000.

Is Practice 1 worth only $200,000 and Practice 2 worth almost $900,000? Market conditions, economic trends in health care, competition from other hearing health care providers, the location of the offices and the overall cost of living have an effect on a practice's value. The figures cited should not be construed as absolute. For the buyer who sees great potential in a stale practice, the value might be higher. For the seller who is anxious to retire to play some golf, a lower offer at the right time is just fine. The old adage in the real estate business is "the first offer is usually the best offer." An audiology practice is worth only what someone is willing to pay for it. Valuations are not based on scientific discovery. If the buyer is interested only in price, then no dollar amount will make the practice worthwhile. As anyone who has ever been in private practice will attest, it is not the price but the calling that is priceless. For the audiologist with the calling, nothing can beat private ownership- at any cost!

References:

Brady, G.Y., & Braskett, R.J. (2009, November 16). Planning ahead - Retirement benefits for an uncertain future. Audiology Online, Article 2302, Direct URL: www.audiologyonline.com/articles/article_detail.asp?article_id=2302

Parker, R. (2010). How to value a business. BizBuySell. Retrieved September 27, 2010, from www.bizbuysell.com/guide/buyguide_06.htm

Appendix A: Buying & Selling an Audiology Practice Checklist

Questions the Buyer should Ask


  • Is the location a good one?
  • Is the office leased or owned?
  • If leased, what are the terms?
  • If owned, what are the taxes and operating costs
  • How far is it from where you live?
  • Will I want to commute here in 5, 10, 15, 20 or more years?
  • Is the area stable economically?
  • Is the area slated for redevelopment?
  • Can I expand if needed?
  • Does the office look nice and inviting?
  • Would I feel comfortable being a patient here?
  • What is the makeup of the community (demographically, ethnically, socio-economically)?
  • Can I see myself working here in 25 years?
Questions the Seller should Ask

  • Does the potential buyer have enough clinical experience to work independently?
  • Does the potential buyer look like he/she would be able to manage an independent practice?
  • Does the potential buyer seem credit worthy?
  • Has the potential buyer had significant experience in the field?
  • Is this a person I could leave my practice to without worry?
What the Seller needs to prepare before offering the practice for sale

  • Investor packet
  • Letter to prospective buyers with general information about the practice
  • Non-disclosure agreements for prospective buyer to sign
  • Description of the practice
  • Services offered
  • Types of referral sources
  • Contracts with third parties
  • Personnel information
  • Resume of owner
  • Ratio of sales by owner and employees
  • Insurance plans accepted
  • Sources of business (private pay, insurance, entitlement)
  • Income statements of past 3-5 years
  • Current balance sheet
  • Tax returns from prior three years
  • Add backs to net profit
  • References
What the Buyer needs to prepare before offering a price for the practice

  • A funding source (bank loan, equity, personal savings)
  • An accountant's analysis of the practice's financial reports
  • References from suppliers
  • Contact with potential referral sources
  • Discussion of extending lease terms with the landlord
  • A thorough review of competing practices in the area
  • An inquiry with the state licensing board to determine if the owner has had any licensing violations
  • Statements from Medicare, Medicaid and insurers to determine if the owner has not been guilty of insurance fraud
  • A review of selected patients files to determine how well records are kept
  • A cash flow analysis of the past three years
  • Income statements showing profits and profit margins for the practice from three years
Appendix B

View PDF of Appendix B
Signia Xperience - July 2024

granville y brady

Granville Y. Brady, AuD Jr, FAAA

licensed audiologist and speech-language pathologist with offices in Clifton and East Brunswick, NJ

Granville Y. Brady, Jr., Au.D., F.A.A.A. earned his Au.D. from Arizona School of Health Sciences. He is a licensed audiologist and speech-language pathologist with offices in Clifton and East Brunswick, NJ. Dr. Brady teaches business development and accounting at A.T. Still University. In addition to his clinical experience, Dr. Brady has served as councilman and finance chairman for the Borough of Somerville, NJ and was responsible for the budget, insurance and retirement operations of the municipality. He serves as treasurer of the Audiology Foundation of America.



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