Question
How can I sell a very active practice with average $200K net income per year and how much should my asking price be?
Answer
This is a simple question for which the answer is very complicated. First of all, you should do your homework. The asking price can be based on a number of factors including: asset value, liquidation value, income capitalization, what similar practices are worth or a formula based on a multiple of the net income. For this practice, it seems as if a multiple of the net income seems appropriate.
To arrive at the true net income of a practice, the seller (and buyer) should be aware of factors that might reduce the reportable income to the IRS but add to the overall value. These are referred to as "add backs". Add backs are perks that do not always show up on the profit and loss statement as income. For example, the children of a practice owner might be listed on the payroll but do little to build the practice. Likewise the owner's salary and over inflated benefits reduce the reportable net income. To arrive at a true net income, the seller needs to list all of the add backs. You might have an additional $50-100K in add backs that the new owner would not incur, thus making the net income plus add backs higher than originally stated. If we believe that the true net income, including add backs is $200K, then a multiple is commonly applied. Anywhere from one to three times net income is a good rule of thumb. Taking the net income of $200K, the asking price might be anywhere between $200K (1X net) to $600K (3Xnet). In these economic times, a factor of 1.5 - 1.75 or $300-$350K might be a realistic asking price.
For more information, please register for Dr. Brady's upcoming AudiologyOnline seminar entitled, Buying or Selling a Practice? What You Need to Know on Wednesday, January 12th, 2011 at 12pm EST. Can't make the live course? View the recording in our Recorded Course library (available after the live session) at your convenience.
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.
