A practice valuation exercise can enhance the overall optimization of your ophthalmology practice, as well as allow you to comfortably entertain potential acquisition offers. In addition to obtaining an idea of what your practice is worth, the economic climate, competitive landscape, and private-equity infusion of funds should also influence the path you decide to take.
There are three popular methods to valuing your ophthalmology practice: asset-based, income, and market. The asset-based approach involves book value computation. These figures can be obtained from your balance sheet statement, and if clean-cut accounting permits, is your shareholder’s equity value (assets minus liabilities). Your intangible assets, consisting of goodwill, non-competes, patents and others, will require additional due diligence to ensure reasonability. The income approach utilizes the discounted cash flow method. The discounted cash flow methods can be broken into five steps:
- analyzing and normalizing historical financials;
- projecting financials for the next 3-5 years;
- estimating free cash flows;
- determining terminal value; and,
- discounting all cash flows to present value.
The market approach takes precedent transactions into account by providing Revenue and EBITDA multiples of comparable transactions.
The Market Environment
There are several factors to consider when comparing your ophthalmology practice to others: size, specialty, service mix, location, and reputation, to name a few. The demand of private equity allows for higher EBITDA multiples and normally leverages your sale price towards an enticing offer. Other factors to consider in the market environment are health care reforms, reimbursement rates, alternative business models, and patient demographics.
The Buying/Selling Process
The typical buying/selling of an ophthalmology practice is a process that consists of: forming a strategy, creating a target list, initial contact, sharing confidentiality agreements, conducting due diligence, formation of a letter of intent, negotiation, financing, and closing, followed by integration.
These steps should be executed mindfully as they constitute what may be one of the largest transactions you ever make. Proper accounting, goal-oriented strategy, and unbiased opinions will guide you accordingly. In Part Two of this look at M&A activity in the Ophthalmology industry, we’ll examine trading multiples and recent transactions–who’s buying and why.
CIG Capital Advisors’ Business Advisory Services professionals can help you determine which valuation method is most appropriate for your unique practice and guide you through a potential buying or selling scenario. Schedule a complimentary consultation with a CIG professional today to begin the valuation process for your ophthalmology practice.