The valuer’s value;
The real economic value;
The predator’s value;
The opportunity value.
I’m going to focus on the practice with turnover between £400,000 and £600,000 – because there are a lot of Principals flying at that altitude who are ignored by the large corporates as being too small to bother.
Assume a practice with existing turnover of £500,000, the Principal generating £300,000, an associate £120,000 and a part-time hygienist the final £80,000.
EBITDA can be running at £150,000 per annum if the place has been run reasonably well, more likely £120,000 if systems are a bit slack.
Step 1 is often to get the valuer’s value.
I would expect 110% of gross in the current market – the valuer might suggest “let’s put the place on the market at £550,000 and see what happens.”
The current owner is now imagining his/her life with £550k, loans paid off and maybe a few years as an associate before the pension kicks in – existing freehold will be retained, so there will be a bit of rental income as well.
It all sounds quite rosy.
Step 2 – the real economic value.
You will get many different opinions here – my own suggestion would be 4 times earnings (for a business this small) and so a valuation of £480,000 at the lower level of profit.
Step 3 – the predator’s value.
The predators are those people who want to come and look at the practice on a Sunday afternoon. They have 20 on the go at any one time.
What they are really trying to do is find out whether this is a distress sale. Is the existing owner paying off a divorce, debt, tax or is there ill-health in the background?
The predator will initially offer close to the valuer’s price, string you out for 3-6 months in due diligence and then try and chip you on the deal just before exchange of contracts, offering you closer to the real economic value right at the death (in the hope that, in desperation, you will just agree).
Think I’m exaggerating? I hear that story every month.
Step 4 – the opportunity value
The prospective purchaser has the funding, wants to move into ownership and, most importantly, wants to live in your post code, raise their kids in your schools, build a lifestyle in your community.
They will pay the real economic value PLUS the opportunity cost of establishing a base for their family as well as professional reasons.
Most likely to offer you the basic £480,000, plus a further £30,000 to reflect the opportunity cost – total £510,000, to include all fixtures and fittings.
There will be a separate conversation about the freehold property.
Most small practice owners have never sold a business before.
They call the valuers first – then begin a perilous journey that can often lead them to the predator.
It’s a risky business and it’s as well to have some good advice before you take the journey – an experienced dental accountant or coach as guide who has made the voyage many times and knows the the people to avoid, the dangerous waters ahead and the safest route.