The recent spate of liquidations and administrations, together with a generally tight finance market for most practices (and SME's in general), make a focus on building value more critical now than ever.
Here are five suggestions on how you can build sustainable business value for your practice. Whether you are planning to sell or simply want to guarantee better access to finance for your practice, these steps will help you refocus your plan for the next financial year and beyond.
Back to basics
Firstly, buyers look to profitability, or more importantly net cash flow, as the key measure of value. In particular, they focus on expected future net cash flows from practice ownership. While the historical results may be relevant, they only assist in determining the likely future net cash flows of the business or practice.
Equally while total sales or fees may also be relevant, they are not critical. Net cash flow is the ultimate measure.
Secondly, in arriving at a value for your practice, buyers (and valuers) use a risk adjusted rate of return to capitalise the expected cash flows. The market returns are determined by broader market and economic conditions. However, the return for your practice will be a function of risk. Higher risk practices will be discounted by the market. Conversely, low risk practices will be purchased and valued at a premium.
Five steps to improving practice value
Here are five areas to address for building value. There are a number of others that may further build value. However, they are often related to these five.
1) Understand your value proposition and value drivers
Understand what drives value for your practice.
While this may sound obvious, it is the key issue you must understand to improve practice value.
For some practices it may be a question of understanding why your clients/patients come to you. What brings them into your practice? For others, while related to the client offer, it may be a function of understanding what are the key assets of the practice which are valued by the market.
It will also require an understanding of what drives growth for your practice: population growth, innovation, or just luck?
Understanding these value drivers will enable you to capture and grow value.
2) Balance and Sustainability – Transferability part 1
Highly specialised practices are often difficult to sell as the market may be limited for such practices. Equally a practice relying on a single major customer or payer, may also represent a risky proposition.
Consider building a balanced and sustainable portfolio of clients/patients (perhaps including different markets); revenue & payment sources (including payers); and resources. In regard to 'resources', this covers a wide-range of aspects for most practices including practitioners, staff, procedures and process, technical resources and general technology, as well as facilities.
Ultimately business value to a buyer relies on the transferability of the practice to a new owner. Heavy reliance on a single contract, a single practitioner, or a key member of your team will limit the effective value of your practice.
Concentrations of any kind are bad.
3) Manage the business
It's not just about revenue. It is also about efficiency and returns on investment.
Tidy the practice up – financially and operationally. This may also require a review of all fees, to ensure they deliver a good working capital model.
Large pools of stock may be perceived as valuable to you, but will generally be discounted by the market.
4) Train staff and the team – Transferability part 2
To reiterate, transferability of the practice to a new owner drives value for many practices.
Practices reliant on the personal goodwill of the practitioner(s), often particularly so for smaller practices, will have limited market value.
While sustainability is the first part of the transferability conundrum, the second part relates to the retention of skilled staff members who will remain with the practice when sold and enable or assist in the retention of clients/patients.
Train your staff and build a strong team.
5) Have up-to-date Financial Statements
Timely financial reporting not only conveys a sustainable and good practice, it also speeds up the process for any party assessing your practice (including valuers, bankers, and buyers) and enables you to better manage the practice.
Driving and building practice value is complex. However, focusing on these five steps will help you build a better practice and improve value.
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