At first glance of reading this episode title, you may ask yourself why you need to worry about the value of your practice or why it’s important to determine. The truth is EVERY practice owner will need to determine the value of their practice at some point in their career. Whether you’ve just wrapped up your residency or fellowship and are looking to buy a practice from another provider, are merging your practice with another practitioner, or are selling your practice to another provider (at the time of your retirement or due to another cause), it’s essential you are knowledgeable about how to assess the practice’s worth.

In this episode of Shorr Solutions: The Podcast, “How Much is My Practice Worth”, co-hosts Mara Shorr and Jay Shorr review how to determine the true value of your aesthetic practice, how to get the proper assistance for an effective valuation, and when the right time to get started on a valuation of your aesthetic practice truly is. Tune in now to learn more!

Introduction:

Mara: We are so incredibly excited to speak today about a topic that we are hearing more and more people ask, in a COVID era even more so, how much is my practice worth? I’m going to let Jay kind of hit the ground running with this. When you’re gathering information ahead of time, what information is needed for a proper valuation, not just a guess, but an actual proper valuation? We’re going to discuss getting the proper assistance to make sure that this is active, you’re getting an effective valuation, and then really talking about when’s the right time to get that valuation on your practice. Do I get this when I’m ready to sell a year, three years, five years? What does that look like? Who’s in charge of getting it? The buyer, the seller, all that good stuff. For those of you that don’t know, Jay is actually my father. We are a father-daughter team, in case you missed that.

Jay: Thank you, one of the most important things that we have to know is what medicine is.  Medicine is a way to keep our patients looking young and beautiful. Medicine is one of the most respected professions today and why? People say well, a lawyer and accountant a doctor. Yeah, they are leading professions. One of the reasons it’s one of the most respected professions today is because of the amount of education that really goes into and that’s required. You have to go to your four years of traditional post-High School, your undergraduate work, and then you go to a four-year medical school. You earn your medical degree from medical school, but are you really ready to practice medicine? Well, legally, yes. When you come up with a specialty, he or she may have gone through four years of med school, a one or a two-year internship, a five-year residency, you may have gone to 10 to 15 years of school, and now you’re in your early mid-late 30s. So, we have to treat medicine like a business. I had a leading aesthetic and cosmetic plastic surgery practice here in South Florida for many, many years. My late wife was the medical director. And the interesting thing about it is, when is the time to sell? And how much is the practice? Well, we’re going to get into that, because what is the practice worth yesterday, today, or tomorrow?

Practice Valuations:

Mara: One of the questions and one of the things that we get over and over again is, do I really need a valuation of my practice.  We know that every doctor that plans to own a practice needs to know at some point what their practice is worth. What we’re seeing a lot of, especially in the time of COVID is that somebody that’s looking to open practice is going to buy instead of opening it from scratch, they’re going to purchase it from somebody that’s looking to sell. Whether you are looking to buy a practice from another provider, of which we are working with clients to do this right now, whether you are the actual seller because you were planning on retiring anyway, it could have been you are going to retire in the next 1-5 years due to COVID. We have practices now that are joining, they’re combining and they’re partnering, so you need to know what the value of the practice you’re either buying into, buying 100% of, or selling is worth. That’s where we really take the time now to talk about these particular steps. It’s so important in any valuation.

Jay:  I never thought that a good percentage of our client base was going to be in the opening and or selling stage. It’s really a strange phenomenon. Let me give you an example. We work either on the buyer side, or the starting of a new practice side usually comes from referral. Let’s get after evaluation versus valuation. Before you put a valuation, by definition, on your practice, valuation is the dollars and cents. What is the practice worth? Evaluation is let’s find out about your practice and evaluate it before we can make a determination on valuation. A lot of times we do a lot of evaluations of practices for strengths, opportunities, weaknesses, and you know the strategy of SWOT strength, weakness, opportunity, and threat. We want to know, where do we need to improve?

Information/Data Needed:

Mara: One of the things I wanted to go through because this is a question we get asked a lot of, and we wanted to make sure to really touch on this is what components and what information is needed to determine a proper valuation?  Do you want to go through some of these items?

Jay: The first things I ask for are the past three years of your taxes, your 1040 is personal if you were at a business then 1120s, if you’re a sub s corporation, and we can get into what type of Corporation you are or are you a professional limited liability company. That’s the way that you set your company up to the Secretary of State or Department of State in your state. Then how are you taxed? Are you taxed as a C Corp? If you’re an LLC, are you a single member? Or are you a dual or tribe member or more because a single-member LLC is concerned by IRS governance as a disregarded entity and therefore really doesn’t have to file a tax return. If you are an LLC with a Subchapter S election, for tax purposes, the sub s does have to file it.  What I want to caution you about between the P&L and your IRS taxes. I go by the IRS taxes in revenues, many times your P&L and your tax statement for revenue purposes will marry, meaning they’re probably very, very close. However, the net profit on your P&L, and your net profit on your taxes may not be identical. The reason for that is we look at EBITDA, which means earnings before interest, taxes, depreciation, and many times on your P&L you’re not showing depreciation, but yet on your tax report you are. As a buyer, I want to know how much profit or how much revenue did you bring in and how much was paid out, including shareholder earnings. As a potential buyer, what could I expect to earn relative to my investment in buying the business?

Mara: Now, there are certain things today that we always talk about with people that are looking to sell their practice or people that are looking to buy a practice that is up for sale. There are certain things as owners of a practice as owners of a business that you may write off, legally, it’s perfectly within the legal scope. It could be for entertainment, although I feel like we’re all doing a heck of a lot less of that right now than we used to. Do you have extremely high healthcare payments? Different things to look at that would be an exception to you as the current owner or would be an exception to the current owner if it’s not you if that’s just the seller and you are the buyer. You want to look at what are some of those anomalies. That’s when you want to make sure you’re asking those questions and really paying attention to detail. We’ve caught some pretty funky things in the past as we’ve done this. Can you explain to me why there is $100,000 in health insurance for the owner at this point? And it’s because look, we need to know is that $100,000 that would go back in the pocket of the new doctor when they become the owner? Or is there something a little funny here? Jay, let’s keep going on what else I want to look for.

Jay:  What’s very important about this is many of these are very legitimate expenses and deductions. Some of them are very questionable. There are clear, concise, consistent, carved out federal IRS guidelines of entertainment rules, and what you can and what you can’t, there are very clear and cut, automobile expenses, whether or not you’re logging your mileage, versus the businesses paying the entire car. We look at it and I say, Wow, that’s a pretty expensive car payment, $9,000 a month. Now, I’m not here to judge. I’m just saying that, as a forensic auditor, I would look at certain things. I am a forensic auditor, I look at things that stick out like a sore. When you’re talking about maybe $100,000 in health insurance, I think maybe it could be $100,000 life insurance, as we have seen, or an older partner or whatever. But when we look at certain things, I say, let me see the backup. Because these are things that could be deducted. For example, you have season tickets to the arena for a sporting event, and or concerts. I read a very interesting article today that is being brought out by what a lot of these medical pharmaceutical laser companies are doing. They’re spending an ordinate amount of money, entertaining people that have no relevance to the project that they’re promoting. For example, we go to all these conferences, and they have these beautiful dinners and these beautiful things and you’re inviting guests who are not the doctors, they may be employees of the practice. I’ll admit it. I’ve been there. I’ve been invited I go. However, there are strict guidelines now that are going to be coming out against this.

Mara: One of the things that we sometimes see and look, we are a family-owned and operated business ourselves. You’re looking at the owners of Shorr Solutions, and they are Mara and Jay Shorr. We have a fantastic team that works with us but we are family owned and operated. So understand that when I talk about if there are members of the family that are employed with the practice that is up for sale, you want to look at do those members of the family plan on staying with the practice? Or do they plan on staying at the practice with their current pay rate? Often we pay the family a little bit more because we can. Do those team members plan on staying with the sale? You also want to look at what is their effectiveness inside the practice? How effective are they in their role? Are they the team members that you want to keep? From time to time we’ve seen, “we’ve had incredible trauma with that person, we’ve had theft with that person and we just don’t know how to get rid of them.” Well, this is an easy way for new ownership. We’re not keeping these positions so we want to take a look at how are we planning on moving forward with the current team that’s in place?

Active Patients and Charts:

Mara: We also want to look at active charts. By active charts, I don’t mean how many people have you ever treated or has the previous seller treated in the 35 years that they have been in practice. Just because they have a name in your EMR does not mean that that patient is going to come back to the practice. How much is a chart worth? And how do you determine what an active chart is worth? People say oh, I have 30,000 means in my database that has to be worth so much money. Jay, you have a great response to that.

Jay: If you are a medical spa it is different. If you are a dermatologist it is different. If you’re a plastic surgeon, for example, you may have a one-hit-wonder, and that means that you come into town and you may have the young female that comes in for her primary breast augmentation, and you may not see that woman again for many years. Now if you have a medspa and you may have a middle-aged patient and the person comes in after they’ve had their children and maybe they want liposuction or a tummy tuck, or they want to get rid of the mommy baby fat. Then you may not see or they come in for a facelift. So what is the average value of that patient? Now, if you’re a dermatologist, for example, and you see 15-75 patients a day, but I want to know is, what is the real lifetime value of that patient, active. If they haven’t been back in three years, don’t count them. Right, because they’re not an active patient. There is software that can value, how much revenue has that patient-generated. It can also say how many referrals that patient has done as well,

Mara: If you are actively looking to bring up the value of your practice, getting a campaign in a place where you have a strong way of bringing patients back both patients that are currently undergoing treatments, in other words, they want their neuromodulators every three months, make sure that they’re coming back for their neuromodulators every three months. If there’s a filler that’s every six months to a year for another injectable, make sure that you keep them on the schedule, if they’ve come in for a surgery, make sure you’re bringing them back for follow-ups. If they haven’t been back, look at getting them onto the schedule and bringing them back because if you are looking to sell your practice, that is a great way in the next six months. Put that system in place. Then you’re going to have more active charts.

Creating Goodwill With New Provider:

Jay: Now are you staying on once you sell the practice, if you’re not staying on, you’re going to sell and depart. The list of active patient charts are probably not worth anything. It’s called goodwill. I always make a joke about it as goodwill is where you donate old clothing and furniture. Because goodwill, if the doctor is not there, isn’t going to be worth very much.  I use this example all the time. When COVID was not around, my wife would go to the hairdresser. She would get her hair colored, she would go to the pedicurist at the salon, whatever. Now let’s say that that hairdresser that she’s been going to for years or many pedicurists leaves Mara’s salon and goes to Jane’s salon. Is that client/patient going to stay with the original? Or are they following the technician/practitioner example your PA or NP your doctor that leaves and goes somewhere else and does the patient’s follow? Alright, so if you leave, unless you bring on your heir apparent meaning you’re going to retire you’re, going to sell you bring on the buyer and you stay on for a little bit of time. During the course of that transition, you would doctrine and introduce your patient base to that new practitioner. Then that active patient has more value.

Creating Highest Value For All Assets:

Mara: Have the previous provider, the seller, credential the new provider. So you want to make sure something like that transition period. We also want to make sure that when you have this transition period and then we’re going to move on to the rest of the analytics together. You want to make sure during this transition period you don’t overstay your welcome. You also want to make sure that you’re gathering, in addition to all of this other information that we’ve gone through marketing analytics as well, you want it because your marketing is worth something. If you are with advice media, then I always encourage you, they do a really great job of providing analytics. Look at Google Analytics, look at tools that they have access to. I would encourage you if this is something you’re interested in, let your website company know that you are looking to build this site up because you want it to have value. Ask your website company to help you put a value to the website. The best way to do that is lead generation of quality leads, and to not just rank for the name of the doctor. We want to make sure that we’re not just ranking for Dr. Joe Smith, Dr. James Smith because once Dr. Joe or Dr. James is no longer with the practice, people aren’t necessarily going to be googling anymore. The other part is capital equipment. Jay and I say this all the time. When you buy a car, when you buy a computer, or iPhone, right or Android, whatever brand, right? When you have this piece of equipment, you buy it, and immediately once you buy it depreciates in value. I bought a car last weekend, as soon as I buy it, it depreciates the second I drive it off the lot. The same thing happens with capital equipment and so just because you purchased a piece of equipment at $100,000 that doesn’t mean that that’s what it’s worth five years later. In fact, I can almost guarantee you that that’s not what it’s worth five years later. We will often go and pull comps, just like if you’re buying a house just like if you’re buying a car, you pull comps as to what it is that that piece of equipment is worth. Is there anything that you owe on it? Also, what is it that they’re currently generating in terms of revenue? So if you have five lasers sitting in the laser graveyard, collecting dust, they’re not going to do you much good in that asset sale. Jay can you talk a little bit more because you’re the one that truly deals so much on the real estate and I mean so much real estate and talk about when somebody either owns a piece of property versus when someone leases, and then what happens if somebody is stuck in a lease and the practice is stuck in a lease for the next three years.

Jay: When you’re evaluating a practice, and you’re going to buy it, I always want to know does the person you’re buying it from owns the property. In my former practice, we had several business units within the business. We owned the real estate in all three offices. We had a real estate management company, which was with a different name that rented to the dermatology practice, it rented to the Med Spa, and is rented to the surgery center. Each one paid rent to the landlord. Now each one of our business units was a separate entity. You can have wholly owned subsidiaries of the mother Corporation if you want. The purpose of that is that each individual business unit had its own P&L. Is it an accounting nightmare? Yes, it is. But when you want to sell a business unit, it’s not because each unit comes with its own set of expenses, its own set of revenues. You will share revenues and you will share expenses by the amount of rent that you’re paying and some common expenses and some common staff. You can do journal voucher entries if you’re an accountant if you’re good at accounting, but the real estate valuation for a second mark is what is the lease that I’m going to assume and require. What’s the balance of the lease. I had no idea whether or not the person who owns the property is going to want to sell it.

Mara: Not only that, we’ve run into issues where the lease still had three to five years left, the space was so much more than the buyer wanted. The price of rent every month was so much higher than the buyer, the potential buyer was able to afford that ultimately that was a huge deal breaker.

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