Southeast Transitions measures the Seller's Discretionary Cash or SDC of the practice by creating a cash flow worksheet.  We take the true expenses of the practice and back out all of the income that the seller realizes each year.  Essentially, we are showing the true profits of the business to the buyer.  Examples of expenses that are backed out to show buyers true net earnings are:

1.  Travel, Cell Phones, Personal items

2.  Personal Medical expenses, car insurance and expenses

3.  Salary for the spouse or family member (that do not work or that will not be needed in  the practice)

4.  Depreciation

5.  Equipment purchase payments, which the buyer is purchasing with the sale of the practice. 

6.  Corporate Credit Card purchases for personal use.

The SDC is the best way to ultimately understand what the true profit of the business is and to understand the debt service the practice can support while you are still making money. 

The other method for valuing a practice in the measure the EBITDA or Earnings Before Interest Taxes Depreciation & Amortization.  It is similar to the SDC in that it attempts to measure the same variables.  It is essentially the pre-tax profits of the practice with interest expenses and depreciation

Practices will typically sell for 50-85% of the previous year's collections. This can vary greatly due to geographic area, specialty, profitability, transferability and other variables.  We like to take an average of the last 3 years to get an indication of where the practice is headed and has been. 

How Much Should I Pay for a Practice? What is it Worth?

Now that you are an expert in the appraisal methods of valuing a practice and the SDC versus the EBIDTA the ultimate question is what is a practice really worth?  The short answer is whatever a buyer is willing to pay and can afford to pay and market demand.  Practices in great areas of growth will be of more value than those in rural areas.  If there are multiple buyers actively looking at a practice then the odds are the practice will be worth more than a practice that has not a significant level of interest. 

Debt Coverage or Capitalization Approach

One of the best ways to evaluate the value of a practice is to understand how much debt service a practice will support while still providing the new owner/owners income to meet their life style needs.  How much money do you need to make when buying a practice?