Columns Alan H. Cleinman: What Is It Worth Published 8 years ago on May 27, 2016 By INVISION Staff Share Tweet Virtually every seller has a price in mind, which may be the result of a Fair Market Value (“FMV”) appraisal. FMV is “an estimate of the market value of a property, based on what a knowledgeable, willing and unpressured buyer would probably pay to a knowledgeable, willing and unpressured seller in the market.” Such appraisals often don’t take into consideration all elements of a transaction. Further, FMV appraisals generally focus strictly on the financial elements of the business and ignore the more important strategic implications of a transaction. Deal design is far more important than the so-called FMV. The seller’s request is just a starting point. And while having a reasonable understanding that the request is “in the ballpark,” investing in a counter FMV appraisal is generally not a good use of capital. So how much is a practice worth? As the buyer, you think you want to pay as little as possible. As the seller; the opposite is true. Either case may be wrong from a deal-making perspective. While there are many elements of the valuation process, reality is that “value” comes out of the deal-making process. Price is intuitively the starting point but actually should be the end-point. Consider that, with in any practice purchase, you’re buying just three things: Advertisement ➤ A Cash-Generating Machine: What’s the practice’s cash flow? The more cash that the business generates, generally the more you can afford to pay for it. Hard assets such as equipment and inventory are secondary to cash flow. Just because the practice is “shiny/pretty” doesn’t mean that it’s profitable. Hard assets are readily valued and they’re value is generally no greater than replacement cost. ➤ An Opportunity for Growth: If the practice hasn’t demonstrated historical growth, why would it grow after you make the purchase? What are the underlying operating ratios that would indicate opportunity? Where does the revenue come from? What assets are being under-utilized? What markets are being underserved? ➤ A Lifestyle: Be careful of focusing on the specific deal instead of the lifestyle that the opportunity represents. If you can’t see yourself living and thriving in a particular community, don’t buy the practice. You’re not just buying an asset but are going to spend a significant amount of your life and energy in a community. Is it where you want to live and raise your family? Designing transactions is an art form. While the numbers have to make sense, there are many elements that go way beyond price. Is the seller staying on for a transition? Who’s responsible for what aspects of the transaction? Can the cash flow support the debt and deliver a reasonable income and ROI? Does the practice need to be re-branded? Is there a manager in place? What about family members? How will warranties be handled? What are the legal and tax considerations? What’s the condition of the assets? The facility? What’s the skill level and tenure of each team member? The answers to these and other questions are what drive the value of the business. But focusing on price up front can actually divert your attention; result in a higher cost or worse, a missed opportunity. Advertisement “Don’t agree to anything until everyone agrees to everything.” Every transaction is unique. What appears simple can end up complex. Knowing what questions to ask is mission critical. Make sure you’ve got time and experience on your side. This article originally appeared in the June 2016 edition of INVISION. Alan Cleinman is the founder and CEO of Cleinman Performance Partners, a consultancy for optometry practices. This three-part series is based on his book A Different Perspective: An Entrepreneur’s Observations On Optometry, Business And Life. Proceeds from the book benefit state optometry PACS. Learn more at invmag.us/acbook. Advertisement Related Topics:management click to Comment(Comment) Up Next Why Upselling is Possibly the Most Foolish Approach To Sales Ever Don't Miss The Business: An American in Milan SPONSORED VIDEO Turn Patients Into Loyal Eyewear Shoppers 80% of patients are browsing eyewear online, are you influencing patients online before your competition? Join thousands of practices thriving with Optify, voted the #1 optical sales tool by EyeVote. Empower your opticians to save time, increase optical revenue, and maximize your EHR data and website with a seamless optical plug-in that keeps patients buying from YOU! Now through August 31st receive a $25 UberEats® gift card when you complete a 15 min demo. Book your demo here.. 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