Valuating the Chiropractic Practice – Part 2 Estimating the value of the practice I n Part 1, we detailed the basics of how to determine whether your chiropractic practice has a marketable value. This section will discuss how to arrive at a credible estimate of that value by “The Excess Earning Method”. VALUE OF THE REAL ESTATE Where the real estate is owned, and is to be part of the sale package, the fi rst step is to subdivide the practice into two separate entities; the real property of land and building, and the chiropractic practice itself. For this purpose, consider your professional practice as a tenant, paying the same rent and with the same lease conditions as if renting from a third party. Value the real estate by the traditional methods. If the practice is leased, this step is not necessary. FURNITURE, FIXTURES AND EQUIPMENT When considering the furniture, fi xtures and equipment, (F.F.&E), you are seeking a value in place and in use, not what you could sell this equipment for on the open mar- ket, which would probably be considerably less. A simple way to produce a reason- ably reliable value estimate is to fi rst determine its replacement-cost-new, abstract the “book value” from your fi nancial statements, capital assets and depreciation schedule, and third, estimate the in-place value as half-way between these other two. For example: Assumed replacement cost new - $100,000 Depreciated book value - $46,700 Halfway between $100,000 and $46,700 = $73,350, say $73,500. This method provides a ballpark global value, which is the total for all items based on replacement cost, adjusted Canada Revenue depreciation, and the “value-in-use” prem- ise. It does not consider that some items depreciate at a faster rate than others, obsoles- cence, and that the replacement cost of certain items is decreasing. VALUE OF THE GOODWILL Lloyd Manning is a semi-retired business appraiser and financial analyst who is now a freelance business article writer. He resides in Lloydminster, Sask. He can be reached at [email protected]. In Part 1, we stated that to have value, goodwill must be transferable to another practi- tioner, and that person must be able to capitalize on it. If it is not transferable, its value is zero. To value the goodwill, take the annual average of your income over the last five years, and expense statements, if the income and profi t has been variable, or three years if it has been quite steady. If there is a noticeable trend, which you assume will continue, use the last two years. Determine the annual average net profi t after payment of income tax that is attributable to the business portion of the practice. Delete depreciation and long-term debt service, both interest and principal, and anything that has nothing to do with, or is out of the ordinary to, your day-to-day chiropractic practice. If you own the real estate, add to the net profi t your annual mortgage payment, but subtract what you would have to pay for rent, were the property owned by another. (Remember – you are a tenant.) Always assume the real estate and the F.F.&E. to be free of debt, even if this is not true. When you sell, you will have to pay or assign the debt. Where equipment is leased; if rental only, or rental with purchase option, as you must assume the buy-out option will not be exercised, do not take its value into consideration. If the equipment is in a lease with conditional sale, whereby title passes at the end of the lease, consider it as owned, with the unpaid balance treated the same way as all other capital asset liabilities, that is, deducted from the estimated going concern value of the practice. If not already done so, deduct a fair wage for yourself including bonuses and/or divi- dends or, if included, adjust to what it should be. This is what you could earn if working 16 • CANADIAN CHIROPRACTOR | DECEMBER 2008 www.canadianchiropractor.ca Lloyd R. Manning, AACI, FRI feature
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