What is Your Practice / Equity Really Worth?

In the forty plus years that our firm has been valuing professional practices, we can probably count on one hand the number of times that a practitioner has underestimated the realistic value of their equity. On some occasions, expectations are not too far off the mark, but probably in the majority of occasions, expectations are either somewhat, if not well above, a realistic value. This can be for a number of reasons.

Probably the two most concerning statements that we hear relatively frequently is:

  1. ‘I bought into this practice at X cents in the dollar so that must be what my equity is worth on the way out’. The concerning aspect about this thought is that no other asset retains the same value into perpetuity, hence why would equity within a firm?
  2. ‘Jo up the road sold his entire practice for $ in the $, so that must be what my practice is worth’.

We’re often asked what a typical practice is worth. Naturally, that really depends on:

  • External market conditions
  • Internal practice characteristics
  • The proposal at hand
  • The number of parties selling down their equity versus the number acquiring, and many more
  • Every different proposed transaction will have a differing value or price based on aspects specific to that particular situation.

Broadly speaking, the lowest value we have ever derived was 13 cents in the dollar and the highest was $1.23. Thus, as will be evident, there is a pretty significant range.

Importantly, valuations and estimated selling prices are imperative to revisit regularly. Getting to the pointy end of a transaction and deciding that you’re not happy with the proposed price or value is too late to make a change and being unrealistic about a likely value will more often than not cost you the whole transaction. Knowing practice value is a cornerstone to proactive succession. It enables you to identify the areas in which your firm is performing well as well as also highlighting the areas of opportunity for improvement. You then have time to work on making such changes and see the benefits to value. It generally also leads to a better run practice. So it is win win all round.

I recall hearing of one practitioner that was endeavouring to sell their fees for $1.80 in the $. Three years on they were still on the market. Getting it wrong will cost you unnecessary time, energy and effort. Thus, if you are concerned about what your practice or equity may really be worth, we would certainly welcome the opportunity to assist through a couple of different approaches. We’re able to discuss the drivers of value within your firm and focus on the key areas for value improvement in addition to setting a benchmark value now from which future comparisons can be performed. Planning and preparation will ensure a better outcome, whatever that may be. Please contact us on (02) 9233 4333 or via services@robknights.com.au.

Posted in Valuations