If accumulating likes on social media has become a laudable and legitimate business goal, it’s a fair bet that excessive use of accounting jargon in your posts would be a good way to lose them again. However, it need not be that way, and, as Oliver Acton of Frank Taylor & Associates points out, understanding just some key principles can help you ensure that your practice is valued accurately and fairly.
Oliver explains, “A practice valuation, similar to that of any business, depends on several variables. However, a key part of that valuation is understanding the ability of the practice to make money, and in valuation terms, this measure is called the reconstituted net profit. Of course, to get a fair and accurate valuation, we need to be able to compare to other practices on the market with a degree of consistency) in other words, “like for like”) And that is why we must use the measure of reconstituted net profit. Essentially, the reconstituted net profit is the EBITDA with some personal or discretionary costs added back. Put simply, this means we remove any items from that profit calculation that are unique to, or a choice of, the practice or the owner. In this way, the reconstituted net profit means we can compare the performance of different practices and get an understanding of how well any individual practice is performing.
“A lot of people just roll their eyes when I mention EBITDA”, agrees Oliver “, but there’s really no need to be daunted by the terminology. EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation and is usually the bottom-line profit reported in a business’s accounts. In short, it means the profit or earnings a practice makes (the E) before (B) deducting interest, tax and payments (I and T) and before deducting depreciation and amortisation (D and A). These latter two terms refer to the decrease in value of assets in the business, be they tangible assets (machinery, e.g.) or intangible (goodwill, e.g.). The reason we look at the profit before these deductions (i.e. before the I, T, D and A items) is that they may vary from practice to practice. A like-for-like comparison is a better way to compare practices, and to understand their relative financial health, and therefore we compare profit before such deductions”.
“We then need to add back some other cost items which are often personal to, or at the discretion of, the current owner, for example, salary, pension, travel expenses and any one-off items. Having added these cost items back, we have a reconstituted net profit, which is a better indication to any potential buyer of what the financials will look like for the practice. Of course, there will be other deductions from this, but these will vary according to the buyer’s circumstances”.
“The key objective in the calculation is to get a like-for-like measure so we can compare practices”, concludes Oliver, “so the simple principle is to add back to the profit any costs you deduct that would differ under a new owner”.
For more information on getting a professional valuation of your practice, call our team on 0330 088 1156 .
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