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Value of Business for NW

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  • Value of Business for NW

    I was listening to an old WCI podcast where he mentioned 50% of his NW is tied to his business and in the same podcast he mentioned deciding not to sell his business as he was only offered roughly 2 times yearly profit. That bring me to the question of the value placed on a business in your NW calcs. For those that own their business, how do you value your business. Multiple of EBITDA? Or multiple of net profit? Or some other means? Do you use multiples specific to your field or go conservative on that multiple for NW calcs? Another topic raised was having higher multiple for businesses with higher profit. Interested in your thoughts.

  • #2
    3x EBITDA for restaurants/chains

    6-9x EBITDA for surgery centers

    Comment


    • #3
      I would be very conservative when estimating business value in an individual NW calculation.  Traditional valuation metrics maybe useful for specific purposes (purchase of equipment from a bank, or buying a building).  For your specific purpose, I would err on the side of conservative and with the hope of being pleasantly surprised in the future when you sell versus vis-a-versa.  I would tend towards easy to measure valuation such as the cash held by the business, equity in building(s), retained earning or some combination thereof.  Two small stories of business valuation:

      a. Physician was looking to sell their practice due to a age/disability.  Was unable to sell due to their expectation the fair 'asking price' (lease owned R/E and the usual practice stuff included) far exceeded what someone was willing to pay, and the way the person interacted/treated others within the same specialty over the prior years.

      b. Farmer in Yakima valley (that is Central Washington state btw).  Bought a small piece of land (200 ish acres).  Managed to farm it for 20 years, and in total lived, though never made a monetary return from being a Cherry farmer.  Sold the land when he decided to give up for $15 million.

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      • #4
        This may or may not help.  I value the business for exactly what I paid 4 years ago, despite the fact that revenue and profit are significantly different.

        If all goes well, I'll go from owning 1/2 to 1/3 in a few years and find out a new valuation.  I'm hoping that 1/3 in 2022 is worth the same as 1/2 was in 2015.

        Comment


        • #5
          What are you going to use your net worth for? If it's to retire when you hit a certain point, I would be extremely conservative. If it's just a mental exercise then I wouldn't even worry about it.

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          • #6
            Thanks for the feedback. Didn't really consider it part of NW even though it's back of my mind. Am far from retirement and the podcast got me curious on how others evaluate it as part of their plans.

            @ajm184 I am familiar with docs overvaluing their practice when they are ready to sell. It is interesting perspective on profits and valuation and how they can be unrelated in some cases.

            Comment


            • #7




              Thanks for the feedback. Didn’t really consider it part of NW even though it’s back of my mind. Am far from retirement and the podcast got me curious on how others evaluate it as part of their plans.

              @ajm184 I am familiar with docs overvaluing their practice when they are ready to sell. It is interesting perspective on profits and valuation and how they can be unrelated in some cases.
              Click to expand...


              Curious why you wouldn’t consider your practice ownership part of your NW. Is it because you will be FI when you leave either way therefore you’re ok to walk away? Asking because i’ve spoken to other single owner practices who are surprised when I ask about succession plans and value - they don’t consider there is any intrinsic value beyond equipment. Is this typical of other participants here?

              Might make a good survey or even a new thread. Thoughts?
              Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

              Comment


              • #8
                @jfoxcpacfp Did not really calculate or keep track of NW until a recent forum post regarding that and even then I only did a back of the napkin estimate. When I listened to the podcast I wondered how others include it in their calculations as most of my current NW is tied to Home and Business . When its time to hang up, I know I will be FI with the business value or with out it and I hope there is plenty of Intrinsic value for succession.

                Comment


                • #9
                  Personally I think knowing my NW is kind of a cool score to track but it may not change much in how we live or spend.

                  Comment


                  • #10




                    the podcast got me curious on how others evaluate it as part of their plans.
                    Click to expand...


                    As you can see above, there are many different potential approached, though being conservative seems to be a theme.  The difference I see is that WCI had an actual offer on the table, what someone else is willing to pay is a far better proxy.  Most physicians don't want to go through the work involved of answering questions/opening their books to a hospital, PE shop unless there is a strong desire to negotiate and sell a practice.




                    they don’t consider there is any intrinsic value beyond equipment. Is this typical of other participants here?
                    Click to expand...


                    Though to some extent depends on the type of practice, intrinsic value was a major component when my wife sold her practice.  She sold her EHR and X-Ray to others.  The clients and getting on staff at the nearby hospital were the intrinsic value components.

                    Comment


                    • #11







                      Thanks for the feedback. Didn’t really consider it part of NW even though it’s back of my mind. Am far from retirement and the podcast got me curious on how others evaluate it as part of their plans.

                      @ajm184 I am familiar with docs overvaluing their practice when they are ready to sell. It is interesting perspective on profits and valuation and how they can be unrelated in some cases.
                      Click to expand…


                      Curious why you wouldn’t consider your practice ownership part of your NW. Is it because you will be FI when you leave either way therefore you’re ok to walk away? Asking because i’ve spoken to other single owner practices who are surprised when I ask about succession plans and value – they don’t consider there is any intrinsic value beyond equipment. Is this typical of other participants here?

                      Might make a good survey or even a new thread. Thoughts?
                      Click to expand...


                      because most physicians are bad at business and too stubborn or busy to seek professional help.  they might be smart enough to learn how to do things properly, but they refuse to acknowledge that they are too busy to actually spend the time to do it properly.  lastly, value of medical practices seems highly regionally and timing dependent and so not a good use of already pressured time to do an accurate one, until you actually start thinking about selling or retiring.

                       

                      Comment


                      • #12







                        the podcast got me curious on how others evaluate it as part of their plans.
                        Click to expand…


                        As you can see above, there are many different potential approached, though being conservative seems to be a theme.  The difference I see is that WCI had an actual offer on the table, what someone else is willing to pay is a far better proxy.  Most physicians don’t want to go through the work involved of answering questions/opening their books to a hospital, PE shop unless there is a strong desire to negotiate and sell a practice.




                        they don’t consider there is any intrinsic value beyond equipment. Is this typical of other participants here?
                        Click to expand…


                        Though to some extent depends on the type of practice, intrinsic value was a major component when my wife sold her practice.  She sold her EHR and X-Ray to others.  The clients and getting on staff at the nearby hospital were the intrinsic value components.
                        Click to expand...


                        I think your wife must be one of the few who actually figured out how to do it right, other than practices selling out to mega groups and hospitals - different animal entirely.
                        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                        Comment


                        • #13
                          The question, "Why net worth?" is where I would start.  Net worth is everything you own minus what you owe.  But I divide it into buckets.  The business value is some theoretical number that might potentially be converted to liquid assets at some future point..... or not.

                          So current net worth buckets that help with FI?  First is liquid assets: stocks, bonds, cash.  Second is income producing real estate cash flowing monthly income.

                          Another current net worth bucket that could potentially be converted to liquid, that might then contribute to FI?  Business value.  The business value I use for total net worth is based on the opinion of my CPA, so who knows how accurate that is....  He uses his gestalt, which is an educated guess based on a combination of EBITDA, annual earnings times a multiple, and what similar businesses have sold for in the past.

                          Then the final net worth bucket is personal use real estate, which could be considered more of a current cost, but could be sold and replaced with less costly housing, with the net proceeds then added to liquid assets and contributing to FI.

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