INTRODUCTION
Ask your auditor, bank manager/consultant or lawyer and each will come up with an suggestion or formula to evaluate your practice.
Excess Earnings Capitalisation Method
My stay in the UK, buying and selling my practice, convinced me that the so-called recommended by the AVPMCA (North American Management Association of Veterinary Practice Management Consultants and Advisors) i.e :-
1. Average profit over the past three years
2. The difference between the assets and liabilities and
3. Goodwill of the practice – and this is where it differs from advisor to advisor because it is very subjective and cannot be measured objectively. A subjective interpretation of external factors that will influence the future of the practice will only be accurate if the evaluator knows the practice and demographics of the surrounding area.
The above is also supported by Mercader Pere, MANAGEMENT SOLUTIONS FOR VETERINARY PRACTICES.
CALCULATION:
Profit over three years and adjusted profits:
The three year period is to see whether the practice is showing growth (or not)
In your case:
Feb 2013 |
Feb 2014 |
Feb 2015 |
Turnover R 6,131,302 |
R6,849,918 |
R8,607,342 |
Annual fee increase |
11% |
25% |
Profit R 1,513,937 |
R1,603,406 |
R2,063,943 |
There was excellent growth over the three year period with an average of 18%. This is typical of a mature practice with the addition of a profitable assistant.
The average taxable profit for the three years is R1,727,095 before members remuneration Adjusted profit – normally practice expenses are geared to the maximum to reduce the profit to pay as little tax as possible. This is done all legally, however to sell your practice you have to maximise your profits to be able to get a good price for your practice.
I had to scrutinise all expenses and added/subtracted those then to the taxable profit which is called the ADJUSTED NET PROFIT.
In your case I did the following:
Average taxable profit |
R1,727,095 |
Less salary for two partners R50K each |
-R1,200,000 = R527,095 |
Plus Depreciation |
+ R88,270 = R615,365 |
Minus 5% of fixed assets for reinvestments |
+ R34,756 = R580,609 |
Plus interest paid |
+R2,817 = R583,426 |
Minus Interest received |
0 = R583,426 |
Thus the adjusted net profit is R583,426
The difference between the Assets and Liabilities
As per Feb 2014 financial year report:
Current assets ( drugs debtors etc) |
R856,983 |
Fixed assets ( furniture etc at cost price excl motor vehicles) |
R695,124 |
Total assets |
R1,552,107 |
Current liabilities *(excluding owners equity) |
R560,316 |
Total liabilities |
R560,316 |
Assets minus liabilities = R1,552,107 – R560,316
Net value of tangible assets = R991,791
*The loan accounts were not taken in consideration.
Goodwill
All practices have a number of tangible assets and intangible assets, The adjusted profit of a practice is the return the owner gets against the assets of the business. One part of this return will come from the tangible assets and the other part the intangible assets. On the tangible assets one can expect double the return compared to a conservative investment. Here the safe return on your investment can be expected to be 10%.
There from the calculations above your value of the tangible assets are the combination of the fixed assets plus the current assets less liabilities. This is then invested at 10% interest per annum.
=R991,791 X 10% = R99,179
Subtract that from the adjusted profit R583,426 minus R99,179 equals R484,247 which gives you the profit attributable to the intangible assets called excess earnings. You then use this excess earnings figure and then you apply a capitalisation rate (a multiplication factor of between 1 and 6) to determine the goodwill of the practice.
Factors influencing the determination of the capitalisation factor are the following :
• Revenue trend over the last three years
• Future ability of the business to retain its goodwill
• Practice location
• Quality and loyalty of staff
• Facilities
• Socio- demographic profile of the area
• Management quality
• Quality of medical care
For this Veterinary Hospital I am of the opinion that, along with these abovementioned factors known to me I would apply a capitalisation rate of 2.5 excess earnings of R484,247 X 2.5 = R1,452,741
Thus the practice goodwill R1,452,741
The net value of the practice is VALUE = NET VALUE OF TANGIBLE ASSETS + GOODWILL
R991,791 + R1,452,741 = R2,444,532.00
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