Why value your podiatry practice?

Whilst the majority of podiatry valuations are carried out in preparation for exploration a future practice sale, there are a number of other reasons a valuation may be required.

Positive reasons include:

• Tax planning and company formation (or restructuring) to ensure that owner’s ongoing annual drawings and any future sale proceeds are enjoyed as tax efficiently as possible.
• Financial planning and assessment of personal net worth conducted as part of early-stage exit planning
• Employee incentivisation – with an acute shortage of podiatry professionals in many areas of the UK and Ireland, schemes such as Enterprise Management Incentives (EMI) offer a way for employers to bring employees into part ownership of the business and to lock them into their practices for the long-term.
• Exploration of succession / staged succession planning within families or internally to one or more existing professional members of staff. *This type of valuation may need to factor in a minority shareholding discount and further advice around implementation of a shareholder’s agreement
• A prospective purchaser commissioning an independent valuation in order to raise finance and/or to obtain a second opinion on the value of a podiatry business to ensure they are paying a fair price.

Sadly, there are also a number of negative catalysts that require an accurate, formal practice valuation. These include:

• The breakdown of stakeholder relationships / disputes between partners that have made a working relationship untenable and require a partnership dissolution via some form of financial resolution, combined with ideally mediation (but in the worst-case scenario litigation) to unlock the impasse.
• Valuation for divorce purposes to help facilitate a meaningful financial settlement
• Probate and settlement of wills and estates
• Valuation due to a compulsory purchase order mandating the closure or relocation of a practice.

What factors affect a podiatry practice’s value?

There are a huge number of variables that are assessed when determining the value of a podiatry practice. These include the level of competition, the enterprise scale, the trend in trading (normally reviewed over the latest 3 financial years), location and catchment population size and demographic, reputation, anticipated repeatability of future profits, specialisms, security of tenure, quality of fixtures and fittings, perceived reliance/personal goodwill of the owner, or other key staff.

Valuations are normally based on historic and current trading performance, but on occasion, a level of potential may be factored in – but only when sufficient empirical KPI data can genuinely support this.  However, within the foot care sector, the primary driver of value is a business’s true underlying profitability.

*It is essential to note that the ‘true’ profitability may differ from the stated ‘paper’ profit on the formal company accounts.  We will deal with this later in this resource when we cover how podiatry practices are valued.

What is the best method for calculating the value of a podiatry practice in the UK or Ireland?

Over the years we have come across people attempting to value podiatry businesses in many ways:

Some methodologies are crude and overly simplistic.  For example, applying a value based on a ratio of annual turnover, an incredibly crude approach that inevitably leads to wildly inaccurate valuation figures in most instances.

Others utilize more complex, abstract approaches such as the discounted cashflow methodology, which is harder to understand and open to interpretation.

In practice, there are 2 credible ways to value a podiatry practice:

• The first is a yield-based business valuation – this is appropriate for profitable podiatry practices and is the most frequently used approach.
• The second is an asset-based business valuation – this is utilized for very small ‘lifestyle’ foot care practices, or larger loss making or marginally profitable podiatry businesses

We will deal with each in turn.

Valuing a podiatry practice via a yield-based approach

The primary method of accurately assessing the value of a podiatry practice in the UK or Ireland involves a 2-stage process:

Stage 1 Accounts Normalization / Calculation of the True Profit / EBITDA

To effectively explain what the process of normalization is and why it is needed, it will help to provide some context.

It is often said (perhaps only half in jest) that a business should produce 3 different set of annual accounts:

• One set prepared for the taxman that minimizes the stated profit – in order to reduce the owner’s tax bill.
• A second set prepared for potential buyers that maximizes the businesses stated net profit – to boost the perception of the businesses value
• A third set that actually shows what is really going on!

As they say, many a true word is said in jest – and the key takeaway here is that accounts can be formulated to present a podiatry business in a particular light to suit a specific agenda.

This means that comparing 2 businesses side by side and establishing their relative values using their stated net profits does not compare them on a ‘like for like’ basis and therefore produces poor outcomes and a lack of clarity.

A greatly simplified example should help demonstrate this.

On face value, PRACTICE B looks to be the more profitable, higher value practice due to its superior stated net profit.  However, on review of the profit and loss accounts a very different picture emerges.

The 2 directors of PRACTICE A both draw a maximum annual pension allowance of £60,000 (so a total of £120,000) which is drawn from the business before the net profit is calculated.  In a sale scenario, this means that a buyer would benefit from this too (they could either choose to use the business to max out their pension – or let this money flow down to the profits.)  In contrast, the owners of PRACTICE B do not draw any pensions.

To reflect the reality of the situation – and to allow a fair side by side comparison of the true yield from the business – we therefore need to add the pension drawings back into the profit figure for Practice A, to produce the fairer, more reflective accounts below:

The process of adjusting a business’s accounts to make them representative of the true underlying profit is called normalization.  In practice this process is far more complex than the example provided above, with typically anywhere between 5 and 10 adjustments needed to the accounts to make them reflective of the real underlying profit level.  Some adjustments – such as amendments to reflect representative open market salaries of owner operators (allocated between their clinical/client facing time and management duties) require extremely careful handling to calculate accurately.

The adjusted net profit returned by the normalization process is commonly known as a business’s EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.

Stage 2 Applying a multiplier to the EBITDA to calculate the practice value

Once a podiatry business’s EBITDA has been accurately determined, the final stage of the process is to apply a multiple to it to determine the value.

We will use the examples of practice’s A and B from earlier to illustrate this more clearly.

PRACTICE A
EBITDA/Adjusted net profit: £100,000 x multiple = practice value

PRACTICE B
EBITDA/Adjusted net profit £170,000 x multiple = practice value

This multiple of profits reflects the amount a purchaser is willing to pay for each pound of annual pre-tax earnings generated by the company.  This approach is utilized across a wide range of healthcare sectors as well as a variety of other industries, with the main variance being the multiple applied.

This brings us neatly to the million-dollar question:

“What multiple of profit should you apply to a podiatry practice”

The answer, as you might have guessed, is not a simple one. It lies within the range of anywhere between 2 at the very low end and 8 at the extreme high end.

Let’s apply this to the previous examples to bring it to life a bit more.  For the purposes of this illustration, we have removed some of the higher multiples that in reality only apply to a very small number of outlier practices possessing special strategic values.

Practice A

*Valuation price excludes balance sheet items.

As the example above illustrates, the multiple makes a huge difference to the value!

Why is the range of multiple-to-earning so great within the Foot Care sector when valuing a practice?

The unusually broad range of EBITDA multiples used to determine practice values is a direct reflection of the incredibly diverse range of business enterprise scales operating and models employed within the UK (and Irish) podiatry sectors.

Ultimately, the multiple of profits reflects the value that investors/potential buyers are willing to pay for the podiatry business’s earnings. A higher multiple of profits suggests that investors/prospective buyers believe the business has strong growth potential and generates reliable earnings.

The full range of factors that influence the multiple applicable in a practice valuation were covered in the earlier section: What factors affect the value of a podiatry business?

Valuing a podiatry business via an asset-based valuation

Where possible, a Foot Care business should always be valued via the yield-based method outlined in detail above.  However, in certain circumstances, applying the normalization process to a practice’s accounts will return only a very marginal profit level – or even a trading loss.

If we then go onto apply a multiplier to a business with finances of this nature, it will return either: –

• An amplified negative number – implying the nonsensical situation that an owner will have to pay a “buyer” to take their business off their hands!

Or

• A positive value, but one that is derisory

In these circumstances normal practice is to revert to an asset-based valuation.

An example should help bring the logic of this to life:

Yet the reality is that if the company were liquidated, the value of the equipment, fixtures and fittings is likely to be well over £50k.

Practice profiles that are likely to require an asset, rather than yield based valuation include:

• Established very small, loss making or marginally profitable ‘lifestyle’ foot care practices
• Immature, unproven practices yet to demonstrate a profit
• Large established practices returning losses or very marginal profit levels, despite impressive revenues

What is the process for valuing a podiatry business?

It is NOT necessary for your Podiatry Business Central valuer to physically visit your practice / the practice being assessed.  Instead, you will be asked to provide photographs and a walk-through video to allow us to review the layout and quality of the shop fit of your practice, which can be emailed/file transferred or sent to us via WhatsApp.

Whilst the physical premises underpin trading, the primary value of most foot care practices lies in the goodwill (patient list) and the financial performance (and anticipated future performance) of the practice.  To allow us to assess this we will need:

• Copies of the latest 3 years available full published accounts (including both profit and loss and balance sheets)
• Accounts are historic/lag indicators, so any more up to date management accounts to provide a snapshot of current trading performance
• Completed copy of our practice assessment questionnaires which cover:
  • Schedule of fixtures fittings and equipment
    • Analysis of chair time utilization per service delivered
    • Analysis of revenue from clinical and dispensing cost centres
    • Trends in clinical procedures
    • Staffing costs and review of owner’s time input
    • Property costs, security of tenure and lease arrangements
    • Review of other readily available KPI and metrics
    • Assessment of other key commercial considerations and contracts

What else is included in the valuation of an independent podiatry business valuation by Podiatry Business Central?

As well as a detailed written valuation report, a valuation from Podiatry Business Central also includes a 30-minute follow-up consultation.

Because Podiatry Business Central are full-service providers, we can offer a unique insight into your foot care business and how it compares with other practices in the sector.

Via our proprietary in-house dataset, we are not only able to value, but also to evaluate the performance of the different key performance indicators and financial metrics of a podiatry practice.  This means that we are able to flag up the crucial areas to focus on for improvement – and when a valuation proves lower than expected for the owner, we are usually able to quickly home in on and diagnose the issues that need to be tackled.

What is NOT covered in or by our standard valuation of a podiatry business?

Whilst our valuation process and modelling tools do include a certain number of checks and balances in terms of benchmarking against a range of expected financial and KPI ratios which may potentially flag up anomalies or discrepancies –  it is important to note that as valuers we are not being paid to check or audit the validity of the accounts of the practice being assessed and therefore have to take the financial records at face value as presented as is standard practice.  We would therefore recommend that parties seeking to purchase some or all of the equity within a podiatry business commission a suitably qualified accountant to assist them with a due diligence process to verify the validity of the practice’s finances.

Whilst we do offer a wide range of practice growth, exit planning and business leadership/mentoring services – these are NOT included in the core price of a practice valuation.