When it comes to the sale of your business, you need to be doing everything you can to increase the valuation. The more profit your practice earns, the more interest it will generate in the marketplace and the more likely you are to get a deal that you will love. One way of boosting your valuation is to add back your personal expenses. Here's what you need to know:
Dollar for Dollar Valuation
First, it is important to understand that the valuation of your practice will not be based only on your current revenue. Instead, potential buyers will value your practice based on today's revenue and profit as well as future potential revenue and profit. For every dollar in expenses that you add back to bottom line profit, your valuation could increase by three to six dollars. With this in mind, it's easy to see how quickly your valuation can compound if you are diligent about adding back personal expenses paid for by your veterinary practice as you prepare to sell.
What to Add Back
Before you begin adding back all of your personal expenses in a bid to boost your valuation, you must also know which expenses you should be adding back. You should begin by focusing on one-time expenses. This is because the new owner will be looking at ongoing revenue versus the ongoing expenses. Keep in mind that some recurring expenses may first appear to be one-time because of the length of time between them. Make sure you pay close attention to these details.
The next area you should consider for add backs are continuing education, travel, car and truck expenses, meals, entertainment expenses, and salaries and rent that are above industry standards. You may add back a portion of these expenses to account for what the industry says you should be paying for these items.
Finally, if your business made any charitable contributions on your behalf you may add these back in as well. Some charitable donations are made by the practice, while others are made to help you personally reach your goals. These costs will not be typical of the new owner.
The best practice is to start monitoring these expenses early in your exit strategy and find ways to add back any items that will boost bottom-line profit. The process itself is meant to insure that your expenses meet industry benchmarks so potential buyers can see a true valuation.