A practice has a value which is based upon the total value of its Net Assets.
THE TRUE WORTH OF THE BUSINESS IS THE VALUE OF ITS ASSETS MINUS THE VALUE OF ITS LIABILITIES.
Most of the above are not controversial when coming to produce a value, however the intangible value of the goodwill requires definite skills to maximise the true worth of the business.
Goodwill: The difference between the purchase price and the sum of the net assets is by definition the value of the "Goodwill" of the practice.
This invisible asset is the extra value put on the business due to its ability to generate profits or potential profits, as we have stated the Goodwill is the major Intangible asset in any practices value. This price is dependent upon the purchasers willingness to pay for the benefits that practice will bring .
Calculating a Value: There are many different methods of valuing a practices, all of which should be based upon either the assets of the business, the profits that the business can generate, the potential profits or a mix of all three.
At the VBA we will nearly always use a multiplier of the Maintainable Profit - This is the most effective and trusted way of valuing a veterinary practice, the principle is to give an estimate of the maintainable earnings of the practice, and hence what the purchaser should get back for their investment.
If the practice is incorporated (i.e. a Limited Company) then the purchaser will normally buy the shares of the company which in most cases are based upon the value in the balance sheet.
Sole trader or partnership Sale.
If the practice is simply a partnership or sole trader the purchaser will normally buys the Goodwill and selected assets, leaving the seller to settle any debts and collect any monies outstanding.
Limited company sale
In most cases the the buyer will purchase 1. The shares of the company, taking over all of the assets and liabilities, effectively taking over the company as a trading entity. The shareholders will obtain the calculated value of the shares on completion of the sale.
2. The business and assets of the company, leaving the company as a non trading shell -from which the shareholders will extract any remaining funds.
Each route will have both differing tax consequences and purchase costs on both the buyer and seller, and it is essential to take tax advice on this before any decisions are made.