Valuation in a Liberal Profession

On Overnamemarkt, practices in liberal professions are regularly offered for sale. This article provides an overview of methods and steps for determining the value of a practice in a liberal profession during transfer, entry, or share sale.

The acquisition of a practice in a liberal profession, such as a pharmacy, physiotherapist, surveyor, doctor, or others, fundamentally differs from the business transfer of a regular commercial enterprise due to the specific nature of the liberal profession and the legal and ethical aspects involved.

Overzicht vrije beroepen

• Specific features of business transfer in liberal professions
• Valuation of a sole proprietorship
• Valuation of a corporation
• Key valuation methods

Specific features of business transfer in liberal professions

1. Personal service and trust relationship with clients

Liberal professions are heavily based on personal service and trust relationships with clients or patients. This means that the value of the practice is closely tied to the professional/entrepreneur and their reputation. In a traditional business, customer relationships are generally less personal and more dependent on "anonymous" products or services offered, or strong brand names.

2. Regulations and licenses

Many liberal professions require specific licenses, diplomas, or qualifications. This means not just anyone can take over the practice; the new owner must meet the same professional standards and legal requirements. This limits the number of potential successors.

3. Goodwill or intangible assets

In a liberal profession, intangible assets such as the practice's reputation and client relationships play a significant role. In the acquisition of a commercial enterprise, tangible assets (such as inventory, equipment, and machinery) are often more important than in a liberal profession, where intangible assets (such as client base and reputation) carry more weight.

4. Ethical and legal obligations

Liberal professions often deal with strict rules regarding patient data and confidentiality. During a takeover, these obligations must be carefully transferred and complied with, which can add complications.

5. Continuity and client retention

In a practice takeover, the continuity of care or service is crucial. This often means there is a transition period where the old and new owner work together to ensure a smooth transfer and to make sure clients or patients feel comfortable with the new professional.

6. Specific elements in valuation

Valuing a practice in a liberal profession is often more complex than for a commercial enterprise. Turnover and profitability must be considered, as well as intangible factors like location, specialization, and the transferring professional’s age and experience.

7. Contractual aspects

There may be specific contractual obligations and insurance tied to a liberal profession, such as professional liability insurance. These must be carefully managed during the transfer.

The combination of these factors makes taking over a practice in a liberal profession a more complex process compared to the takeover of a traditional commercial enterprise. Nevertheless, the basic valuation principles remain.

Here too, we first distinguish - sole proprietorship ↔ corporation - with or without real estate and base our approach on adjusted historical results and business plans for the coming years to determine the free cash flow.

Valuation of a sole proprietorship

The valuation of a sole proprietorship follows a step-by-step plan:

• Inventory and normalize results: Collect financial data from the past 3 to 5 years, including income and expenses. Adjust for exceptional occurrences to achieve normalization of figures.
• Available Professional Income: Calculate net income after deducting social contributions and taxes.
• Economic Result: Recalculate business results by excluding costs considered private or exceptional.
• Evaluate Investments: Determine the real market value of assets (for example, equipment, inventory), which can be higher or lower than the book value. (Book value = historical cost minus depreciation)
• Special attention to real estate. Is the availability of the same property essential for continued operation of the practice? Is the property leased or owned? Is there an ongoing financing?
• Apply Valuation Techniques: Use normalized figures to apply valuation techniques.

Valuation of a corporation

The valuation of a corporation follows a step-by-step plan:

• Analyze Balance Sheet: Start by analyzing the company's balance sheet to establish a base value.
• Value of Assets: Revalue each balance sheet item to their real value, including any intangible assets like goodwill.
• Latent Tax Liability: Consider taxes on capital gains in the valuation.
• Results and Forecasts: Use historical data and projections to estimate future profits and cash flows.
• Apply Valuation Techniques: Apply multiplier methods to the adjusted balance sheet and the projected cash flows.

Key valuation methods

Refer also to Quick Guide UNIZO - What is my business worth?

1. Substantial Value liberal profession

This method focuses on the balance sheet and includes the value of assets minus debts. The adjusted substantial value accounts for revaluations and is often considered a minimum value.

2. Methods based on historical results

These use rules of thumb based on market-conform prices in specific professional groups. (Source: goodwill Messotten)

Examples:

• Accountants; accounting firms one times the gross annual fees,
• Lawyers one to two times the annual fee amount,
• Pharmacies 100%-200% of the average annual turnover of the last five years,
• Auditors 1 to 2 times the annual fee amount,
• Notaries 2.5 times the average income of the office over the five years preceding the transfer.

These methods can vary over time and are not always scientifically substantiated.

3. Methods focused on future results

These approaches look at the future yields and free cash flows of the practice based on detailed business plans for the next 5 years (or longer).

The Net Present Value (NPV), also known as Net Cash Value (NCV), is a financial metric used to determine the current value of future cash flows. It helps assess whether an investment is worthwhile by accounting for all future income and expenses converted to their present value.

A simplified method is calculating the repayment capacity. Here, it determines what free cash flow is available annually after paying salaries (including to the "manager"), necessary investments, and repaying long-term debts. This free cash flow can then be used to repay the acquisition sum. A handy rule of thumb is that a purchase price is reasonable if it can be repaid with the free cash flow of the next five years - provided no real estate is included in the acquisition sum.

Conclusion

An accurate valuation requires careful analysis of financial data, adjustments for exceptional circumstances, and the use of appropriate valuation methods. Expert guidance is essential to obtain a realistic and fair valuation that can serve as a basis for successful negotiations and strategic decision-making.