Is your practice worth less due to COVID?

No reason to wait to sell.

Board certified business appraisers begin the process of valuation by reviewing the income producing ability of the practice. One advantage of small businesses are the “perks” of expensing optional and allowed items to minimize profits. Each owner personalizes these options upon their personal preference and their accountant’s advice.

The appraisal standard that guarantees uniformity is a process called normalization or recasting of the income statement. This is necessary because there are extra-ordinary and/or one-time expenses that must be considered. The evaluation process normalizes these items to get an accurate representation of the practice’s true cash flow. Examples are: 1) Legal fees from lawsuits; 2) Accounting fees from audits; 3) If office real estate is personally owned, paying an above market rent to yourself; 4) Paying yourself a below market salary and taking draws against profits for the balance to minimize FICA taxes.

These examples pale in comparison to the devastation of closing your practice for Convid-19 but there’s precedent for normalization. Every city unintentionally closes businesses from roadway summer construction. Professional practices, retail stores, restaurants are affected from the difficulty of getting to the business. Some are effectively closed for weeks.

There are acceptable normalization techniques to use for Convid-19 shut-downs. 1) If the practice is down 4-8 weeks, an add-back proportionate to lost business revenues will be made to the NOI. 2) If the practice is shut-down for more than two months, the preceding year’s income statement should be normalized and all the value weight be given to it. Assuming year to year performance consistency, there should be no value penalty due to Convid-19 closures.

Therefore, there is no reason to wait to list and sell your practice. Just make sure the appraiser of your practice is aware of and uses these techniques.