Many private practice owners are so busy doing their therapy work that they never really have the time (or take the time) to step back and look at their practice from an investment perspective. You need to think of your practice as an investment. You’ve invested time, energy, education and resources into it. You’ve also built up a list of clients, services, and referral sources.
Unfortunately, many business owners only start looking at their practice in this way once they’re ready to exit and retire. By then, it could be too late. If it’s not too late, then retirement may be delayed so that you can work to build value in your practice.
This article is Part 2 of 3 in a 3 Part series titled “Is Your Private Practice Worth Anything?” In Part 1 we covered:
1. Financial Performance
2. Growth Potential
3. Switzerland Structure
Here, in Part 2, we will cover the next 3 of the 8 drivers of a business’ value and why each driver is important. As you read through this, think about ways you can build value into your practice.
4. Valuation Teeter Totter: How much free cash flow does your practice produce. Most service-oriented businesses are cash spigot businesses assuming expenses are managed and there is consistent and steady cash flow. So, when a potential buyer looks at buying your business, they will look at two things: (1) The amount of revenue your business generates on an ongoing basis and how quickly it’s collected (2) The amount of money that goes out to operate the business.
A potential buyer wants to know how much they will need to float the company to cover expenses while waiting on the revenue. The lower the expenses (without compromising the business’ operations or revenue) the better and the higher the revenue and the faster it is collected the better.
Imagine you are looking to buy a business. It generates invoices of $10,000 per month or $120,000 per year. This may look very attractive to you. Now imagine that the $10,000 per month has an average collection date of 60 days (e.g. insurance reimbursement). This means that it takes 2 months to receive payment for services rendered. Now, compare the $10,000 per month practice with a 60 day collection cycle to one that generates $8,000 per month with a same day collection cycle (e.g. private pay). Which business would you rather purchase?
5. Recurring Revenue: This driver relates to the proportion and quality of automatic, recurring revenue you collect each month. Businesses that generate a portion of their revenue from recurring revenue are seen as much more valuable than those that must be hired by new clients all the time to generate the same level of income. The risk associated with the latter is high – there’s a great deal of uncertainty associated with generating new revenue, from scratch, all the time. Therefore, depending solely on that type of revenue will make your practice less valuable.
As mentioned in Part 1 of this series, you can build value into your practice by expanding your service offering. Think about how you can help the broader market by providing paid access to tools and resources that help them solve a pain point. Not everyone is comfortable going to a therapist. Some people are more comfortable doing activities or self-help exercises to help with a problem. Why not create a tool to help these individuals and charge for access to it. Whatever you charge should be reflective of the value the program provides. People will gladly pay for access to programs that truly help them and provide them with desired results.
6. Monopoly Control: How well differentiated are your services from competitors? How well differentiated are you from other therapists in your geographical location? Unfortunately, location isn’t generally enough to differentiate oneself from fellow therapists.
Differentiation means…if you are a therapist working with children in divorce, then how are you different than any other St. Louis therapist working with children in divorce? What do you do differently? How is your approach different and why does this matter? How do your results differ? What do you do differently that impacts the family unit?
Many buyers look for businesses that have a differentiated marketing position. This is because the more you differentiate your services, therapy, and results the less commoditized your services become. This means that your services are less likely to be price shopped. You will have more control over your prices and more selection in the customers you serve. THIS makes your practice more desirable and therefore more valuable.
Whether you are a newer practitioner or a veteran, I encourage you to take some time this month and really think about how you are different than other therapists doing similar work. It’s important to identify your uniqueness so that you can actually incorporate these details into your marketing, communication, Psychology Today profile and other marketing materials. By doing so you will have the opportunity to become more profitable, be better able to attract your ideal clients, and build value into your practice.
Stay tuned for next month’s newsletter where I will cover the next 3 drivers of a business’ value. And remember, it can be extremely helpful to have a “thinking partner” in this process. I invite you to reach out if I can be of help in any of the (3) areas covered above. Until next time, I want to wish you a successful and prosperous July.
I can be reached by email at email@example.com or phone at (314) 250-3865 and (314) 272-0727