If you own optometry practice, you own a valuable asset that can be sold and thereby converted to liquid funds. You might choose to sell your practice when you retire or when you receive a generous offer.

It’s important to know the value of your firm before you attempt to navigate the process of selling a business. The value of your firm can also be used as a metric of success in an annual evaluation of your company’s performance.

The Rough Estimate

If you’re looking for a quick and easy way to estimate the value of your firm, simply multiply your gross revenue by 0.65. The gross revenue of your firm is the sum of dollars collected over the course of the year.

This estimate isn’t very accurate because it neglects to account for variations in the ratio of profit to revenue that optometry practices can collect. If your firm has a relatively high ratio of profits to revenue, the value of your practice is likely higher than this estimate.

Calculate Equity

A better way to determine the value of your practice is to calculate your firm’s minimum value or equity. You can calculate the equity of your practice by subtracting the firm’s total liabilities by the firm’s total assets.

You should think of equity as the money you would be left with if you abruptly shut down your practice, sold all your equipment and property, and paid all your debts.

A Better Way to Valuate Your Practice

To find an even more accurate estimate of the value of your company, first find the Adjusted Optometric Net by subtracting the expenses of your business, excluding the costs of ODs working in the practice, from the practice revenue. You’ll also have to add back depreciation and personal expenses that you run through the business into the Adjusted Optometric Net.

Add interest, taxes, and amortization to the Adjusted Optometric Net to get your practice’s Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA).

Find the weighted EBITDA with this formula:

(0.167 x EBITDA year one) + (.333 x EBITDA year two) + (.5 x EBITDA year three)

The final step is to multiply the weighted EBITDA by 4.25.

This method rewards business growth, high gross revenues, and high Adjusted Optometric Nets, making it a more comprehensive determination of your firm’s value.

What to do with Valuations

You probably retain outsourced bookkeeping services to handle the finances of your optometry practice. If so, your CPA should calculate your company’s equity at least once a year. You should compare the company’s equity across the years; if the number goes up, your business is growing.

If you want to raise money to expand your business, take out a business loan, or just keep track of how your business is growing, you’ll need to know the value of your business.

More than a Formula

Valuations are important, but you’ll need more than just a number to determine a plan for the sale or long-term plan of your optometry practice. Caro & Associates can offer advice and assistance during important transactions and throughout the entire life of your business.

Retaining a CPA and EA to handle your small business finances can keep your business on the right track while you focus on optometry. Contact us at (206) 497-0671 or info@caroandassociates.com to learn more about how we can help your optometry practice.