Valuation
Placing a value on a business
There are a number of reasons why you might want a valuation performed.
Valuation performed for tax planning purposes
A valuation should be performed, for tax planning purposes, in a corporate restructuring situation, where for example, a sole proprietorship is transferred into a corporation.
Avoiding having unreported income
By accurately determining the value of your business, you avoid the potential pitfall of Canada Revenue Agency (CRA) reviewing the transaction and assessing income tax on “unreported income”.
A valuation should be performed in a marital breakdown situation, whereby there is a need for determination of value of the practice.
A valuation is required by the legal professionals for purposes of determining settlement as between the parties.
Valuation performed for purchase or sale
Whether you are the buyer or seller, our role is to determine a purchase price or a proposed offer price.
This valuation serves as a professional document that you can use to assist you in your negotiations to get the best price in the circumstances;
If you're the vendor, our valuation will assist you in determining the asking price.
If you're contemplating the sale of a practice a valuation and due diligence assessing the current value and salability of your practice can help you determine what steps need to be taken to put the practice into better shape for future sale.
We recommend that you plan ahead at least 5 years in advance of a potential sale. By reviewing your practices and assessing your practice, you have the time to make necessary changes.
The valuation and due diligence process
We review the financial and qualitative aspects of the practice.
We review the financial information and statistical data of the practice.
If you are the purchaser, we request the information from the vendor's accountant and the vendor themselves, as often the vendor's accountant doesn't have the relevant information.
Is the purchase price reasonable?
We review the documents for reasonability, whether they makes sense, whether there are inconsistencies and to assist us in doing our financial calculations.
Where we find inconsistencies in the data (see case study below) such as between the income tax return and the financial statements or as between the practice management software and the bookkeeping information, we perform additional procedures.
We may then request to see more detail including bank statements, deposit books and cheques.
We review, on your behalf, the statistical information, discuss with the vendor such qualitative issues as patient demographics, competition, type of practice, staffing and various other issues.
We add these qualitative factors into our risk formula, along with our financial calculations to come up with value.
This is not a simple task assignable to a calculator. Professional judgment is at the root of determining risk factors, and judgement comes from experience with and knowledge of the health care profession and the business itself.
A Valuation Case Study
Situation
A health care practitioner was acquiring a practice in the Greater Toronto Area and wanted to be sure they were doing the right thing.
Solution
We obtained the necessary financial information from the vendor, including personal income tax returns, statistical information from their practice as well as monthly summaries of billings and collections from their practice management software.
With our knowledge of the practice management software and how it worked, we were quickly able to identify what information was necessary for us to analyze the practice.
When we looked at the billings and collections, we noticed that the vendor had neglected to give us the other page from the monthly printouts. This page included accounting adjustments and write-offs. These adjustments reflected discounts and other write-offs that the chiropractor had done for family and other patients as well as bad debts.
By doing a comparison of the revenue from the practice management software (after we had taken into account the adjustments) to their revenue as shown on their personal tax returns, we identified a discrepancy of approximately $25,000 per year, whereby the income reported on their income tax returns was $25,000 higher than the revenue (after adjustment) from the practice management software.
A comparison to their bank statements and, in particular, the deposits shown on their bank statements confirmed that the money they deposited for the year was nowhere near the revenue that she reported on their tax return. In fact, the vendor never performed a reconciliation between their deposits and their billings (a big NO NO!!!).
After further investigation, we reported this significant discrepancy to our client.
Result
The vendor lowered the purchase price by $25,000, which provided a healthy return on our client's investment in valuation and due diligence.
Contact us today to help you get the right deal.