Changing Values of Your Professional Practice / Business

In lieu of the NBA free agency and big money handed out to star talent in the basketball world (i.e. Paul George 4 yrs/$137million, Chris Paul 4 yrs/$160 million), I, as a small business owner, began to think about a familiar situation facing many of the small, bigger small firms, and mid-size firms today. This thinking led me to a famous scene from one of my favourite movies – Moneyball, which has numerous analogies that most of us miss in everyday life – see scene below:

Grady: The problem is we have to replace three key players in our lineup.

Billy Beane: No. What’s the problem?

Pittaro: Same as it’s ever been. We’ve gotta replace these guys with what we have existing.

Billy Beane: No. What’s the problem, Barry?

Barry: We need 38 home runs, 120 RBI’s and 47 doubles to replace.

Billy Beane: [Billy groans, loudly] The problem we’re trying to solve is that there are rich teams and there are poor teams. Then there’s fifty layers of crap, and then there’s us. It’s an unfair game…..

Billy Beane: If we try to play like the Yankees in here (incorrectly drafting and building a team/organization), we will lose to the Yankees out there.

Grady: That sounds like fortune cookie wisdom to me, Billy.

Billy Beane: No, it is just Logic.

 

We have presented the Cleveland Cavaliers franchise value from 2003 to 2018, and the chart below clearly shows the impact that key player(s) have on organizations.

Cleveland Cavaliers – Franchise Value from 2003 to 2018

In 2011, Lebron James left the Cleveland Cavaliers and value drops from $476 million, in 2010, to $355, in 2011; subsequently, when Mr. James returns to the Cleveland Cavaliers, the franchise value rose dramatically, in 2015, to $915 million, from $515 million. Every valuator / appraiser knows that value is prospective…it is equivalent to the present value of all future benefits anticipated to accrue from ownership. Often the value of any business includes people (i.e. intangible assets – relationships/networks, trade secrets, innovative thinking etc.), which are not directly captured on the financial statements of any company; however, they have a huge impact on the bottom line.

As business valuators / appraisers, we are, often, retained to value either a medical, dental, law, accounting or other professional practice. The valuation is often required for matrimonial disputes, purchase or sale of a practice or partnership reasons. Most specific value-influencing factors that should be considered in the valuation of professional practices include:

  • Start-up costs of a new practice;
  • Quality and retention of staff;
  • Quality and retention of clients;
  • Location / target market;
  • Lease and lease terms;
  • Tangible asset backing; and
  • Covenants not to compete.

Additionally, there are other factors, some of which may be specific to certain types of professional practices and these professional practices’ are influenced by these factors:

  1. Accounting Practice
    • Revenue composition;
    • Location / target market;
    • Size;
    • Profitability; and
    • Client base.
  2. Law Practice
    • Nature of clients;
    • Clients’ expectations;
    • Quality of personnel;
    • Organization in place;
    • Competition;
    • Value of work-in-process; and
    • Size of firm.
  3. Medical Practice
    • Continuity of patients;
    • Patient profiles;
    • Location; and
    • Specialized services.

At Minerva Valuation Advisors, we are trained, as business valuators, appraisers, bankers and financial analysts, in a variety of valuation & advisory settings including in tax planning, family law, shareholder disputes and merger & acquisitions and advisory. Please contact us at either 647-367-8457 or at 647-695-0830.

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