Hearing Aid Practice Financial Value: Part II

BackgroundBusiness 1
Last week’s blog was devoted to providing some questions/comments that could be helpful to a potential buyer/seller of a hearing aid practice.  It discussed organizing a team, financial performance, and value.  This week’s blog focuses on evaluation of other elements of the business: employees, sources of sales, the user list, and equipment and inventory – all related to valuing a hearing aid practice.

1.   Organizing Your Team
2.   Financial Performance
3.   Value
4.   Evaluation of Other Elements of the Business

The following evaluations can be done while the accountant is analyzing the financial records.

•  Premises

Are these part of the practice or are they subject to a leasehold or lease?  If the practice includes land and buildings, this is fairly straightforward.  However, if the practice is subject to a leasehold or lease, this may create a unique set of considerations.  In this case, the lease document and all of its amendments and attachments must be reviewed carefully, provision-by-provision.  Specifically:

  • What is the term of the lease and what are the renewal options or existing   opportunities?
  • Is the rental figure a gross amount, or is it a net lease?  If the latter, it may allow the landlord to add to the basic rent a wide variety of additional charges for such things as common area maintenance, taxes, utilities, and maintenance.
  • Who is responsible for major maintenance?
  • Are the various lease obligations current, and has the current tenant received notice of any impending changes and/or breaches of the existing lease agreement?
  • If the leased premises are in a building shared by other businesses, is there protection against the entry of a competing business?
  • If located in a medical building, are you protected against physicians or audiologists already in, or who may move into the building, deciding to dispense hearing aids from the building?

Check all of the above by a careful inspection of the surrounding neighborhood and a personal conference with the landlord or his agent.

•  Employees

Are there any employees not accounted for?  If so, what functions do they perform, how long have they been there, what salary levels are they presently enjoying or have been promised?  Are they under employment contracts?  Do they intend to stay or leave?  Are there any other existing contractual obligations–cleaning and maintenance contract, for example–to which cash is committed?  Business 5

•  Sources of Sales

From where does the practice get its customers?  Evaluate the three sources for hearing aid sales.  This is critical because the obvious question is to what degree one can count on continued business activity in the event of a change in the management and/or personnel of the practice.

•  Referral Business  

It is extremely difficult to transfer referral business.  This is based on personal relationships with the referral sources and may be discontinued.  Additionally, if a significant percentage of the business is based on referrals from ENT or audiology groups, this continued activity is subject to complete termination if they decide to dispense hearing aids.

•  Walk-in Business

If a significant portion of the sales is due to this, examine the demographic trends in the immediate and extended neighborhoods.  Changing urban population patterns may significantly lessen the worth because of the relocation of primary customers.

•  Lead generation Business

If the majority of the business comes from this, it may be expected to continue along its trend line provided that the same commitment to resources continues.

•  The User List

Consideration of this as an asset must be approached with a great deal of skepticism.

•  First, the list must be aged.  Experience suggests that any user who has not purchased an aid or batteries from the dispenser within the past 18 months, must be summarily dismissed.

•  A determination of recent sales must be made for the following  reasons:

1.  A recent sale should be a signal that follow-up, adjustment, and orientation procedures may well remain outstanding.  What is the status of these individuals and the completion of these sales?

2.  Many sales of recent origin suggests that the list may be purged against immediate repeat sales, and that the existing customer list may have been bombarded by promotional materials that may not make them receptive to the next wave of promotions.  This can be especially devastating to sales if the rash of recent sales was produced by reduced-rate sales.

•  Equipment and Inventory

Equipment, fixtures, and inventory evaluation should present no current or special problems.

•  Equipment must be valued on the basis of its trade-in value – not replacement value.

•  All maintenance and calibration records should be reviewed.

•  All non-testing/evaluation equipment should be tested for function and condition.

•  Office furniture and equipment should include allowances for the accelerated depreciation pattern for that type asset.

Inventory usually consists of hearing aids, batteries, and accessories.

•  The general rule regarding the valuation of each of these items is usually based on the date of purchase.

•  Current inventories will net current sales prices, but the older the inventory items, the lower their sales return.Business 8

•  A last consideration is the importance of a complete listing of all items that will pass with the business.

5.  The use of an attorney during final discussions may make good business sense. 

About Wayne Staab

Dr. Wayne Staab is an internationally recognized authority on hearing aids. As President of Dr. Wayne J. Staab and Associates, he is engaged in consulting, research, development, manufacturing, education, and marketing projects related to hearing. Interests away from business include fishing, hunting, hiking, mountain biking, golf, travel, tennis, softball, lecturing, sporting clays, 4-wheeling, archery, swimming, guitar, computers, and photography. Among other pursuits.

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