Practice Valuation: The Buying and Selling of an Audiology Practice

ABSTRACT

Audiology practices are valuable businesses that can be bought and sold. It may be necessary to evaluate the worth of a practice for purchase, sale, financial planning, partnership agreements, or benchmarking reasons and these values can be established by the use of business valuation principles. The book value and presentation methods of practice valuation for a hypothetical practice are outlined and can be used by audiology practitioners to understand this process.

KEYWORDS

Business - goodwill - practice valuation - book value - nondisclosure agreements - financial due diligence - clinic due diligence - asset purchase - business in transit

REFERENCES

• 1 Drullinger R. Buying and selling an audiology practice. In: Traynor R CAS 7308, Business and Professional Issues in Hearing Healthcare, University of Florida Working Professional Doctor of Audiology Program. Gainesville, FL; 2004
• 2 Money Words .Goodwill. ADFVN Financial Glossary. http://Available at: www.advfn.com/money- words_term_2212_goodwill.html Accessed July 31, 2005
• 3 Hosford-Dunn H, Dunn D, Harford E. Buying and Selling a Practice: Audiology Business and Practice Management. San Diego, CA; Singular Publishing 1995: 436-440

APPENDIX A Confidentiality Agreement

This Confidentiality Agreement (this “Agreement”) is entered into as of the 11th day of May, by and between ABC Audiology, Inc., having its principal place of business at 9733 Flower Street, Portland, OR 97745, and its Affiliates (as defined below) (“ABC”), and Ace Hearing (USA), Inc., having its principal place of business at 1234 6th Avenue, Portland OR 97236, and its Affiliates (“Ace Hearing”).

PRELIMINARY STATEMENTS

ABC and Ace Hearing intend to explore possible business arrangements involving the two companies (the “Potential Arrangements”).

Exploration of the Potential Arrangements will necessitate disclosure of certain financial and other Proprietary Information (as defined below) of each party to the other party.

Use of such Proprietary Information by the party receiving such information for purposes other than evaluation of the Potential Arrangements would be seriously detrimental to the party furnishing such information.

AGREEMENT

In consideration of the Preliminary Statements and other good and valuable consideration, the adequacy, sufficiency, and receipt of which are hereby acknowledged by the parties hereto, the parties hereby agree as follows.

Section 1. Definitions. In addition to the terms otherwise defined in this Agreement, the following terms shall have the following meanings:

“Affiliate” shall mean, with respect to any party hereunder, any entity directly or indirectly controlling or controlled by or under common control with such party; provided that, for purposes of this definition, “control” (including, with correlative meanings, the terms “controlling”, “controlled by,” and “under common control with”) shall mean the possession, directly or indirectly, of the power to direct or cause the direction of management policies, whether through the ownership of voting securities or otherwise. As used in this Agreement, any reference to a party includes the party's Affiliates.

“Proprietary Information” shall mean all information about the business, properties, or operations of a party to this Agreement that the party or its Representatives (as defined below), supply to the other party to this Agreement or its Representatives, regardless of the manner in which the information is provided; provided, however, that the term “Proprietary Information” shall not include any information which (a) was available to the public prior to the time of such disclosure, (b) becomes available to the public as a result of actions by persons or entities other than the Receiving Party (as defined below) or its Representatives, or (c) was obtained by the Receiving Party or its Representatives, either prior or subsequent to disclosure, from a third party not under any obligation of confidentiality to the Supplying Party (as defined below).

“Receiving Party” shall mean, as to any Proprietary Information, the party to this Agreement that receives such Proprietary Information from the other party to this Agreement.

“Representatives” shall mean, with respect to any party to this Agreement, all officers, directors, employees, agents, consultants, representatives, and professional advisors of such party.

“Supplying Party” shall mean, with respect to any Proprietary Information, the party to this Agreement that originates and supplies such Proprietary Information to the other party to this Agreement.

Section 2. No Exclusivity. The parties agree that this Agreement imposes no obligation to discuss Potential Arrangements exclusively.

Section 3. Proprietary Information. The Receiving Party shall, and shall cause its Representatives to, use Proprietary Information provided by the Supplying Party or any of its Representatives solely for the purpose of considering the Potential Arrangements, and keep such Proprietary Information strictly confidential unless such confidentiality is waived in writing by the Supplying Party. Each Party shall inform its representatives who have access to Proprietary Information of the other party about the confidential nature of such information and about the confidentiality undertaking contained herein, and shall be responsible for any breach of this Agreement caused by any of its Representatives.

Notwithstanding the foregoing, if the Receiving Party or any of its Representatives is requested or required to disclose any Proprietary Information, the Receiving Party will promptly notify the Supplying Party of each such request or requirement so that the Supplying Party may seek an appropriate protective order or other appropriate relief. Each party agrees to cooperate fully with the other in seeking any protective order or other remedy. If, in the absence of a protective order or the receipt of a waiver hereunder, a Receiving Party or any of its Representatives is, nonetheless, in the reasonable written opinion of the Receiving Party's counsel, compelled to disclose Proprietary Information, it may disclose such information pursuant to such request or requirement without liability hereunder.

Section 4. Confidentiality of the Potential Arrangements. Neither party nor any of their Representatives will, without the other party's prior written consent, disclose to any person (other than the persons employed by either party or its Representatives who are actively and directly participating in evaluating the Potential Arrangements under a duty of confidentiality) any information about the Potential Arrangements or the terms, conditions, or other facts relating thereto, including without limitation the fact that Potential Arrangements are under discussion.

Section 5. Return of Proprietary Information. If either party does not wish to proceed with the Potential Arrangements, that party shall promptly advise the other party of that decision in writing. In that case, or in the event that the Potential Arrangements are not consummated within a reasonable time, the parties will, promptly, upon timely written request, return to the requesting party the Proprietary Information that the party has received and will use its best efforts to cause all copies thereof to be returned or destroyed. Such destruction shall be confirmed in writing to the requesting party. In addition, each party shall take all reasonable steps to secure all documents, memoranda, notes, analyses, and other embodiments prepared by it or its Representatives in the course of evaluating the Potential Arrangements based on or reflective of the Proprietary Information of the other party in confidential archival files.

Section 6. No Representation or Warranty. The parties understand and acknowledge that neither party nor their Representatives are making any representation or warranty as to the accuracy or completeness of any Proprietary Information except in the case of and to the extent and only to such extent as shall be expressly set forth in an executed and delivered definitive agreement between the parties to effect the Potential Arrangements. Neither party nor any of their Representatives shall have any liability to the other party or any Representative of the other party relating to or arising from the use of the Proprietary Information, except as may be otherwise agreed in writing.

Section 7. Availability of Equitable Relief to Prevent Breach of Agreement. Each party agrees that the other party, without the requirement of posting any bond or other security, in addition to all other remedies available at law, shall be entitled to seek and obtain equitable relief, including injunctive relief, in the event of any breach of the confidentiality requirements of this Agreement.

Section 8. Compliance with Applicable Laws. It is the intent of the parties hereto to comply with all applicable laws.

Section 9. No Further Obligation. Except as provided in this Agreement, no party to this Agreement shall have any obligations with respect to Potential Arrangements until such time, if any, as definitive documentation with respect thereto shall have been executed and delivered.

Section 10. Choice of Law. This Agreement shall be construed in accordance with the laws of the state of Oregon without regard to conflict of law principles.

Section 11. Severability. In the event any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, the parties hereto agree that such holding shall not invalidate or render unenforceable any other provisions hereof and that this Agreement shall be construed as restricting, limiting, or eliminating the particular provision held to be invalid or unenforceable so as to render the entire Agreement valid and enforceable to the fullest extent possible. The parties hereto further agree that the holding by any court of competent jurisdiction that any remedy pursued by any other party hereunder is unavailable or unenforceable shall not affect in any way the ability of such party to pursue any other remedy available to it.

Section 12. Counterparts; Amendment; and Waivers. This Agreement may be executed in counterparts, each of which shall be deemed to be one and the same instrument. This Agreement may be amended only by a written instrument or instruments signed by the parties hereto. No failure or delay by any party hereto in exercising any right, remedy, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or of any other right, remedy, power, or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any other rights or remedies provided by law.

Section 13. Notices. All notices and other communications to any party hereunder shall be in writing and shall be given to such party at its address set forth herein. Each such notice or other communication shall be effective if given (i) by mail, 72 hours after such communication is deposited in the mail with first class postage prepaid, addressed as aforesaid, or (ii) by any other means, when delivered at the address as aforesaid.

Section 14. Term of Agreement. The term of this Agreement will commence upon the execution and delivery of this Agreement and will extend for a period of two years unless extended or terminated earlier by written agreement of the parties. From and after the end of the term of this Agreement, neither party hereto shall have any further liability or obligation hereunder.

Dated as of the day and year first above written.

ABC Audiology Center, Inc.

By: ____________________________________

Title:_____________________________________

Ace Hearing (USA), Inc.

By: ____________________________________

Title:_____________________________________

APPENDIX B Preliminary Due Diligence Questionnaire

Figure 2 APPENDIX B Preliminary Due Diligence Questionnaire

APPENDIX C Spade Work for the Seller: Portfolio Categories and Information Gathered by the Seller[3]

Type of Documentation	Method of Documentation
Descriptive Statistics
Demographics	Number of people in target market area, according to age, income, marital status, etc.
Local/Regional Growth Trends	% change in population by census tract, according to age, income, etc.
	Home sales
	% change in number of businesses and description of types of businesses in that area
Competition Survey	All sites, broken down according to location, services offered, number of and qualifications of staff, target markets, financial statistics, fees, reputation
	Additional analysis of hospital, clinic, agency, university, and government sites: offering or likely to offer services? salary or contract?
Special Situations	Local and state regulatory activities (e.g., state licensure)
	Third-party insurance regional reimbursement policies and rates for audiologists
	Managed care groups' arrangements for audiology services
Spade Work for the Seller Portfolio Categories and Information Gathered by the Seller[3]
General Outlook for Independent Audiology Practice	Highlights and summarizes above information, concluding with owner's subjective impressions, in the form of present and future SWOT analysis
Practice Documentation
Mission and Philosophy	Copy of Mission Statement
	Copy of Practice Philosophy
	List of short- and long-term practice goals
Physical Premises	Square footage
	Photos and floor plans of the building and practice
	Photos of exterior and interior signage
	Copy of deed or lease
Products and Services	List of services and fees
	List of tangible products and pricing structure
Target Markets	Computer printout of active patient base (e.g., patients served within the last 12, 18, 24 months)
	Computer printout of inactive patient base (e.g., patients who have not been served within the specified time frame, have a disconnected phone number, no forwarding address, etc.)
Profile of Patient Population	Central tendency statistics (range, average, mode) for age, needs, etc. (e.g., “On average, 50% of new patients require hearing aids, but the range varies from only 25% in June/July to 75% in January.”)
	% of total patients that are new
	Average number of patients per day
	Annual % increase in total patients
	Average reimbursement per patient
	Average number of encounters per patient per year
Referral Sources	List of sources, including breakdown of the sources of new patients (e.g., word of mouth, promotions, physician referrals, contractual arrangements, etc.)
Promotional Materials	Compilation of materials, including (but not limited to) waiting room brochures; newsletters; direct mailing; referral program materials; ad copies (Yellow Pages, newspapers, radio/TV, etc.); practice brochure, staff bios, etc.
Practice Forms and Documentation
Office and Audiology Forms	Test forms
	Sample referral letters and other referral correspondence
	Insurance and private pay billing forms
	Patient info forms (e.g., insurance billing procedures and policies, product return policies, etc.)
	Product order forms
	Product sales agreements
	Product repair agreements
	Inventory control forms
Licenses, Credentials, and Registration	Copy of state business registration and any local forms that apply
	Verification of legal business entity (e.g., IRS approval of S election; state corporate registration, etc.)
	Copies of Audiology certification/licenses and hearing aid licenses held by the owner(s) and / or employees of the practice
Insurance	List of insurances held by the practice for owner(s) and/or employees: malpractice, office, workers' comp, disability, life, health
Equipment and Supplies
Equipment	Inventory list of major equipment showing date of purchase, serial number, supplier, purchase price, and maintenance record
	List of leased equipment, with rate and age of lease
Furniture and Fixtures	Inventory list showing date of purchase and purchase price
Instruments and Tools	List showing quantity and cost of each
Audiology and Hearing Supplies	Listed with date of inventory
Consumable Office Supplies	Listed with Date of Inventory
Financial Information and Trend Analyses
Pension and Profit-Sharing Plan	Report of current status of the plan, including percent vesting each employee
Tax Returns	Copies of last 3 years of business returns
Financial Statements	Annual income statements for last 3 years with the CPA's signed cover letters included
	Interim income statement to present date
	Pro forma income statement for next 3 years
	Current balance sheet
Accounts Receivable	Listed according to aging of accounts
Accounts Payable	Shown according to due date
Trend Analyses	Quarterly sales volume for last 3 years
	Annual profit for last 3 years
	% of owner's/owners' net income to gross receipts for the last 3 years
	% of cost of sales for the last 3 years