If you have not bought or sold a clinic before, the process can be a little confusing with phrases you have not heard of. Here are some hints to help you..
Net Profit – This is the most important figure when buying or selling a clinic. Once you have paid all your bills then you’re left with a net profit. Often the net profit may be small at around $15-$20K however the owner lives an lavish lifestyle … trips to Europe regularly, leases a Ferrari etc. This is done to lower the net profit and avoid paying too much tax.
When selling a clinic, many of these expenses can be ‘added back’ into the net profit as the new owner may be a bit more reserved. Remember the bigger the net profit, the higher the sale price will be on a clinic.
Earnings Before Income Tax (EBIT) – this very important term relates to net profit and how it is displayed. An EBIT net profit means that the owner has taken a wage and there is still profit at the end of the day. An EBIT profit is one the best profit figures you can get and this type of profit guidelines the best sales price of a clinic.
P&L – A Profit and Loss Statement (P&L) is a report that shows the clinics performance and financial position. It shows your net Profit (or loss) based on your total Income & Expenses, expenses incurred during a specific period of time, usually a fiscal quarter or year.
Addbacks – when calculating the real net profit of a clinic it is a common practice to add back into the net profit certain expenses to give a true indication of the actual money you will earn out of the clinic. Justifiable addbacks are depreciation, one off expenses like interest on a loan, lawsuit, leasing of vehicles, overseas trips, excess wages or superannuation. All of these expenses can be stopped when you buy the clinic, which is why they can be included as an addback.
Return on Investment (ROI) – this figure is important to determine how quickly you will get your money back on your investment. For example if a clinic had an EBIT net profit of $100K and you purchased the clinic for $200K then your ROI would be 50% which means you would make you money back in 2 years. In most cases the higher the ROI the better the investment. To work out ROI all you need to do is take the net profit and divide it by the sale price of the clinic then multiply by 100. EG $100K ÷ $200K x 100 = 50%.
Income summary – The income summary account is a transitional account which all income statement revenue and expense accounts are transferred at the end of an accounting period. The net amount transferred into the income summary account equals the net profit or loss that the business incurred during the period.
BAS – Clinics registered for GST will report their tax obligations and entitlements on a single compliance form called the Business Activity Statement (BAS).
The BAS form requires clinic to report:
- Goods and Services Tax (GST) – monthly or quarterly
- Pay As You Go (PAYG) – monthly or quarterly
- Fringe Benefits Tax (FBT) – quarterly
- PAYG – instalments
- Wine Equalisation Tax, Luxury Car Tax, etc.
Walk In Walk Out (WIWO) – the other option when buying a clinic is to purchase it on a WIWO basis. This is where all the stock is included in the sale price. This often happens if the clinic does not have a lot of stock (less than $5000) or the owner just wants to sweeten the deal.
Equipment list – The equipment list is an extensive list of all equipment within the clinic. This includes desks, chairs, computers, beds etc. The list will include the year purchased and amount the item was purchased for. In many cases the equipment is more than a year old and will therefore require a depreciated figure to be calculated as well.
Stock at Value (SAV) – this can often be tacked onto the price of a clinic and suggests that you will be required to purchase the clinic at a certain price plus the current stock. Eg – Sale Price of $150K + Stock of $20k.