To add a practice broker's viewpoint to the discussion, I also talked with Larry McCormick, DVM, MBA, CBA, co-owner of The
McCormick Consultant Group and Simmons & Associates Mid-Atlantic. McCormick believes in some very select situations, it is
appropriate to attach value to the client list.
"If the acquiring practice has excess capacity to accommodate the influx of additional business,
it is reasonable to believe that the majority of the clients will make the transition to the new practice, the clients have
value," he states. "When clients transfer from another practice, they bring the revenue they generate but no added fixed costs.
Thus, the bottom-line gain from the transferring clients can be significant," McCormick explains. So how does he arrive at
the value? By projecting (and capitalizing) the earnings the transferring clients will generate.
"Part of the confusion about putting a separate value on the client list comes from obsolete U.S. income tax law, which used
to allow a faster write-off of the value of the client list and no write-off of purchased goodwill," states List. "So, buyers
were motivated to put separate values on the client list. However, that law changed several years ago and current law allows
a 15-year write-off of intangible assets, whether that asset is called "client list" or "goodwill"," she adds.
So from a valuation standpoint, it seems we're all in agreement. A client list has value
those clients generate earnings for the practice. The value of the client list is determined by the earnings, and the earnings
are what truly determine practice value.
But isn't there more to consider when it comes to the value of a practice's client list? Is it more than just the financial
dollars a client brings to the practice? What about the value of the relationship?
From a business perspective, the value of a client might equal the client's lifetime expenditures with the hospital. In the
October 2007 issue of The Harvard Business Review, Kumar, Peterson, and Leone point out that this formula underestimates the true value of a client. "A client's true lifetime
value incorporates her own expenditures with the business as well as the expenditures of new clients she refers, or her Customer
Referral Value." Their research indicated that clients with the highest Customer Lifetime Value didn't necessarily have the
highest Customer Referral Value.
"As a veterinarian who started my practice from nothing, the value of a client has been quite obvious, says Dr. Damon O'Gan,
co-owner of Austin Equine Associates in Driftwood, TX. "The financial reward of one good client is worth a fraction of the
goodwill which a happy client provides. The equine industry is very close knit, the owners and trainers are often extremely
knowledgeable, and they all love to talk horses. If we take good care of a client, it often results in five new clients directly
gained by the satisfied owner's or trainer's referral," he adds.
Dr. O'Gan shared this experience. "Recently we were visited by a new client with a miniature donkey that was having difficulty
becoming pregnant. We weren't terribly excited about dealing with the breeding of miniature donkeys, but we're always happy
to meet a new client. Not only has this become a wonderful client and a good friend, but her experience and influence in the
industry in our area has benefited us greatly. She's our loudest cheerleader, and has brought numerous new clients from various
disciplines to our practice in a very short time. Reputation is critical in equine practice, and it is the client that perceives
and spreads a good reputation, resulting in more growth than any amount of advertising I can imagine."