Should You Buy or Should You Walk? Look at the Tax Return FIRST!
In my opinion, a practice HAS TO make money AND has to make sense for you to reasonably go forward with any purchase.
Let’s figure out how to determine basic profitability quickly and easily.
It would be helpful to have the tax returns for the practice you are considering in front of you, as well as a piece of paper and pen.
We are going to add up these numbers from this acronym.
Cats in Delaware Often Ate Apple Turkey.
C – I – D – O – A - A - T
C Compensation Line 7 Doctor’s (seller’s) salary
I Interest Line 13 – Seller’s interest, not yours
D Depreciation Line 14 Seller’s depreciation
O Ordinary income Line 21, Profit after everything is paid
Then – you follow Line 19, “Other deductions” over to the statements– page back in the tax return until you see the statements - a list of items that shows the total as the amount in that line 19.
The statement list is actually very obvious and you really can’t mistake it for anything else. You just have to remember that you need to page back.
Statement items are rarely numbered, and you are looking for non-practice related items,
For our acronym, you are looking for:
So, there we have it. CIDOAAT (Cats In Delaware Often Ate Apply Turkey)
Add those numbers together to get a total - and you have a quick and dirty number for the profitability of the practice.
Yes, there can be more to it, but this will get you started and we’ll discuss more in upcoming blog posts!
Listen to the podcast that goes along with this blog post: