Small Business
The Benefits of a Professional Practice Valuation

The Benefits of a Professional Practice Valuation

An essential resource for estate planning and making business decisions.

How much is your practice really worth? If you can't answer that question with specific, detailed figures, it might be time to consider undergoing a formal business valuation process - whether or not you're planning on selling your practice anytime soon.

In fact, selling is just one of the good reasons for having a professional, regularly updated business valuation, according to the Service Corps of Retired Executives. Knowing what your practice is worth is an essential resource for estate planning and making business decisions. And when you do start to think about selling, having regular valuations that you've updated over the years will give a prospective buyer that much more confidence that you're asking a fair price.

The Internal Revenue Service describes the three generally accepted valuation methods as the asset-based approach, the market approach and the income approach. While each has advantages and drawbacks depending on your situation, the help of a professional is vital in deciding which method to use and how to use it, the IRS notes. A professional appraiser who has experience with practices such as your own will likely be trained to evaluate the tangible and intangible assets that determine what yours is worth.

Asset-based Approach
As the name implies, this method tabulates the value of your practice by comparing your assets (equipment, building, etc.) against your liabilities. This gets quite complex as you gauge the current value of things you've owned for years. The asset method might be considered by practices that rely on expensive equipment for operations.

Market Approach
This method values your practice based on the competition. Because each practice is unique, knowing how much yours is worth involves much more than finding out what a similar-sized practice in your city or town sold for. Much of a practice's worth is determined by goodwill - elusive and sometimes difficult-to-gauge factors such as the attractiveness of your location, the loyalty of your staff and your reputation. A detailed appraisal of goodwill, backed up by facts, may lend credibility to a market valuation.4

Income Approach 
Logically speaking, the value of your practice (from a financial perspective, that is) comes down your ability to generate income. Though it may sound simplistic, evaluating a practice based on its income is anything but easy, since it involves placing a current value on income that will be earned in the future. What if a productive partner suddenly retires, or the demographics of your area change? An appraiser can factor in these and other risks to arrive at a proper valuation.5

Whichever method suits your practice best, a comprehensive valuation may be a vital addition to your practice, whether you expect to keep going for the next five years or the next 35.

 

1 SCORE, "Business Valuation 101." score.org/resources/business-valuation-101
2 Internal Revenue Service, "Business Valuation Guidelines." irs.gov/irm/part4/irm_04-048-004.html
3 Terry Masters, "Types of Business Valuations," Houston Chronicle. smallbusiness.chron.com/types-business-valuations-18360.html
4 ibid.
5 ibid.

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