Measuring Business Value

Three Recognized Valuation Methods

Over the years various appraisal methods have survived the reasonableness test and survived the test of  time for measuring the value of a professional practice.  

Following is an explanation of some of the approaches with their respective methods.

Income Approach

This approach incorporates specific operating characteristics and conditions of the physician practice into a cash flow analysis. It takes into account  the future benefits of growth or expansion that can be projected from the current situation and then discounts those future earnings into current dollars.

Often the question the buyer will ask themselves is “What is the difference between the cash flow from buying this practice versus cash flow if I just start a practice from scratch?”

Cost Approach

Using this approach, the practice is assumed to be worth the Fair Market Value of the assembled assets. The approach values debt-free assets, and places a premium on goodwill when the earnings are sufficiently high.

Both tangible and intangible assets are isolated and valued. Goodwill is measured using   weighted excess earnings and reflects the practice’s profitability and performance.

Market Approach

Similar to the real estate market, this approach compares similar practices sold to the subject practice.

Factors affecting comparability can include geographic markets served, competitive position, profitability, growth prospects, risk perceptions, and capital structure.

All three approaches are considered and may be weighted by the Appraiser when determining value.