Determining Fair Market Value (FMV) of a dental practice requires the identification and in-depth analysis of multiple factors.
That complexity has led to the development of several different methods for determining FMV. At Practice Solutions, we review the findings from four separate methods to arrive at a FMV that reflects a variety of accounting perspectives:
How We Determine Fair Market Value
Method 1: Asset Valuation
We determine the value of capital assets or fixed assets based on the “going concern” concept – the utility value assets that are actually in place.
There is no goodwill component (i.e., intangible assets, such as widely held customer perceptions of good service), associated with this method, so we address goodwill separately. In this asset valuation method, the value of the business is derived solely from the value of the equipment and furnishings (usually at current market value) and instruments, hand pieces and supplies. Goodwill can be addressed as a chart value based on criteria and demographics specific to the individual practice. Understandably, this value is often both objective and subjective.
Method 2: Capitalization of Earnings
In this mathematical model, we determine the practice value using a single measure of the expected business economic benefits divided by the capitalization rate, a number that represents the risk associated with receiving this benefit in the future.
This valuation method requires a highly experienced valuator to select the proper economic benefit being capitalized and the appropriate capitalization rate. Unlike some of our competition, our rates are specific to the practice, risks and investment.
Method 3: Debt Service
This is the cash required over a given period for the repayment of interest and principal on a debt over a reasonable period of time. Only excess cash should be considered in this equation. That is the cash left over after compensation for your time, effort, skills and risk as well as contingencies for Capital asset replacement, new technology and growth.
Method 4: Direct Comparison
An informed purchaser would pay no more for a property than the cost of acquiring another existing and equivalent property. The Direct Comparison method is based on the selling price and listings of comparable properties. At Practice Solutions we are able to rely on our rich inventory of practices sold.