If you are considering buying or selling a dental practice, it is important that you understand some common methods for evaluating this type of business. Understanding valuation methods enables you to interpret the valuations of others and to form your own evaluation of a business. There is no single method that is used in business valuation. In fact, several valid methods may be used. It is worth looking at a few of the valuation methods that are most appropriate to a dental practice.
Adjusted Book Value
This is the simplest way of determining the value of a business. To determine the adjusted book value of a dental practice, add all the practice's assets and subtract all its liabilities. Assets might include the dental office (if it is owned, not rented), dental equipment, office furniture, and office equipment. It does not include intangible assets such as goodwill or brand value. Liabilities are any debts that the practice owes. Liabilities can include accounts payable, wages payable, notes payable, and any other debts the practice owes. This method may be used if the dental practice is being sold mainly for its tangible assets and not its intangible assets.
Cost to Create
The "cost to create" approach of evaluating a dental practice may be relevant if the buyer is simply looking to save time by purchasing an established business, rather than building one from scratch. Unlike the adjusted market value method that considers assets and liabilities, the cost-to-create approach considers intangible assets such as current clients, reputation, and internal processes. This can be difficult to determine since it requires the evaluator to estimate the cost to create these intangible assets. Generally, this method involves a premium to pay for the convenience and time savings of immediately acquiring assets, rather than starting a practice from scratch.
Discounted Cash Flow
The discounted cash flow method assigns a value to a business based on its expected future cash flows. Essentially, the value equals the amount that one could get as a loan, based on the expected future cash flows of the business. This can be estimated for a dental practice by using annual data about clients and estimating client growth. Cash flow is adjusted for amortisation, depreciation, and inflation. The discounted cash flow method would be a relevant method for evaluating a dental practice that has predictable future cash flow.
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