In the case of a professional practice (such as a medical, legal, dental, accounting, or financial services practice), a number of considerations need to be taken into consideration, including:
- The Income or capitalized earnings method. Under this method, a business valuation expert will look at the net income of the business and apply an industry/market factor that will take into account matters such as business stability and other factors. The problem with this approach is that it does not take into account the personal goodwill and talents associated with the key professional (discussed below). The result is that this valuation results in a somewhat artificial value of many professional practices, such that they really have little value if the professional leaves.
- A market-based valuation (how much the business could be sold for). This method can vary widely depending upon factors such as whether the patients or clients of the practice will likely continue with the business if the business becomes owned by someone else.
- Asset-based valuation. This approach takes into account the amount that could be obtained in a sale of the assets. In most professional practices, the business assets tend to be worth little – often such as used office equipment and furniture. This method usually results in the lowest value.
Because of the wide variations in valuation that can result in different valuation models, it is important that an attorney fight aggressively to see that the model that is the most advantageous for a client be used. It is also critical with professional practices to determine the amount and type of goodwill associated with a professional practice.
Is Goodwill Considered in the Valuation of a Professional Practice?
Yes. There are two types of goodwill: entity goodwill and personal goodwill. Entity goodwill may be considered in the valuation of a professional practice; personal goodwill is not considered.