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Not All Practice Valuations Are the Same

by Dr. Tom Snyder

Most of us understand the necessity of having a practice valuation prepared for financial and transition planning purposes, as well as for a potential practice sale or partnership buy/buy-out. The type of valuation prepared for these scenarios is called a “market value” practice valuation.

To prepare a market value, most valuators use three IRS commonly accepted approaches: Market, Income, and Asset Approach. Each valuator can choose from several valuation methods within each approach category to value a subject practice. In using three approaches,the subject practice is viewed through three different lenses, each requiring the application of various valuation formulae and databases to reach a conclusion of value. An average of the three methods is usually calculated to arrive at a market value. 

Ultimately, a potential buyer will use a market value valuation as an aid in determining what a fair offer would be, based on an accurately prepared business valuation.Lendersoften require a market value valuation to determine whether the transaction makes sense for their customer, the buyer.

There are, however, several other purposes for preparing a practice valuation that utilizesother valuation approaches and methods. These “special-purpose” valuations are either prepared to minimize the tax implications regarding a practice sale or co-ownership transaction,or for use in various litigation...

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