Business Valuation of Professional Services
When you are looking for a business valuation of professional services look no further than business reports and values. For over 30 years we have been providing understandable, concise, and transparent business valuations for:
- Law Practices
- Medical practices
- Veterinary Practices
- Dental Practices
- Accounting Practices
- Consultancy Practices.
Due to the nature of a professional practice, much of the value is attributable to intangible assets, or what we commonly refer to as goodwill (the value of a business above and beyond the value of its tangible assets).
This goodwill value can be broken down into professional goodwill, which is associated with the individual professional, and practice goodwill that associated with the business, making it difficult to measure.
“Professional” goodwill derives from the individual practitioner’s reputation and personal success in the profession, and the trust and respect that the individual practitioner has engendered in his or her clients.
“Practice” goodwill relates to the firm’s ability to continue to generate earnings without the presence of any particular professional. Location, computer systems, staff, operating procedures, and a recurring client base are all elements of practice goodwill.
The valuation of professional services firms is driven by the expectation of future profit.
Once the financials of the professional practice has been analysed and the profits ascertained, a discounted cash flow method should be applied for the valuation. I say should because there are numerous times when the incorrect approach of valuation have been applied for the purposes of valuation. The following are two examples:
The market approach draws comparisons to publicly traded companies or private companies that are similar to the subject company. The market approach uses empirical evidence of value using databases for private businesses and companies. A major disadvantage with the market method is that it ends up comparing general information in the market, it is unable to consider specific factors leading to a specific transaction.
The asset-based approach utilises the Company’s adjusted balance sheet as the primary focus of fair market value. This approach is important where the fair market value of a company’s assets is significantly greater than its book value. The asset-based approach may be considered when valuing a controlling interest with significantly appreciated assets such as real estate.
The Discounted Cash Flow Approach is the most common valuation method and should be used almost exclusively if the situation permits.
Should you wish to learn more, contact Lee Goldstein at info@brv.com.au