THE ADA PRACTICAL GUIDE TO VALUING A PRACTICE iii Chapter 1: Practice Value ...................................................................................................................................... 3 Concepts of Value ........................................................................................................................................................... 3 When Should a Practice Be Valued? ......................................................................................................................... 6 Fair Market Value, Price and Terms ............................................................................................................................ 9 Chapter 2: Critical Valuation Issues .............................................................................................................13 Critical Valuation Issues ...............................................................................................................................................13 Valuation Assumptions and Limiting Conditions ...................................................................................................15 Information Required to Perform a Valuation .......................................................................................................18 Chapter 3: Valuation Methods.........................................................................................................................25 Which Valuation Method is Right for You? ...........................................................................................................25 False Assumptions Concerning Practice Valuation...............................................................................................26 Valuation Concepts and Earnings Methods ...........................................................................................................27 Capitalized Earnings Method ................................................................................................................................28 Discounted Cash Flow Method ............................................................................................................................39 Asset Approach: Net Asset Method .................................................................................................................. 44 Market-based Approach ....................................................................................................................................... 48 Guideline Company Method .................................................................................................................................49 Transactions Method ..............................................................................................................................................51 Chapter 4: Factors Complicating the Valuation Process ..............................................................55 Associate Buy-outs and Buy-ins ..............................................................................................................................55 Valuing a Portion of a Practice ..................................................................................................................................57 Inadequate Financial and Clinical Records ..............................................................................................................57 Valuing Specialty Practices .........................................................................................................................................58 Participation in Managed Care Programs ...............................................................................................................58 Employment of Family Members ..............................................................................................................................61 Dentist-owned Real Estate ........................................................................................................................................61 Practices with Multiple Office Locations ...............................................................................................................62 The ADA Practical Guide to Valuing a Practice: A Manual for Dentists Table of Contents