I am looking to gain exposure/experience in the valuation of small businesses. I have a particular interested in dental practices and insurance books of business. What valuation models are typically used? What are good sources of reading material? Any input is appreciated. Thanks!
Valuation of Small Businesses
Answers
There are several ways to value any business, but the best in my opinion is to look at PV of Free Cash Flows (EBITDA adjusted for Repair and Maintenance Reserves and other adjustments) and payback periods. You can also pay a lot of money to companies to "value" real and personal property, but at the end of the day, the value of a company is how quickly you get your investment back. Of course, other things to look at are Cash on Cash returns, IRR and ROI. But these all rely on Free Cash Flow.
That is the quick and dirty answer.
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Thank you for your response. I will look into the PV of Free Cash Flows model. By the way, I'm also a PwC alum. Thanks...
How does PV of FCF relate to DCF vs Equity Value and IRR, since they too rely on WACC?
Hi Daniel - I'm a
Valuing a dental practice is different - the purchase price is mainly centered around % of collections on what the practice produces, and what other practices have sold for in the same general metro area. Similar to real estate, a practice is worth what someone is willing to pay for it. A practice in a larger metro area sells for a higher % of collections than a practice in a more rural area.
In the Pacific NW larger metro areas, the price typically is around 75-80% of annual collections. The variations will depend on the
CFO who's wife is a dentist-Thank you so much. Would it be possible for me to reach out to you directly for a couple follow up questions? No pressure.
Thanks again.
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