The Only Type of Appraisal You Should Use…Income-Based

A few weeks ago, we talked about the importance of a paid valuation on your dental practice. What we didn’t look into was the best kind of appraisal method to base your valuation on. The three main types of valuations are:

– Asset-based
– Market comparison
– Income-based

We’ll take a brief look at each one and see which one comes out ahead!

Asset-Based

In an asset-based valuation, you’re basically calculating the overall value of the dental assets the practice possesses. You can even have sub-categories under this, basing the asset value on the original cost, the current book value of the asset, or the appraised replacement value of the asset.

This has some major flaws, because it doesn’t even consider the cash flow of the practice. You definitely can’t rely solely on an asset-based valuation.

Market Comparison

The market comparison is a valuation that looks at what similar practices sold for. There are a variety of methods for doing this, but it has a huge shortcoming: no two dental practices are alike. While a comparison method of valuation works reasonably well for residential properties, dental practices are businesses with too many unique features for a market comparison to be accurate.

Primus Dental Design - Income-based appraisal

Income-Based

In an income-based valuation, you’re looking at the projected cash flow of the practice. Whether you’re buying or selling a practice, this is the method of appraisal that makes the most sense. It focuses on the practice’s expenses and revenues.

Based on this raw data, you can actually calculate what kind of a return on investment you would receive after purchasing an existing practice, because you can reasonably calculate the amount of income it’s likely to generate.

While asset-based valuations and market comparisons have their places, there is no substitute for an income-based appraisal!

We hope this helped you get a better sense of how to gauge the value of your and other practices.

And as always, we’re here to answer questions or provide further guidance for you!

~Jason

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