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    Information About Valuations    

     

    As a past member of the Professional Responsibilities Board of the Institute of Business Appraisers (“the IBA”), Mr. Avery helped develop the Professional Standards of the IBA which became effective on June 1, 2011.  These principles-based Standards have been developed to provide guidance to members and other valuation professionals performing valuation services.  These new Standards provide conformity between the IBA and the National Association of Certified Valuation Analysts (“NACVA”), and define and describe:

    • General and Ethical Standards (integrity & objectivity, competence, confidentiality, etc.)

    • Scope of Services (valuation engagement or calculation of value)

    • Development Standards (asset based approach, market approach, income approach)

    • Reporting Standards (content of report, summary report, calculation report)

    • International Glossary  of Business Valuation Terms

     The International Glossary of Business Valuation Terms has been adopted by the:

    • American Institute of Certified Public Accountants (“AICPA”)

    • American Society of Appraisers (“ASA”)

    • Canadian Institute of Chartered Business Valuators

    • National Association of Certified Valuation Analysts (“NACVA”)

    • The Institute of Business Appraisers (“IBA”)

     

    Fair Market Valuations

    Our fair market valuations consider four methods to determine the fair market value of a healthcare business under The Asset Approach, The Market Approach, and The Income Approach.

    Adjusted Asset Method - This approach to valuation estimates the value of a healthcare business in terms of the cost to reproduce and place in service both the tangible and intangible net assets.  In order to calculate this value, we make estimates of value for each of the individual components of the practice.

    Market Comparison Method - Under this approach, the value of a healthcare business is determined by a multiple or combination of multiples of various financial statistics which may include multiples times EBITDA or multiples times revenue of similar healthcare specialties or businesses. 

    Discounted Cash Flow - This is a future income approach to valuation in which the total fair market value of the entity is determined by estimating projected future spendable income for five years, and then discounting that income back to the date of valuation.

    Capitalization of Excess Earnings - Capitalization of Excess Earnings is an historical income approach wherein the tangible and intangible assets of the business are valued separately.  These components are then combined to determine the total fair market value.

    Fair Market Value is defined in Revenue Ruling 59-60 as “the price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”   Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property. 

    As used here, this definition of Fair Market Value incorporates the following assumptions:

    • The prospective purchaser is prudent and profit seeking;

    • The business will continue as a going concern and not be liquidated;

    • The business would be sold for cash, or cash equivalents; and

    • A reasonable period of time would be allowed to find a buyer.

     

    Calculation of Value

    The American Institute of Certified Public Accountants (the “AICPA”) defines a Calculated Value in their Statement on Standards for Valuation Services No. 1 (“SSVS #1”) as an estimate as to value, arrived at by (1) applying valuation procedures agreed upon with the client and (2) using professional judgment as to the value or range of values based on those procedures. 

     

    The IBA adds language which states that “This Calculation Engagement does not include all of the procedures required for a Conclusion of Value.  Had a Conclusion of Value been determined, the results may have been different.”  Accordingly, the valuation analyst expresses the results as a “calculated value”, which may be either a single amount or a range of calculated values.

    The client may only want an estimation of how much practices like this are selling for, and may choose a Calculation Engagement instead of a Fair Market Valuation in the interest of time, or expense.

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