If you are considering a dental practice appraisal, here are some interesting industry statistics:

There are over 147,000 privately owned dental practices in the US alone, classified under the SIC 8021. Dental practices are a large part of health services and generate around $44.6B in annual revenues. Yet an average dental practice is a small service business – employing a staff of 6 and producing some $300,000 in annual sales.

Dental practice valuation methods – market comps

Practice sales are a frequent occurrence so there are plenty of comparable data to use for valuing a dental practice. There are a number of valuation multiples to choose from, each giving you a different way to determine the practice value. Here are the top ones, in the order of accuracy:

• Practice sale price to gross profit.
• Sale price to total invested capital.
• Practice sale price to net sales.
• Sale price to discretionary cash flow.

The lineup may be surprising to some - a traditional way to assess a dental practice value has relied upon the net sales or gross annual revenues. However, the market for dental practices is quite dynamic and pricing trends change over time.

We pay close attention to the spread of actual practice selling prices around the average. The measure of this is the coefficient of variation – the smaller this number the tighter the selling prices cluster around the mean. If you want to estimate your practice value, use the valuation multiples with the smallest coefficient of variation first.

Recent dental practice sales data show that the gross profit based valuation multiples can give you the most accurate estimate of current practice value. In fact, its coefficient of variation is just 0.39 compared to 2.39 for the net sales based multiple.

Example: Using dental practice valuation multiples

Consider an average private dental practice generating $300,000 in annual net sales, having a gross profit of $275,000; discretionary cash flow of $100,000; and total invested capital, which includes practice total assets and long-term liabilities, of $85,000.

Let’s take reasonable values of the respective valuation multiples for use in our value calculations:

• Sale price to gross profit: 0.7.
• Sale price to total invested capital: 2.
• Sale price to net sales: 0.6.
• Sale price to discretionary cash flow: 1.7.

Applying these valuation multiples gives us the following practice value estimates:

• Based on gross profit: $192,500.
• Based on total invested capital: $170,000.
• Based on net sales: $180,000.
• Based on discretionary cash flow: $170,000.

This gives us the average practice value of $178,125.

As is typical with professional practice appraisals, this value includes all tangible assets and practice goodwill. It does not include cash, accounts receivable, liabilities or real estate. The value of earnouts, if present, is also excluded.

Other methods for dental practice valuation

As in other health care practice valuations, the value of a dental practice is driven by its earning capacity. You can use a number of income based valuation methods to determine what your practice is worth. Both Multiple of Discretionary Earnings and Discounted Cash Flow methods are frequent choices in dental practice appraisals.

For an established practice, consider using the Capitalized Excess Earnings method that lets you estimate the value of practice goodwill. This may well make up a large part of the overall practice value.

The number of business valuations involving private law practices has grown steadily in recent years. The two main types of situations calling for a law firm appraisal are these:

• Transactional such as the law practice sale, merger or spin-off.
• Legal controversy. The most common reason is divorce followed by partner disputes.

Given the rising volume of law firm valuations you may wonder: what are the methods best suited for private law practice appraisal?

Methods for law practice appraisal

Law firms are a prominent example of professional service companies. Given the relatively low levels of hard assets in a typical law practice, most valuations are generally done using a combination of market and income-based appraisal methods.

For smaller privately owned and operated law practices you can do market value comparisons based on the recent law practice selling prices. Such comparisons usually rely upon the valuation multiples that are based on the firm’s gross revenues.

This value assessment is then complemented by the income analysis using the well-known Multiple of Discretionary Earnings business valuation method.

For larger law firms, the preferred income-based valuation method is Discounted Cash Flow. This valuation technique focuses on the law practice cash flow given the acceptable level of investment risk which is represented by the discount rate.

This combination of the comparative market value analysis and discounted cash flow valuation is known as the First Chicago Method.

Law practice goodwill valuation

For established law firms the value of business goodwill may be a sizeable part of the overall practice value. Consider using the highly respected Capitalized Excess Earnings method, also known as the Treasury Method. You can calculate the law practice goodwill based on the so-called excess earnings – those in excess of the fair return on the capital committed.

Market-based business valuation techniques are often used to value professional architecture firms, classified under SIC code 8712. Many business sales in this professional services industry are brokered by skilled intermediaries. As a result, there are reliable business sale comparables data to value your architectural services company.

While you have a number of valuation multiples for business value estimation, some are more accurate than others when it comes to valuing the architecture firms.

Top valuation multiples for architecture firm appraisals

Our ranking of valuation multiples is based on the coefficient of variation that indicates the spread of business valuation multiples around the average. The smaller the coefficient, the smaller the spread of business value estimates you get.

Here is our list of valuation multiples arranged in the order of their accuracy:

1. Business selling price to gross revenues or net sales.
2. Price to EBITDA.
3. Business sale price to EBIT.
4. Business sale price to Net Income.
5. Business sale price to total business assets.
6. Price to the book value of equity.

The first valuation multiple is the typical one used for pricing an architectural company for sale.

The coefficient of variation for the net sales-based valuation multiple is just under 0.5 which is 2.5 times less than the equity-based number. What this means is that most architecture firm sales are actually priced using the company net sales or EBITDA as the valuation basis.

Setting the right asking price for your business can make a big difference to the successful sale outcome and the time it takes to sell the company. While the average days on market is around 470 days, it can take over 2 years to sell an architecture firm.

Example – business valuation of an architecture firm using the multiples

Let’s consider a typical firm grossing around $600,000 in net sales and generating $200,000 in EBITDA profits in the most recent year.

Using the typical valuation multiples of 0.5 times the net sales and 2 times the EBITDA, gives us the following estimates of business value for the firm:

• Business value based on net sales: $300,000.
• Business value based on EBITDA:    $400,000.

One way to reconcile the difference is to average the two results above. Applying the weights based on the accuracy of each value estimate, we get:

$300,000 x 0.52 + $400,000 x 0.48 =  $348,414

The business value estimate covers the tangible assets, goodwill and other valuable intangibles such as client lists. Cash, receivables and company owned real estate are usually not included.

If you are valuing a CPA practice, consider using the tried and true tools – valuation multiples derived from the sales of comparable accounting practices, classified under SIC code 8721.

The advantage of taking this market approach to an accounting practice valuation is twofold:

1. It offers highly defensible evidence of the current selling prices for CPA practices.
2. It captures the risk including the important industry and firm size risk premia as well as the discount for lack of marketability.

Top valuation multiples used for CPA practice appraisals

While there are a number of economic and accounting bases you can use to estimate the CPA practice market value, most acquisitions are priced using just a few valuation multiples:

• Selling price to gross revenues or net sales.
• Price to EBIT, EBITDA or discretionary cash flow.

The first valuation multiples are by far the most common ones. In fact, the coefficient of variation for the Price to Net Sales valuation multiples is just under 0.27 which is less than 10% that of the EBIT based number.

This indicates that the variation of the CPA practice selling prices around the mean is much smaller when the net sales basis is used. Put differently, your peers tend to trust the revenues a lot more as the basis of pricing an accounting practice acquisition.

Earnouts are a frequent element of the CPA practice purchase deal structure. This is especially so for firms that tend to rely on tax preparation as the main source of income.

A typical hold-back period is one year but can be shorter for accounting firms with substantial value-added services to help smooth out the hectic tax preparation season – and the practice’s income stream.

Example – CPA practice value estimation using multiples

Consider a practice generating $500,000 in annual client billings. A reasonable current valuation multiple is 1 times the revenues. This gives us the business market value for the practice of $500,000.

By convention, the value estimate includes the practice tangible assets, goodwill and other valuable intangibles such as the client lists. Liquid assets and practice owned real estate are extra.

Other methods for CPA practice appraisal

If you are handling the valuation of a small accounting practice, consider the Multiple of Discretionary Earnings business valuation method. A well-known variant of the direct capitalization valuation methods under the income approach, this technique is an excellent way to value a private accounting firm based on its earning power and a number of key financial and operational performance factors.

Business goodwill can be a large portion of the overall CPA practice value. The Capitalized Excess Earnings valuation method is a proven way to determine the value of practice goodwill. Known as the Treasury method, it has been described in the Internal Revenue Service Ruling 59-60 and 68-609.

With the amount of debt accumulated by both the consumers and businesses in recent years, professional debt collection is a growing business.

Key industry stats

Classified under SIC code 7322, there are close to 7,780 collection agencies operating in the US alone. They generate over $11.99B in annual revenues.

According to the US Bureau of Labor Statistics, over 121,000 debt collectors were employed in 2008 and the industry employment growth is likely to continue until at least 2014.

The industry is highly fragmented with the average collection agency making $1,700,000 in annual gross revenues and employing 16 collectors plus support staff.

Main business value drivers for collection agencies

Successful professional debt collection services get their business from a variety of clients that refer past due accounts for recovery. Effective firms focus on specific industries and achieve collection rates in excess of 10%.

While there are a number of factors that make for a successful business in this industry, some do stand out as the key business value drivers:

1. Client concentration. A diverse client base is essential for smooth business cash flow. This, in turn, contributes to higher business value.
2. Employee turnover. Work in a collection agency is stressfull and requires considerable skill. Training and retaining effective employees is an important factor that contributes to higher business valuations.
3. Business practices that comply with legal requirements. Both the Federal Trade Commission and state governments regulate debt collection practices. Strict compliance is important to avoid severe penalties. Actual or pending legal actions can reduce the value of a collection agency considerably.
4. State of the art communication systems. Efficient debt collection requires specialized phone systems and data processing equipment. This may be capital intensive and exert downward pressure on the business cash flow.

Valuation multiples for collection agencies.

Companies in this industry are driven by cash flow. Hence, you can value an agency using the cash flow based valuation multiples:

• Business selling price to seller’s discretionary cash flow.
• Business selling price to EBITDA.
• Price to gross revenues.

Other business valuation methods for collection companies

If you are valuing a smaller agency, consider doing it directly on its cash flow using the Multiple of Discretionary Earnings business valuation method. Importantly, the method also lets you assess such important value drivers as client and market concentration, quality of staff and management, and stability of earnings.

Valuing a Business as Multiple of its Earnings

Established collection agencies with long-term client relationships can build significant business goodwill as part of the overall company value. In this situation, you can take advantage of the Capitalized Excess Earnings method – an excellent way to determine the value of business goodwill.

This may be an essential step toward allocating the business purchase price in a tax-advantaged manner, setting up an earnout agreement with the outgoing ownership or a departing partner.

Valuation of Business Goodwill

Day spas are popular personal services businesses. Their number speaks for itself - classified under the SIC code 7231, there are over 325,000 such establishments in the US alone.

The industry employment of 907,250 people is quite large. Day spas and beauty salons contribute over $18B in total annual revenues to the economy. Yet an average business is quite small – employing just 3 staff with $100,000 in annual sales.

Typical spa valuation multiples

If you need to estimate the market value of a spa, consult the recent spa selling price data. Valuation multiples derived from such business sales are the formulas that let you compare your spa to others – based on its revenues, profits, or asset base. Here are the valuation multiples commonly used to price a spa for sale:

1. Business selling price to gross revenues. Inventory is extra.
2. Price to seller’s discretionary cash flow, plus inventory.

The price to gross revenue valuation multiple is more accurate for valuing a privately owned spa or hair salon. In fact, the spread of business selling prices, from low to high, is about half that of the business value estimates you get using the discretionary cash flow as the basis.

For example, it is not unusual for a spa to sell for about 40% of its gross revenues. Even the top businesses rarely fetch a price that is more than 100% of their annual sales.

In contrast, we see some spas selling for more than 10 times their discretionary cash flow. That can be 4 – 5 times the average – a very considerable spread. One reason is that profitability of a spa can vary greatly for a given level of sales. This, of course, affects the discretionary cash flow the spa can throw off.

What this means is that the actual spa sales are more often priced based on the business revenues.

Other business valuation methods for spas and beauty salons

No spa valuation is complete without an income-based analysis of your business value. If you are valuing a small owner-operator managed spa, consider using the Multiple of Discretionary Earnings method. You can consider both the earnings and a number of essential performance factors to determine what the business is worth.

For a well-established business, the value of goodwill can be a large part of the overall spa value. You can use the well-known Capitalized Excess Earnings method to determine what the business goodwill is worth.

This may be an important step when allocating the business purchase price, determining what to pay a departing business partner, or handling a business valuation in divorce.

Business Valuation using Several Methods

If you are valuing a women’s apparel store, there a number of important factors to consider:

Apparel retail business value drivers

• Rental expenses for successful stores are kept to within 10% of the gross revenues.
• Labor costs are a significant factor that contributes to the store profitability and business value. The industry norm is to keep labor expenses under 18% of gross revenues.
• Product costs and gross margins. Successful retailers have their COGS within 50% of sales.
• Product and market differentiation. Many apparel retailers have carved out lucrative niches – with bridal, maternity, men / women product mix, gifts and special occasion offerings.
• Quality of customer service. Often the store’s image and its ability to attract and retain customers depends on the quality of its service staff.

Valuation multiples for womens clothing stores

Owner-operator managed small apparel retailers are frequent acquisition targets. You can use such private business sale comparables to estimate your own business market value. The standard technique is to develop valuation multiples that relate the business likely selling price to its financial performance.

Here are the valuation multiples that your industry peers use most often when pricing a women’s clothing store for sale:

• Business sale price to annual gross revenues, plus inventory.
• Business sale price to seller’s discretionary cash flow. Inventory is typically extra.

One reason that the apparel stores are mostly priced on business gross revenues is that many buyers make considerable changes to the store after they take over. This is done in order to reduce the operating expenses and improve the business profitability.

Other business valuation methods

You can also value a women’s clothing store using a number of well-known business valuation methods under the market, asset, and income valuation approaches.

Valuing a business as a multiple of earnings

For small retailers the Multiple of Discretionary Earnings method offers a great way to assess your business value based on its earnings and a set of key financial and operational performance factors.

Business valuation based on cash flow and risk

For larger, multi-location retailers, the Discounted Cash Flow valuation method is preferred. Using this business appraisal technique you can determine your business worth based on its earning capacity and risk.

Business goodwill estimation for established retailers

Well-established womens clothing store command considerable goodwill in their market. You can determine the value of business goodwill using the classical Capitalized Excess Earnings method.

Be careful to adjust the business assets to their market values. One asset that often calls for such an adjustment is inventory. If you carry inventory in excess of 1 year’s worth – reduce it to good and saleable levels.

While there are no truly recession proof small businesses, fitness centers come close. And there are good reasons for this:

• Health club membership continues to grow as more and more people realize the health benefits of regular exercise.
• Excercise is an excellent stress reducer.
• Health club members enjoy the social benefits of participation in regular activities with others.
• Many employers and insurance companies offer membership benefits.
• There is a wide choice of affordable health center facilities available, including privately owned and publicly funded fitness centers such as YMCAs.

Some key industry statistics

There are over 46,000 fitness centers in the US alone. The industry as a whole generates some $11.2B in annual revenues, and employs just under 303,000 staff.

Yet a typical health club is small business – averaging around $300,000 in annual sales with 7 employees.

Factors that affect the value of businesses in the fitness industry

If you are wondering what factors affect the value of a fitness business the most, here is the short list:

• Profitable history. Despite strong competition from full-service health clubs, small fitness centers that generate consistent earnings from a well-established client base continue to thrive.
• Strong client retention. Successful fitness centers have the client retention at or above 69%.
• Focus on a market niche. A gym can develop a loyal following if it focuses on a specific demographic, such as women, children or family oriented.
• Location and facilities. State of the art exercise equipment is essential for client retention. Convenient access and easy parking are also key to keep the members happy.
• Quality of the fitness programs. Many successful clubs establish themselves due to the quality of their personal trainers, tennis school staff, swimming instruction and other acquatic activities.

Valuation multiples for health clubs

Fitness centers sell often, so you can get reliable data on the private business selling prices. You can estimate a health club market value using these valuation multiples:

• Business sale price to annual gross revenues, plus inventory.
• Business sale price to seller’s discretionary earnings, plus inventory.

For larger or multi-location fitness centers, consider these valuation multiples:

• Business sale price to EBITDA.
• Price to EBIT.

For a highly accurate business market value assessment consider using a number of valuation multiples at once. This way, you can determine your business value based on its revenue, profitability, and asset base.

Business Market Value Estimation

Other business valuation methods for fitness centers

As with other personal service businesses, you can determine the value of a health club using the income-based business valuation methods. For smaller fitness centers that are owner-operator managed, consider using the Multiple of Discretionary Earnings method.

You can determine what the business is worth based on its discretionary earnings and a set of important financial and operational performance factors.

For larger fitness centers you may wish to use the well-known Discounted Cash Flow method. This method is especially useful if you have reliable earnings forecast and need to negotiate with sophisticated investors or potential partners.

A successful health club may have established itself as a true institution in its market. If you are valuing a business like that, the value of business goodwill may be an important factor in your assessment.

You can use the classical Capitalized Excess Earnings method to determine the value of the entire business as well as business goodwill. This may be very important if the fitness center is to be sold and the purchase price needs to be allocated among its hard assets and goodwill.

If you are wondering how the current economic downturn is affecting the restaurant values, there is no better way to find out than by studying the recent business sales. The food and drink industry, classified under the SIC code 5812, is huge and restaurants sell quite often.

Typical valuation multiples for restaurants

Restaurants for sale are most often priced using these valuation multiples:

• Business sale price to gross annual revenues.
• Business sale price to seller’s discretionary cash flow.

Asset based valuation multiples are rarely used in valuing a restaurant. The seller’s discretionary cash flow is the most common measure of owners’ benefit when valuing private restaurant businesses.

Restaurant values and recent valuation trends

We study restaurant selling prices very closely. Here are some interesting trends that have emerged recently:

• In 2008 the restaurant sales have generally been priced based on the seller’s discretionary cash flow.
• The business price to discretionary cash flow valuation multiples are down about 20% in 2008 compared to a year ago.

What are the business buyers doing? They value a restaurant based on its ability to generate cash flow rather than revenues. And they price in the additional risk right into their valuation multiples. The implications?

• Profitable restaurants still sell.
• Those that do sell tend to command lower prices as buyers factor in the earnings risk into their business valuations.

Example – effect of the valuation multiples decline on restaurant business values

To put things in perspective, let’s say that a restaurant generates $1,000,000 in annual gross sales and throws off $250,000 in discretionary cash flow.

A likely selling price for this business in 2007 would have been around $500,000. By the end of 2008, the same restaurant would be worth $400,000 – a $100,000 drop in business value in just 12 months!

Valuing a Restaurant based on Market Comps

If there is one measure of financial performance that stands out in the retail industry it is sales per square foot or SPF for short. Retail stores are often benchmarked using SPF – and there are good reasons for doing this:

• Floor space is expensive. Successful retailers utilize it to maximize their revenues. For each business concept there is a sweet spot square footage that works best.
• Rent is a major operating expense for retailers. Rents in excess of 10% of gross revenue are a red flag.
• A retail shop with oversized floor space has to contend with high rental expenses and extra product costs to fill in the space.
• It takes more labor to service a larger than needed floor space. This erodes the retail business profit margins.

Top valuation multiples for a retail business

Here is the short list:

1. Business sale price to annual revenues, plus inventory.
2. Business sale price to discretionary cash flow. Inventory is extra.

Given the importance of maximizing the sales per square foot, you would expect that the value of a retail business depends on its revenues. This is indeed the case – the most commonly used industry valuation multiple for a retail business is the business sale price to annual revenues.

If returns and discounts are significant in your business, consider using the business sale price to net sales valuation multiple.

The close second valuation multiple for private retail stores is business sale price to seller’s discretionary cash flow.

The advantage of using this second multiple to value your retail business is that it measures your business worth directly on the amount of cash flow the business throws off.

A word of caution: do not confuse discretionary cash flow with business net profits. The discretionary cash flow is what the business puts in its owners’ pockets – which typically is quite different from the taxable business income.

A major mistake in retail business valuations is applying the cash flow based valuation multiple to business net income or EBITDA. This is likely to result in your business being undervalued significantly!

With all the cost of goods and operating expenses a retail shop owner needs to handle, valuing your business on cash flow makes sense.

Business Market Values across 420 Industries

Other business valuation methods for retailers

If you need to value an owner-operator managed retail business, consider using the Multiple of Discretionary Earnings method.

This well-known method considers both the business cash flow and a number of critical financial and operational performance factors.

If your retail business is an established institution in its market, then you probably have built up considerable business goodwill.

Capitalized Excess Earnings valuation method, described in the Internal Revenue Service Ruling 59-60, is a recognized way to calculate your business goodwill and total business value.

Valuing a Retail Business Three Ways