A common method of valuing Professional Practices is to use a Rule of Thumb based on a multiple of revenue.

A major disadvantage to using rules of thumb to value a business is the number of different multiples that are used for the same type of practice. For example: Gary Trugman in his book “Understanding Business Valuation” published by the AICPA was valuing a Dental Practice, and found ten different Rules of Thumb.

In “Valuing Professional Pratices” published by CCH, James L. Horvath suggests two different methods:

(1) Fair Market Value of furniture, fixtures and equipment, plus 20 to 60 percent of annual revenues.

(2) Net asset value plus one year’s pre-tax earnings before owner’s compensation.

In the “Business Broker’s Reference Guide” published by Business Brokerage Press, Tom West  lists four different methods:

(3) 1 to 1.5 times annual adjusted earnings plus fixtures, equipment and inventory.

(4) Net assets plus 25 to 30 percent of gross annual revenues.

(5) 20 to 60 percent of annual fee revenue plus fixtures, equipment and inventory.

(6) one year’s pre-tax earnings before owner’s salary, plus fixtures, equipment and inventory.

In the “Handbook of Smalll Business Valuation Formulas” published by Valuation Press, Glenn M. Desmond suggests two more methods:

(7) 8 to 12 times monthly revenues plus net asset value.

(8) 2.5 to 5 times monthly revenues, plus net asset value.

In “Valuing Small Business and Professional Practices” published by McGraw Hill, Shannon Pratt mentions two additional methods:

(9) Equipment and fixtures plus 25  to 35 percent of revenue.

(10) Equipment and fixtures plus 50 to 100 pervent of earnings available to the owner.

These 10 methods yield values for the same dental practice ranging from $212,000 to $1.4 Million as follows:

(1)      $307,655 to $802,615

(2)      $730,489

(3)      $212,073 to $286,272

(4)      $567,935 to $629,845

(5)      $311,155 to $806,115

(6)      $535,579

(7)      $1,023,343 to $1,435,810

(8)      $516,377 to $774,168

(9)      $369,525 to $493,262

(10)      $291,270 to $532,079  

These authors are all top professionals in the valuation field. If they can’t agree, maybe we shouldn’t use Rule of Thumb to value a business.