You're a physician but what are you worth as a business asset? Here are 3 Ways to determine your price.
One of the key decisions every seller has to make , whether it's a house, a business or any other asset for sale, is to detemine its value and price. I'm married to a residential real estate broker, one of the dwindling few left standing, it seems, in a business that's been in a tailspin for the last 3 years. Consequently, I hear lots of stories about how much people want for their houses and how they make the decision. Typically, sellers overprice, figuring that the largest drop in housing prices in 30 years does not apply to them, that they are entitled to recover every cent they spent on their gourmet kitchen renovation, and they need to build in some wiggle room in the price anyway since they know they will have to negotiate some away later. Then, of course, there is dreaded realtor's commission to factor into the equation.
When it comes to selling a business, there are three basic ways to value it.
The first approach is known as the Asset Based Approach. This approach derives an indication of value based on the costs to replace the tangible assets in depreciated or replacement cost condition. Some businesses for sale are generating negligible cash, so the assets are the only thing that has value. True, intangible assets, like intellectual property, and future market growth might have value, but let's keep this simple for now.
The Market Approach derives indications of value using ratios or factors derived from the earnings, sales and/or assets of past transactions of similar businesses. This approach is like getting comparables for house, asking what a similar house in a similar location has sold for in the recent past. In the case of businesses, the value is determined by comparing it to the selling prices of similar businesses.
The Income Approach derives indications of value by converting some level of earnings into a value using a capitalization rate, discount rate or multiple. There are several ways to calculate this net present value, but basically it has to do with using historical revenue numbers and applying a discount rate to determine the value of the revenue streams.
If you are considering branching out from your medical practice or leaving it all together, suppose you were to apply the same technique to valuing yourself?
Using the asset method, the monetary value of the chemicals and proteins in the human body is $4.50.
Using the comparables method, you are probably worth what most others who do what you do are worth. The average salary of a realtor, for example, is about $45K and it is all commission based. But, don't tell that to all the ex-realtors trading resumes at Starbucks or Ms. Bigbucks still selling the occaisional multi-million McMansion.
Using the NPV method, you are worth the discounted net present value of the future cash flows you can generate compared to what you make doing what you are doing now.
Inevitably, despite the self-actualization talk, docs and their families want to know how much they'd be worth if Mommy or Daddy did something different. Go figure.