fair dealby pod (no login)There was an article in podiatry mgt. about using the future value equation to determine fair market value. Here goes: FV=PV(1+i)^T If I were to buy this practice I would want to make a 15% return on my money but that is just me. Perhaps 10% is a fair rate but I would want more to cover the risks inherent in this business. This equation forces you to look at buying this business as an investor would. In other words, does the investment make sense from a rate of return standpoint. Here is how this equation works: you take 430K-75K(salary you must pay yourself)= 355K/2 = 177.5K net earnings * remember that you don't count your own salary in the true net. Next you multiple the true net income x 20 177.5x20years = 3,550,000 (this extra amount is what you are truly buying as an investor in today's money) 3,555,000= Present value (1.15)^20 = 216,992 so solving for present value or the value in today's money you get 216K assuming a 15% rate of return x 20 years. at 10% interest PV = 529K So in other words, if you think a podiatry practice is no riskier than the top 500 companies in the U.S. you should be willing to pay 529K to get a 10% rate of return. If alternatively you are concerned that this business faces risks such as medicare changes, new competition, your own disability, failure of old owner to truly quit, HMO penetration, etc. you might want to earn a higher rate of return and therefore pay less for his practice. I would not pay a nickel over 216K but I am cheap. Also, make sure that your CPA get these gross figures directly from the IRS. DO NOT trust his numbers of just his P&L statement. Make sure that these are the numbers that he reported. Good luck. Get professional help. from IP address 69.29.100.125 Goto Forum Home |
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