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Practice Valuation

Several situations call for a determination of the economic worth of a medical practice, including its goodwill value. Historically, the most common reason for valuation of a medical practice was the death or retirement of an established practitioner. The prospective buyer was often a young physician looking to establish a practice for the first time. As the number of group practices increased, valuation was also undertaken to arrive at a "buy-in" price for a physician interested in becoming one of several stockholders or partners in a group. During the 90's decade, hospitals, health plans, and practice management companies became the focus of much of the buying activity. Divorce proceedings are another common source of valuations.

Medical practice valuation is a time-consuming, complex process. In essence, it requires coming up with a dollar figure not only for every tangible asset in your practice but for your intangibles as well. Can you do it yourself? Maybe. Should you do it yourself? Absolutely not. The task is far from simple, and it could cost you thousands of dollars if performed improperly. Most physicians have no background in appraisals and have little comparative information on the market. Additionally, because it is generally in the selling physician's best interests to value his/her practice as high as possible, the resulting appraisal will have little credibility with a prospective buyer. Even if the appraisal is done by the physician's accountant who has worked with the practice many years, the seller will still have a difficult time convincing a buyer that the accountant's appraisal is objective. The most objective results are obtained by hiring an independent appraiser who will generate a complete report covering all practice assets.

A medical practice has only three elements of value: hard assets, accounts receivable and goodwill (intangible assets). Hard assets include: buildings, equipment, exam tables, office furniture, computers, lease-hold improvements, supply inventories, etc. Buyers are generally not interested in buying a practice's accounts receivable as only 30-40 percent of buy-sell agreements include sale of the A/R and this percentage is declining. The largest element or component of practice worth is goodwill, which is the sum of all the intangible qualities of the practice. On average, goodwill accounts for about 90 percent of a practice's purchase price when A/R is excluded.

With regard to the valuation of goodwill, it is important to differentiate between "personal goodwill" (which cannot be sold) and "institutional goodwill" (which can be sold). Personal goodwill includes those things that go into the development of the relationships between a physician and his/her patients such as the physician's personality and unique skills. Institutional goodwill, on the on other hand, includes factors that attract patients and payers to a practice as a whole, rather than to an individual practitioner.

Examples of institutional goodwill factors include:

  • Overall profitability and economic soundness of the practice
  • Practice location and practice reputation
  • Level of competition in the area
  • Referral patterns
  • Transferability of patients from seller to buyer
  • Patient payer mix
  • Quantity and quality of patient medical records
  • Training, quality and retention of staff
  • Relationships developed by the practice staff with patients
  • Seller's willingness to assist in the transfer of the practice

Goodwill may be described as "the ability of a going concern to earn a return in excess of that which would be expected from the value of its tangible assets." This ability to earn an excess return is critical to understanding the rationale for the valuation techniques which generally focus on cash earnings.

There is no single "right way" or methodology to determine the goodwill value of a medical practice. The most frequently used methods for valuing practice goodwill are: (1) market transaction or comparable sales, (2) excess-earnings and (3) discounted cash flow. The valuation reports prepared by Marc H. Bailey & Associates generally utilize all three approaches in arriving at an opinion of the value of practice goodwill and fully explain the relative advantages and disadvantages of each approach.

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Marc H. Bailey and Associates • 5013 Butterfield Court • Culver City, CA 90230 • Tel/Fax 310.838.9170 • marcbailey@ca.rr.com