Appraisal Valuation of Medical Practice Value
by Keith Borglum

 

This physician medical practice valuation video about medical practice appraisal discusses detail about formulas, rule of thumb, multiples to apply, valuation in divorce, valuations for buying or selling a medical practice for sale, issues about goodwill and finding a value of a medical business, by a licensed broker, appraiser, and Certified Healthcare Business Consultant. This same information can be applied to valuation of a chiropractic practice, podiatry practice, physical therapy practice, or any healthcare specialty, especially those impacted by ObamaCare and Medicare reimbursement.

 

 

There is no one practice valuation formula. It depends on a lot of factors. For the same reason, any one rule of thumb is suspicious. You can read a practice valuation guidebook, but some of the variables might not apply to your situation. Its like trying to diagnose your own illness using a PDR. Practice valuation multiples vary by practice size, specialty, and even location. If you need a practice valuation for divorce, there might be state laws that apply, and you need to check with your attorney first. Goodwill valuation is the most difficult part, much more difficult than just valuing a tangible asset like an exam table.

There are many occasions when the valuation of your medical practice is important, and there are a number of ways to value a practice, including but not limited to:

(a) The Asset Approach, including the Adjusted Book Value Method, Net Asset Value Method or Asset Accumulation Method which adjust the book value of the assets and liabilities to fair market value. It also includes the Excess Earnings Method codified in Revenue Ruling 68-609, for valuing intangible assets. It is most applicable to practices with a high amount of tangible assets, like radiology. It is also used under the premise of liquidation when no goodwill value is present.

(b) The Market Approach, including the Direct Market Data Method for closely held companies including medical practices; the Mergers and Acquistions Transactional Data Method used more frequently for large or public companies, and the Guideline Public Company Method which uses minority interest transactions in publicly traded companies. The Market Approach applied to professional practices compares the subject to other similar practices that have sold. Finding "similar" practices can be very difficult due to lack of data and the significant differences between practices.

"Goodwill" is the area that generates the most controversy in practice valuations. The value of intangibles, often described in a valuation as "goodwill", generally includes a favorable location; going concern value; use of seller's name; favorable leasehold; covenant not to compete; compensation for past managerial and entrepreneurial services; patient lists; credit records; patient care contracts; employee contracts; as well as assignment of future incomes from the practice. Goodwill value can be modified by a myriad of factors best determined by an impartial third party. Goodwill value is often also abused, at the risk of legal and tax complications to the buyer and seller. The Small Business Administration (SBA) identifies goodwill value in transactions as the price minus the value of the tangible assets.

(c) The Income Approach is a way of determining value by converting anticipated benefits into a current value. In other words, value is represented by the return on investment available above what you could earn through the result of your labor in simple employement. The IRS has published Business Valuation Guidelines in its Revenue Rulings 59-60 and 68-609 that clarify on the Income Approach. With slight modifications, those Rulings have become the standard for professional practice appraisal.

There is some confusion about including in the name of the "income approach" a word or words which represent the stream of returns on earnings or income. These words have included the use of "earnings" (which excludes cash flow), "cash flow" (which excludes pure earnings), "discounted cash flow, returns, benefits, economic income", etc. Dividend-paying capacity is encouraged in Revenue Ruling 59-60 Dividend-paying capacity in medical practices is identified through the use of net cash flow after considering the equivalent market-rate compensation of the owner as if the owner were employed and the remaining cash flow was available to shareholders/investors.

Goodwill value is not separately valued in this approach. The income approach results in a value that includes all tangible and intangible assets, including that described as goodwill. It does not separately seek to break out goodwill value, but to include it. The underlying concept is that when using income of the business as the approach for valuation, that income results from the value of both tangibles and intangibles together.

(d) Rules of Thumb, such as "one times net", are virtually never used anymore because changes in the marketplace and the increasing diversity and complexity of the medical marketplace have eliminated what minimal accuracy they might have once enjoyed. Two practices, each with $500,000 collections, -one with $250,000 net and one with $100,000 net- logically do not have the same value as a ratio of collections, nor a ratio of net. A multiplier of "dividends" might be the closest remaining rule of thumb.

What is most appropriately used now in valuing medical practices is usually the Income Approach, which generally doesn't distinguish between goodwill value and asset value. It only cares about the return available, particularly in excess of what the fair market compensation is for that practice. As an example, a hypothetical family physician can readily find employment at $150,000 per year full time. A practice that only earns $100,000 would have no value to him or her, and likely little to no goodwill value. A well managed practice with midlevels and ancillary services that earns a similar owner $250,000 per year would have value, including goodwill value. That extra $100,000 per year is worth something, and appraisers' job is to figure out how much.

Medical Practice Valuation

Practice valuation is an inexact science attempting to reach a value within a reasonable range; therefore, even knowledgeable people can differ in their opinions.

An important factor in valuation is why and how a value is achieved. Good reports generally contain background information and documentation so the protocols followed are clear, and data can be confirmed. The objectivity of an appraiser can often be determined by a close evaluation of his/her report, especially in comparison to other reports by the same appraiser.

You should demand to have the appraiser present the resources-used, the currency of his/her data bases, and the assumptions underlying the opinion. Many so-called appraisers appear to base their valuations on rumors and hearsay, with little-to-no substantiation of their opinions. I recently had a practice-broker tell me that the extraordinary value she placed on a physician's practice with her "appraisal" was based on "that's what the seller wants" (!).

When you ask "What is my practice worth?" a definitive answer may be elusive, but common sense, professional judgment and bonafide statistical analysis can result in a usable estimate

 

 

Author Keith Borglum is a consultant and medical practice appraiser with Professional Management and Marketing, 3468 Piner Road, Santa Rosa California 95401.

Phone 1-707-546-4433 for consulting and appraisal information.

Keith is one of the few consultants in America to be accepted as a member at some time of all of the following;
the Institute of Business Appraisers,
National Association of Healthcare Consultants (Board of Directors, Committee Chair, Faculty),
Society of Medical Dental Management Consultants (90-94),
American Medical Association's ConsultantLink© (93-05),
National Society of Certified Healthcare Business Consultants, (Committe Chair, Faculty, Certified member)
American Academy of Family Physician's Network of Consultants, (Founding member)
American College of Physicians Consultant Network,
American Academy of Ophth Executives' Consultant Network,
American Academy of Dermatology Residents' Faculty,
AAAAI Practice Management Faculty,
and the California Association of (Licensed) Business Brokers, (licensed and Certified)

Permission is granted to reprint or quote any portion of this article provided that the author, firm, phone and city are named and two copies of the quoting journal are immediately mailed to the author at 3468 Piner Road, Santa Rosa CA 95401.