Appraisal of Medical Practice Value

by Keith Borglum

There are many occasions when the valuation of your medical practice is important. The most common reason for getting a medical practice appraisal is for purposes of practice sale. Other valid reasons include mergers, divorces (marital and professional), buy-in or pay-out, estate planning, disability and death insurance planning, etc.

The true test of medical practice value is what a willing buyer actually pays a willing seller with neither party being under any undue outside influence. Unfortunately the greatest undue outside influence usually encountered is ignorance, either on the part of the physician or his/her advisors. Applying too high a value to a practice can cause a seller to lose his or her practice through not being able to sell it, or cause great financial hardship on a buyer for paying too much.

One impact of Medicare's RBRVS, managed care and government intervention has been to upset the values of medical practices. Many doctors are opting for early retirement and are flooding the market with practices for sale, which reduces the value. In addition, fewer physicians are seeking solo practice opportunities, creating a buyers' market. An exception to this are those limited markets where competition is fierce among large institutions to capture medical market share and bidding wars erupt. In those markets there sometimes appear to be neither rules nor reality checks (nor staying power).

There are a number of ways to value a practice including but not limited to:

(a) Discounted Cash Flow Approach, (also known as the Income Approach) is based on the current worth of the anticipated cash flows of the practice above the income that would be paid to the physician as an employee, such as in dividends. Goodwill and other asset values are included together for calculations. This method is currently less favored due to the uncertainties of future cash flow because of the rapid changes occurring in managed care and government policies. When practices are in matured capitated environments with stable cash flows, this approach may again become in favor.

(b) Cost Approach, (includes the Adjusted Book Value and Excess Earnings/Asset Accumulation Approaches) which estimates the cost of replicating the business, but has limited usefulness in valuing an on-going concern. It also is in question in this time of unstable future earnings projections, particularly for specialist physicians. Capitalization rates used in calculations can also be difficult to substantiate.

(c) Market Comparative Transaction Approach, (excluding the Market Comparison Approach which pertains only to publicly traded companies) which compares the practice being valued to other similar practices that have actually sold. The national research publication the Goodwill Registry reports accumulated data and is the dominant publication in the field. We are contributors to the Registry and use it's data as a baseline upon which to compare the practice being valued. The Institute of Business Appraisers Inc. and other organizations also maintain sales data bases.

(d) Rules of Thumb, such as "one times net", are seldom 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.

I favor the Market Comparative Transaction Approach for most medical practices. I follow market value guidelines put forth in publications and educational presentations by the American Medical Association Department of Practice Management, Society of Medical-Dental Management Consultants, Medical Group Management Association, The Goodwill Registry, Financial Valuation of Businesses and Business Interests; Health Care Providers; by Zukin, and Financial Valuation of Your Practice; by Ginsberg.

"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.

Market value is a total of the sum of furnishings, supplies, instrumentation, accounts receivable, intangibles and sometimes tenant improvements or real estate.

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.

Practice valuation is an inexact science attempting to reach a value within a reasonable range, therefore even knowledgeable people can differ in their opinions. You should demand to have your appraiser present the resources used and the currency of his/her data bases. Many so-called appraisers appear to base their valuations on rumors and hearsay, with little to no substantiation.

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.

Keith is one of the few consultants in America to be accepted as a member of all of the following; the Institute of Business Appraisers, National Association of Healthcare Consultants, Society of Medical Dental Management Consultants (90-94), American Medical Association's Doctors Advisory Network, American Academy of Family Physician's Network of Consultants, and the American College of Physicians Managed Care Advisory Consultant Network.

Phone 1-800-79-CONSULT for consulting and appraisal information.

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.