Goodwill Value (General)

by Keith Borglum

What Is Your Medical Practice Worth?

There are many occasions when knowing what your practice is worth is important information. The most common reason for getting a practice valuation has always been 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 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 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 and Clinton's managed care promotion 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.

The effect of these changes has caused the obsolescence of traditional methods of valuation such as discounted cash flow, capitalization of excess earnings, adjusted net assets and the old favorite "one times net". What is most appropriately used now is a market comparison, or what other similar practices have actually sold for. Market value is a total of the sum of furnishings, supplies, instrumentation, accounts receivable, goodwill and sometimes tenant improvements. Goodwill now rarely exceeds 30% of the past year's receipts and is often as low as 5%. This can be modified by a myriad of factors best determined by an impartial third party.

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.

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 data bases.

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

Reprinted with permission from CALIFORNIA MDs BUSINESS ADVISOR.

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

Member National Association of Healthcare Consultants, Society of Medical Dental Management Consultants, American Medical Association's Doctors Advisory Network, American Academy of Family Physician's Network of Consultants, California Academy of Family Physician's Consultants on Call, and the Institute of Business Appraisers. Phone 707-546-4433 for consulting information. Permission is granted to reprint or quote any portion of this article provided that both the author and publication are named and two copies or the quoting journal are immediately mailed to the publisher.

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.