Medical Practice Valuation or Appraisal, and Goodwill Value of Medical Practices
There are many occasions when knowing
what your practice is worth is important information. The most common reasons
for getting a practice valuation has always been for purposes of practice sale,
buy-in, pay-out or for marital divorce.
Most of the debate about the value of
medical practices settles around "goodwill" value. "Goodwill value" is what remains after the values of the tangible assets and other separately identified intangible assets are subtracted from an actual purchase price. Goodwill value CANNOT be defined as some multiple of collections. As
an example; blindly applying a median goodwill:revenue ratio of 25% to two
practices, each with $1,000,000 in collections, with one being a well managed
cash-practice in an excellent location with a $500,000 profit, and one a poorly
managed Medicaid practice in a terrible location with a <$100,000> loss,
yield the same goodwill:revenue value; which is clearly illogical. Many
people confuse the concept of “sociological goodwill” with “financial goodwill”.
I am frequently asked by sellers why their practice has little-or-no
dollar-value of goodwill, when they have an excellent reputation, a large
patient following, and have poured “years of blood, sweat and tears” into their
businesses. The answer is that if the sociological goodwill doesn’t demonstrate
itself in dollars (SDE or dividends), then the sociological goodwill has no
measure or value when measured in dollars. I am also often asked why the “opportunity
for a buyer to take the existing practice and build upon it” has no goodwill
value. The answer is that the result of the buyer’s efforts belong to the
buyer, not to the seller.
According to the IRS Business Valuation
Guidelines: "The three generally accepted valuation approaches are the
Asset-based Approach, the Market Approach and the Income Approach. Consideration
should be given to all three approaches.” IRS Revenue Ruling 59-60 states that
earnings are preeminent for the valuation of operating companies.
Earnings-driven methods therefore are most important for the medical practice appraiser
to consider. Most appraisers favor the Income Approach in valuing small,
privately-held professional services businesses, as it best reflects the impact
of profit or dividends rather than just gross collections”.
There is some confusion about including
in the name of the "income method" a word or words which represents
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.
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.
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" (!). Valuations should adhere
to the “scientific approach” and comply with national standards, like ASA,
NACVA or USPAP (info on these at http://www.medicalpracticeappraisal.com/links.html)
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.
You wouldn’t use an “unlicensed doctor”.
Don’t rely on unlicensed, uncertified “valuation consultants”. Practice
valuation and/or transaction consulting is a licensed activity in some big
states, like Florida and California.
Rather than reprint much of what I and
others have already published elsewhere, I direct the reader to the Articles
section of my website for much more detailed information and resources at
http://www.medicalpracticeappraisal.com/appraisal_of_medical_prac.html
-Keith Borglum
CHBC CBB
Licensed medical
practice broker and appraiser
Certified
Healthcare Business Consultant
Certified
Business Broker
MGMA Affiliate Member
since 1986
Credentials