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Medical
Practice Goodwill Value
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 reasons for getting a practice valuation has always been for purposes of practice sale, or for marital divorce. Other valid reasons include mergers, buy-in or pay-out, estate planning, disability and death insurance planning, etc..
Value should not be confused with price. Value is determined, price is negotiated.
Value is an economic term that sets it apart from price. Value is a creation of individual opinion. Value is what the practice is worth to an individual, given that individual's unique thoughts, wants, needs, purchasing-power, use, supply, and demand.
Price refers to the amount for which a practice actually sells. Successful negotiation between two individuals, each with their own perceived value, regarding the transfer of a practice, results in a price. Sometimes a value is needed, when there is no sale, such as in dovorce proceedings.
Divorce court has its own rules about valuation of goodwill, whether it exists, or whether there is a distinction between "professional goodwill" and "personal goodwill". These rules apply on a state by state basis, so I will defer further discussion of "divorce" goodwill here.
The true test of practice market price 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 price 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. Applying to low a price loses the seller money.
Goodwill value is a reflection of the ability to continue to generate a cash flow, whether that cash flow is profitable or not. For example, one unprofitable practice might become instantly profitable by acquiring the cash flow of another unprofitable practice.
One impact of managed care has been to upset the values of medical practices. Many doctors think there is no goodwill value in their practices, mostly as a result of informal conversations in the doctors' lounge at the hospital. The result is many doctors are opting for retirement by closing their practice rather than trying to sell it, when it might have been successfully sold. In addition, fewer physicians are prefering group practice over solo practice opportunities, creating a buyers' market for those solo practices.
What is most appropriately used now in valuing medical practice goodwill 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 remaining value of tenant improvements or a beneficial lease. Goodwill sales price in healthcare practices 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 valuation reports generally contain background information and documentation so the protocols followed are clear to the lay person 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 1-707-546-4433 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.
