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Appraisal
of Medical Practice Value
by
Keith Borglum
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.
(b) The Market Approach, including the Direct Market Data Method for closely held companies including medical practices, the M&A 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 Direct Market Data Method is often the most appropriate when setting the value for a practice sale, buy-in, pay-out or merger.
(c) The Income Approach, including the Single Period Capitalization Method for businesses with a stable annual financial return and constant growth rate, and the Multiple Period Discounting Method when the two assumptions for the Single Period Method are not reasonable. The Income Approach is a way of determining value by converting anticipated benefits.
(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.
"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, or even whatever number the client desires, with little to no substantiation of their opinions.
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 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.
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.
