Medical Practice Valuation

Practice appraisers perform a fair market value (‘FMV’) analysis to help them establish a reasonable value for a medical practice based on several factors. FMV is an estimated price based on the voluntary transaction between a willing buyer and a willing seller who both have equal bargaining power. Therefore, what the practice is worth is subjective and is a mixture between what someone in the free market is willing to pay for it and what the vendor is willing to sell it for.

Factors such as tangible assets and intangible assets are carefully evaluated to help determine how much a practice is worth and the FMV. For example, two similar medical clinics in the same location may not have the same FMV, as other factors such as profitability, cash flows and how smoothly the practice is operating are also taken into consideration. A medical practice valuation is a complex and subjective process as the ‘asking price’ is not always indicative of what the practice is worth or what it will sell for. In many cases, sellers will believe that their practice is worth more than it actually is because they associate their hard work and time spent building the practice to the price. However, this has no relevance to the buyer and is often what causes disparity between the buyer and seller.

Goodwill is an intangible asset that is used in the valuation approach and is generally known as being one of the more subjective and difficult approaches to practice valuation. Goodwill refers to the intangible assets that either restrict or enhance the future earnings of a practice and include factors such as the owner’s reputation within the community, staff longevity, customer base, and competition.

This is particularly important to a potential buyer when establishing if they should buy-in/purchase a business based on the expected earnings the practice. For buyers and sellers, protecting goodwill is important as it accounts for a significant portion (60% - 80%) of a practice’s total value, as many patients will often transfer their loyalty and trust to a new buyer.

Every clinic has goodwill, however, not all buyers fully understand the concept or want to pay for it. Entities such as hospitals do not want to pay for goodwill as they believe that they are purchasing the physician and their expertise, not the clinic. However, for a buyer who is looking to purchase a private practice, this is something that should play an important role in practice valuation as goodwill directly affects the value and is a free form of endorsement and social proof from the previous owner.

Other factors to consider during a medical practice valuation are the general state of the economy, tax implications, the terms of the deal that you agree on and the general timing of the sale.

Regardless of how much your practice is worth after a medical practice valuation, the state of the economy can also impact the purchase price and determine how easy it is to buy or sell a practice. Not having a hard and fast deadline to sell or buy can be advantageous as the timing of your sale can have a major impact on your final price and may differ to the medical practice valuation. For example, if you are in a rush to sell your business and the economic climate and is not right, you risk selling your practice for a much lower price than what the practice is worth. The more time you have, the more likely you are to get the best deal. Another consideration is the terms of payment which you agree on with the buyer. Some sellers might lower the purchase price in exchange for a quicker payment (1-2 years instead of 5) and receive less than what is estimated in the practice valuation. Additionally, tax considerations such as the way you structure your sale and reporting to the IRS and government regulations operating at the time of sale can also impact the final value of your medical practice.