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Medical Practice Valuation

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What is Your Medical Practice Worth?

At some point in time most clinics will undergo transfers of ownership due to clinic expansion, physicians joining or leaving the practice or mergers or fragmentation of the business. During this period, a practice will be required to perform a ‘practice valuation’ to determine the price the practice will be sold or bought for. This can be a long and detailed process that takes several factors into consideration in order to estimate the value of the business.
A medical practice valuation can help a new physician who is buying into a business determine how profitable it is and can help retiring physicians work out how much their practice is worth including the amount of non-tangible assets such as goodwill. Here’s a few things you should know about a medical practice valuation if you’re planning on joining, buying or selling a practice.

Valuation Methods

In order to reach a fair and accurate price, there needs to be a rational basis for how a medical practice valuation is determined and in order to properly assess how much a practice is worth rigorous and uniform valuation methods must be used. Understanding the factors that help to determine medical practice valuation can assist physicians to make an informed decision when buying or selling a practice.

There are several things to consider when determining the value of a practice such as the location, profitability, and reputation of the clinic as well as the age of the seller and if he or she will continue to work at the clinic.


Tangible Assets

During the valuation the tangible assets and intangible assets of the medical practice are also considered.Tangible assets include things that can be readily observed such as, medical equipment, inventory, facilities, medical records, leaseholds, real estate and accounts receivable.

Intangible Assets

An intangible asset includes things that are not always easily identified but are generally highly valued, such as the existing patient base, buy/sell agreements, goodwill, staff and administrative processes in place.Practice appraisers will use tangible assets and intangible assets as well as other factors to help them determine how much the practice is worth to reach a fair market value (FMV) calculation.

Frequently Asked Questions

What is ‘Fair Market Value’?
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.
How does ‘Goodwill’ affect Practice Valuation?
What Other Factors Determine Practice Valuation

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