Medical Practice Valuation
Let an expert help you evaluate your medical practice.
What is Your Medical Practice Worth?
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.
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.
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.
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
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.