Practice Management Tip

How Much Your Practice is Worth?

By Cheryl Toth, MBA

What’s the value of your practice? If you aren’t certain, it may be time to engage a professional appraiser to conduct a business valuation.

Whether or not you’re planning on selling your practice or seeking an employment agreement with the hospital, an up-to-date valuation of the practice makes good business sense. The data is useful in a variety of transactions, from divorce settlements, partnership disputes, and practice mergers, to estate planning and the resolution of partnership buy-sell issues. 

Here are 3 things to keep in mind as you seek a valuation:

1. Ask your CPA for a referral. 

Business valuation requires special skills. In its State on Standards for Valuation Services, the American Institute of Certified Public Accountants (AICPA) prohibits CPAs without specific training in business valuation from providing then. Select someone with the right credentials – not just “CPA” – for your appraisal.

2. Understand the three, standard valuation approaches. 

These are: market, income, and asset-based. Market valuations are used when value can be estimated by reviewing comparable, recently sold properties or businesses that are similar in size and features in a market. They are typically used to value a home or building. Income valuations are used when value can be estimated based on future potential income generation of a businesses. A formula that considers discounted cash flow, direct capitalization, or a gross income multiplier is used to estimate this. Income valuations can be used for income-generating (rental) properties or businesses. 

The most commonly used approach for appraising physician practices is asset-based valuation. This  approach establishes a value based on the cash, accounts receivable, hard assets (equipment, patient records, supplies, building), and good will (anything paid above cash, A/R, and hard assets) of a business. As you might expect, good will has very little value in today’s healthcare environment, where managed care contracts are de rigueur, and patients typically choose their physician based on the plan their employer has offered. 

There are exceptions to this. For instance, if a practice has differentiated itself from others and cultivated a steady stream of out-of-network or cash-paying patients, you may be able (emphasis on maybe) to justify some good will. However, if that good will is primarily attributed to one physician and that physician is the one selling, don’t count on getting any value for it. Good will may also be a moot point if the hospital is acquiring the practice. Wary of Stark and anti-kickback laws, assigning value to a squishy measure of value like good will has the potential for being perceived by the Feds as paying for future referrals. Many hospitals steer clear of paying for it all together.

3. Update the valuation every few years. 

The healthcare environment and your personal and financial situation are constantly changing. Your practice valuation should change along with these external factors, as well as with major changes in your business. For example, if you purchase a building, open a new location, or if your revenues increase significantly due to a new partner. Keeping the valuation current is a positive signal to a prospective buyer that you’ve made an ongoing effort to calculate the worth of practice, based on fair and objective data.

Cheryl Toth, MBA is a consultant and writer with Chicago-based KarenZupko & Associates. She brings more than 20 years of consulting, management, training, software product and executive management experience to her projects.