What's Your Practice Worth Today?

Kenneth J. Terry, MA

Disclosures

September 04, 2009

In This Article

Ways to Calculate Practice Value

The methods used to compute the dollar value of practices are discounted cash flow, market value, and the cost or asset approach. The discounted cash flow method calculates the "present value of a practice's future earnings stream discounted at an appropriate risk-adjusted rate of return," notes Simons.

The problem with this approach, he says, is that most practices don't have a positive cash flow because they distribute all profits to the partners and/or because the hospital will pay them more than they could earn in private practice. "So when a hospital acquires them, there's no cash flow the hospital can expect to receive from the practice."

Still, appraisers do use discounted cash flow to valuate practices. La Penna looks at the cost of capital and the risk factor. Although interest rates are at historic lows, he notes, the future income streams of practices are increasingly risky because of the changes in the healthcare environment.

"So as this stuff drags on, the discount rates we're using go way up because of the risk. But they go down because of the recent decline in interest rates." Today, he says, the discount rates, which rise as practice values fall, are approaching 20%, compared with 15% to 16% a few years ago.

Another method of assessing practice value is the market value approach. This is similar to figuring out how much to ask for your house: You find out the purchase price of similar practices in your area that were sold in recent years.

Besides calling former practice owners, you can get some information about practice sales from the Goodwill Registry, a listing of sales in various specialties and how much goodwill was included in them. The Goodwill Registry is available from The Healthcare Group in Plymouth Meeting, Pennsylvania.

Unfortunately, this registry includes fairly sparse data for many specialties, with a focus on The Healthcare Group's own consulting clients. Also, the registry does not reveal anything about physician compensation after the sale or which valuations were done in the context of divorce proceedings. The registry also doesn't include practices that were sold with no goodwill.

Simons says his firm looks at the Goodwill Registry, Pratt Stats, Irving Levin Health Care Acquisition Record, and the Institute of Business Appraisers database. "None of them are really good," he says, because the underlying information is confidential and is limited to what has been disclosed. So, like most appraisers, he simply uses these data as a "reality check" in computing practice values.

Simons primarily relies on the asset approach to valuation. First he identifies all of the tangible and intangible assets and assigns a fair-market value to each. Then he adjusts the balance sheet of the practice to come up with an overall figure for its market value.

Different appraisers use different methods. But in the end, the value of your practice is what a buyer is willing to pay.

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