How Much Is Your Practice Worth?

Neil Chesanow

Disclosures

October 17, 2017

In This Article

What's Involved in a Practice Valuation?

The valuation process consists of several steps, according to experts.

After determining the purpose of the appraisal and the yardstick of value to be used, an appraiser gathers pertinent facts about the practice that affect its value.[1,2,3,4,5] These include referral patterns; payer mix; patient mix; tax returns and year-end financial statements for the past 5 years; interim financial statements through the effective date of the valuation; ownership information; market information; competition analysis, and more. The economic climate and the state of the healthcare industry at the time of the valuation are also assessed.

The practice's tax returns and financial statements are then analyzed.[1,2,3,4,5] Its strengths and weaknesses are compared with those of competing practices in the area. Financial statements are "normalized" to eliminate personal or nonrecurring items. And on the basis of this information, future performance is forecasted. The appraiser then calculates the final estimate of value.

Finally, an appraisal report is prepared.[1,2,3,4,5] In most cases, a summary report describing the results of the valuation is sufficient. However, if litigation is involved, an appraiser is required to prepare a comprehensive, extremely detailed report that contains all the data and valuation steps used.

Says John P. Reiboldt, CPA, managing partner at Coker Capital Advisers, a healthcare investment bank in Alpharetta, Georgia, a comprehensive report can run over 100 pages and cost even a small practice $10,000 or more.[6] But you are not likely to need this level of detail.

"The times when you need a formal valuation report are limited," says Kropiewnicki. "When you're buying or selling a practice, or doing a buy-in, a buy-out, or even a practice merger, you don't need a formal appraisal. People just want know, 'What's my practice worth? I'm just doing a deal, and I need to know whether I'm in the right ballpark.'"

Kropiewnicki mainly sees formal valuations when a hospital or equity firm is the potential buyer. But they are the ones to commission and pay for the report, and the principals of the practice up for sale typically accept its findings, he says.

Even if the document is lengthy, you should still do your due diligence and have it reviewed, Reiboldt maintains.[6] "These reports are opinions, so we always recommend that you have an expert look at the appraisal a purchaser has prepared," he says. "Maybe they project a growth rate lower than you think is valid, or you are recruiting a new physician and they didn't fully recognize that."

"Most appraisals are based on a range of values," says Kropiewnicki, by way of perspective. "Nothing is absolute, because everyone makes assumptions. If I'm doing a report and I change some of the assumptions, I can get almost any answer I want. You usually get negotiated on the assumptions."

"Valuation is a great starting point," Nechay agrees. "Maybe the way you organize the deal is going to require you to make some adjustments. The valuation is your tool to use to your advantage and to make things happen."

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