How Much Is Your Practice Worth?

Neil Chesanow

Disclosures

October 17, 2017

In This Article

Determining the Value of Your Practice

"There is a great misunderstanding in the medical community as to what constitutes the value of a medical practice," Reed Tinsley says.[7] "Purchasers often think it is valued on the basis of what they plan to bring to the table. Sellers often think it's a simple formula that's applied uniformly across the board."

Neither is the case.

"Although guidelines and formulas are used to calculate values, many unique circumstances set a practice apart from all the others," Tinsley points out.[7] "Being the only practice of a certain specialty in an area affects value. The demographics of the patient base or physician referral sources can also affect value."

"These circumstances are where the appraiser focuses on making assumptions that affect the value of the practice," Tinsley continues.[7] "These assumptions are applied numerically to valuation formulas to determine a dollar amount that represents the value."

The aim of all this calculating is to arrive at answers to two fundamental questions, Tinsely says[7]: What is the strength of a practice's income stream (and what does it produce for the owner or owners)? And is the practice's current income stream a good predictor of future income?

To arrive at answers to these questions, "there are three generally accepted approaches," Alex Nechay says: "the income approach (based on cash flow or earnings), the cost or asset approach (based on assets minus liabilities), and the market value approach (based on comparable sales). The preferable one is the income approach. But that requires a good cash flow in the business."

An appraiser chooses an approach on the basis of the practice's circumstances.

"Say you have an internal medicine practice in which the owner does not generate any income beyond what his fair market compensation should be," says Nechay. "With the income approach, there's no value to the doctor's business because there's no free cash flow there.

"However, there are physicians who don't want to work for someone who are willing to buy this practice. They're willing to pay something to go in and be in private practice. That's where the market approach would make more sense."

"The market approach is the one I tend to use," Mark Kropiewnicki says. He likens the market approach to an approach to selling a house. "An appraiser comes in to try to value the house. She looks for comparable houses in the area. She doesn't look for comparables across the country. She looks at the local area. And she starts to make adjustments. 'Well, this house has a two-car garage. The other house only has one car. One place has a finished basement; the other doesn't.' And then she starts doing pluses and minuses off of that."

"You do the exact same thing when appraising a practice," Kropiewnicki says. "The two major factors are location and profitability."

But whereas there are usually several similar houses to compare in an area, there may not be a lot of local practices that are similar. The Goodwill Registry, an online database of what practices sell for across the country, may be useful, but it is far from complete, with some specialties better represented than others.[8]

"The asset or cost approach may also be used in the appraisal," Kropiewnicki says. "But it doesn't really help you a lot. It's just saying, 'If I were going to replicate this practice from scratch, what would it cost?' But that doesn't have any goodwill value in it. It doesn't give you a patient base."

If the appraiser is just doing a summary report, only one approach—usually the income approach—may be used. But for a full-blown valuation, all three approaches may be used, Kropiewnicki says, and the results are averaged. "A lot of subjectivity goes into it," he admits.

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