Medical Practice Valuation
How much is your physician practice worth? Often, it depends on who wants to know and why. Valuation professionals follow different methodologies depending on whether a practice will be sold to another physician, valued for a divorce proceeding, or if practice partners just want to go their separate ways.
You can follow several pathways to put a value on a physician’s medical practice. The market value approach – what other practices in the area sold for recently – is dandy for houses but can be an exercise in uncertainty to compare medical practices in different parts of the country. Finding “comparability” is often quite difficult.
Another approach is to try and project future cash flow, the component most important to business investors. While it works well for many types of businesses, cash flow valuation is of little help to the typical medical practice owner since most have little cash left after paying for overhead expenses and physician compensation – in other words, medical practices do not retain earnings.
Physician owners tend to take whatever’s left after expenses as their compensation. If physician compensation is set at a fair market level for the same area but there’s never any cash left at the end of the year, then what’s it worth to an investor? Unless a physician earns substantially more than the fair market rate for his or her specialty and the area, that money is physician compensation, not profit. That’s why figuring in goodwill – the ability to make profits – is such a major component in determining practice value.
A physician practice is unique and as such, it is important to know the nuances of physician practice when conducting a practice valuation. This includes understanding the revenue stream and what it comprises (ex. CPT coding) and the unique overhead issues (ex. one-time costs and non-operating costs). It also includes understanding potential healthcare restrictions on the valuation, such as:
- Stark definition of fair market value and commercial reasonableness
- IRS Private Inurement
- Physician ownership in an entity involving “Designated Health Services” – “Stark Laws” and allowed exceptions
- Perceived physician inducements to refer patients is provided in the deal structure – Anti-Kickback Statutes (“Fraud and Abuse Laws”)’ and allowed “Safe Harbors”
My medical practice valuation services occur in the following situations:
Practice Sale To another physician, acquisition by a hospital, or acquisition by other entity
Retirement/Withdrawal Buy/sell agreement states buy out value based on FMV
Divorce To assist in determining value to the marital estate and related inclusion of personal versus enterprise goodwill
Practice Merger To assist in the distribution of initial equity interests and/or distribution of sales proceeds
New Owner Buy-In If buy-in will be based on FMV; services also include structuring the buy-in and any related tax issues
Litigation Valuation usually needed with regard to physician contract disputes and damage calculations