Understanding Medical Practice and Healthcare Entity 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 the physician is selling a medical practice 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 – for example 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 and buyers. This is called the income approach and I consider it the most appropriate method for valuing physician practices and healthcare entities. But first you must normalize revenues, expenses, and more importantly, physician owner compensation.
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 physician practice valuation.
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:
Selling a Medical Practice
I can help with the sale of a medical practice to another physician, acquisition by a hospital, or acquisition by other entity. This includes brokerage through Tinsley Medical Practice Brokers.
Working with your legal counsel, I can help draft buy/sell agreements that state buyout value based on FMV (Fair Market Value) or some other agreed upon formulary.
I can assist in determining value to the marital estate and related inclusion of personal versus enterprise goodwill.
I can assist in the distribution of initial equity interests and/or distribution of sales proceeds.
New Owner Buy-In
If a new owner buy-in will be based on FMV for a formulary; services also include structuring the buy-in and any related tax issues.
Litigation valuation is usually needed with regard to physician contract disputes and damage calculations.