Medical Practice Valuation for Purchase or Buy-in
Why do you want to get a medical practice valuation?
Medical practices can have different values for different reasons, often based on why the dollar value of the practice is important.
– Sale for many reasons
– Merger with another solo, group, hospital or chain
– Buy-in of a new associate or pay-out to a retiring senior partner
– Insurance & estate planning
– Economic damages in litigation
There is no exact answer to the valuation of a medical practice
You should know in advance that there is no perfectly accurate answer on the value even if you pay the most knowledgeable medical practice appraiser on the planet for their opinion. That is not to say that you can’t come up with a reasonably defensible working opinion of value that might be accepted by an associate, a buyer for your practice, a pay-out formula for a retiring senior partner, or a courtroom; its just that “value” is an opinion, not to be confused with a “price”. Reasonable people can differ on their opinions of value based on different assumptions.
Value is a concept based on judgment applied to a set of circumstances. Value is an economic term that sets it apart from price. Value is a creation of individual opinion. A practice can have a value, or worth, without a sales price, like in litigation for economic damages, or divorce. Value is determined, price is negotiated between two specific parties, each with their own unique situations and needs.
Reasonable people can disagree on the value of a medical practice
Valuation experts commonly disagree with each other widely on the value of a practice. This is often based on differing assumptions underlying the value, or errors, or bias (bias is actually a violation of appraiser professional ethics). How a valuation is determined should be clear by reading the narrative text of the appraisal. There should be no indecipherable “mumbo-jumbo”. Appraisers are supposed to lay out clearly for a reader exactly how they came to their opinion, so any non-expert reader can follow the appraiser’s assumptions, reasoning and mathematics. In valuing a practice on your own, you should do the same. The purpose of drawing your attention to the issue of underlying assumptions, is that those assumptions are a very important part of arriving at a value. An example of an important assumption is whether Medicare and other insurance reimbursement will go up or down in the future.
Most owners over-value their businesses
Most business owners are proud of their businesses, whether medical practices or any other type. They have spent years of “blood, sweat & tears” building it up, and believe there is much value to that effort. The success of the business may be a large part of the owner’s ego. Most owners therefore have an opinion of the dollar-value of their practice higher than the market’s opinion of value of their practice, as represented by knowledgeable buyers. On the other hand, in medicine, I find many physicians that believe the scuttlebutt in the physician’s lounge at the hospital that proclaims that “medical practices no longer have value”. Many buyers have similar opinions. Neither is based on fact. The real answer to whether a practice has value is;” it depends”. I would suggest that owning a practice that provides the owner $500,000 more income per year than would similar employment has real value to potential purchasers. How much it is worth is what the topic of valuation is about.
Practice appraisal is an unlicensed profession so competence varies
You might be surprised to know that medical practice valuation is not a licensed activity, like medical practice brokerage in most states, or even real estate valuation.
Heck; you need a license to cut hair, but not to provide a value on a medical practice where errors could result in hundreds of thousands or millions of dollars of damage! Anyone can hang out a shingle and call themselves “medical practice appraisers”, and many consultants of various flavors do that, not knowing what they are getting into. Often, a general-business-broker in your local town will be approached by a physician who wants to sell a practice. The broker will apply generalized valuation formulas that he uses with all the rest of his clients; like restaurants, body shops, franchises and hairdressers. The broker hasn’t got a clue about the difference between a general practitioner and a general surgeon, Stark, proposed Medicare reimbursement reductions, ancillary services, etc. The broker doesn’t want to spend the $500 to buy an annual MGMA physician compensation report for normalization of market rate incomes and a $500 goodwill valuation report to do just one little doctor-office valuation, and usually doesn’t have one medical practice valuation textbook in his library. The broker then does a lousy appraisal to-which he and the seller become psychologically committed as “fact”.
In representing a buyer of a medical spa this year, I actually had a broker tell me that his excessively-high valuation of the doctors’ practice was because “that’s the amount the owners wanted”, and he “adjusted the math” to support the desired asking price! How’s that for the broker’s ethical “unbiased independent expert valuation” opinion! Similarly, there are appraisers that specialize in giving their “employing attorneys” whatever number the attorney wants for a court case. The appraisal industry has its subset of charlatans as does every business including medicine, so beware. If an appraiser starts an engagement with the words “How much do you want me to appraisal the practice for?”, get a different appraiser.
Plan for the competence of the other party to the transaction
You have to expect the other party to a transaction to have competent counsel. Bogus valuations will be discovered by competent appraisers; and your soliciting a bogus valuation will reflect on your credibility too. Then the buyer starts thinking “If the appraisal is bogus, maybe the underlying accounting is too, and maybe the CPT coding too”, and on and on. I’ve seen cases where the practice “seller” makes more on ripping off sequential associates on shady buy-ins and accounting than he does on seeing patients! That type of predator depends on the associate being too nave to get competent counsel. Other cases have involved skimmed profits, double posting, and separate sets of accounting books.