Considerations in Practice Valuation

This article organizes the original guidance on considerations in practice valuation into clear sections for easier reading and reference.

Overview

This opening section presents the main context from the original post.

At some point, you might consider selling your medical practice. There are many considerations, including continuity of patient care — and, if you’re retiring, perhaps emotional issues connected with leaving patients, and practice itself, behind.

From a financial perspective, you’ll need to get a reasonable estimate of your practice’s value before you put it on the market. And the only way to do that is to engage a qualified valuation professional to perform a practice valuation.

4 traditional assets Practice valuation takes into account both tangible and intangible assets. Typically, a valuation professional considers four traditional assets:

1. Tangible assets. These include equipment, cash, accounts receivable and any property owned by the practice.
2. Liabilities. These are debts the practice holds that will need to be paid in the future. Typically, they are accounts payable or loans.
3. Equity. This is the difference between the assets a practice owns and what it owes (or assets minus liabilities). It includes the residual value of stock and retained earnings.
4. Intangible assets. These are the “invisible” components that make a practice successful — often referred to as “goodwill.” This may include the owner-physician’s reputation, practice location, patient loyalty, the volume of high-paying insurers and management systems that contribute to a well-run practice.

All of these need to be considered in estimating the practice’s value.

Approaches to valuation

This section keeps the original guidance focused on approaches to valuation.

The traditional valuation approaches most frequently used are:

Asset-based. This starts with building an adjusted balance sheet to identify the book value of the tangible assets. It includes examining the value of intangible assets as well, which can be determined by calculating factors such as reputation, name recognition and location.

Income-based. Income-based valuation looks at the practice’s historical revenue streams and makes projections about future revenue. This approach is especially valuable when a prospective buyer is likely to improve revenue because of increased productivity, lower costs or other value-adding strategies.

Market-based. This approach builds on the two previous approaches but asks: “What is the practice worth in the current market?” The market-based approach works better if there are more similar deals occurring in the specific market.

The valuation professional must evaluate how much of a practice’s goodwill is related to personal goodwill and how much to corporate goodwill.

A physician’s charisma, personality or, in some cases, distinctive medical skills may not be transferable to some buyers. Corporate goodwill, however, is usually transferred more easily.

Corporate goodwill is often a significant part of what a buyer is acquiring. It’s largely related to factors associated with revenue production — such as location, payer mix, referral base, historical growth patterns, visit volume, collection ratio and management systems.

Get started early Your medical practice, no matter its size, has value. If you plan on selling your practice, you should have it appraised by a qualified professional expert at least two years ahead of when you intend to retire.

Doing so can help you build the practice’s value for an optimal sale price — as well as deal with the tax, succession planning and estate planning issues involved.

Content from Thomson Reuters

Related Resources

These resources connect the article topic with related Bowers service pages and approved professional reading.

• Tax Services
• Business Strategy & Growth
• Business Valuation
• Mergers & Acquisitions
• Harvard Business Review
• Accounting Today

FAQ

The questions below summarize the main points already covered in the article.

What is the main focus of Considerations in Practice Valuation?

The article focuses on considerations in practice valuation and organizes the original guidance into sections for easier review.

What topics does the article cover first?

The article begins with approaches to valuation and then continues through the remaining points in the original post.

Does the post include action items or reminders?

Yes. The original post includes listed items that have been kept in list format for easier scanning.

Was the original post wording changed?

The revision keeps the author wording and updates the structure so the post is easier to read online.