Before determine the value of your medical practice, you have to know why you're valuing it and how best to approach the valuation process. Here's a look at what you need to know to find out how much your practice is worth in today's market.
Before discussing how to value a medical practice, physicians need to know the context of the valuation. Is it for a sale or purchase; admission or retirement of an owner; estate planning or completing an estate-tax return?
The purpose of the valuation will dictate the “standard of value.” The most common is “fair market value,” generally defined as:
The price, expressed in terms of cash equivalents, at which an asset would change hands between a willing and able buyer and a willing and able seller, both acting at arm’s length where neither is under any compulsion to act, and both having reasonable knowledge of the relevant facts.
Most medical practices have two types of assets which require consideration. Tangible assets, such as equipment, buildings, vehicles, etc., if significant to the valuation, should be appraised by an independent appraiser. Accounts receivable can also be a valuable tangible asset of the practice. Typically, receivables are not “on the books,” since many practices prepare their financial statements on a cash basis. Determining the net realizable value of receivables can be challenging, but cannot be overlooked.
The second type of asset is intangible assets. Often, the most significant intangible asset of a medical practice is goodwill. While the definition of goodwill is somewhat elusive, the following are several factors that can impact the determination of goodwill:
• Anticipated future earnings.
• Level of competition.
• Economic strengths.
• Price charged for services of products (when compared to other practices).
• Location of practice.
• Workforce in place.
• Patient data.
Choosing the Right Approach
There are three approaches to business valuation: Income, market and cost. The goal of each approach is to provide an indication of value under the selected standard of value. There are multiple valuation methodologies under each approach.
Generally, goodwill of a medical practice is valued using an income approach, whereby an estimate of continued future earnings is determined and subjected to either a capitalization or discount rate. The value of the tangible assets, net of liabilities of the practice, is added to the goodwill value, yielding a preliminary value of the practice.
When reliable, comparative data are available, the market approach may be used. This approach bases the value of the practice on the results of actual sale transactions of comparable medical practices, or metrics from operating practices (when available). The relevance and reliability of the data should be determined before being used for this purpose.
The cost approach generally is applicable to non-operating and holding companies. Therefore, it is rarely used in the context of an operating medical practice.
Finally, as indicated above, the purpose of the valuation may also affect the determination of value. A valuation for a purchase or sale is subject to all forces that affect supply and demand, including all relevant economic factors prevalent at the time and other factors which influence the market for the practice. Currently, the uncertainty of the impact of the new healthcare legislation on the medical profession creates added difficulty in establishing the value of a medical practice. As a result, the projected affects of the new law need to be considered by the valuation analyst.
Joel Charkatz, CPA, CVA, CFE, and Melissa Pitchford, CPA, are shareholders at KatzAbosch, P.A., based in Timonium, Md. KatzAbosch is a leading provider of accounting, tax and consulting services to the medical community. For more information about KatzAbosch, or the topic discussed in this article, Joel and Melissa can be contacted at email@example.com and firstname.lastname@example.org, or by phone at (410) 828-6432.
KatzAbosch is also a proud member of the National CPA Health Care Advisors Association. HCAA is a nationwide network of CPA firms devoted to serving the healthcare industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at email@example.com.