Pricing a Practice

A physician hired me to help him buy the practice of the physician who had inspired him, since his childhood, to become a doctor.

I knew the seller slightly. He was an officer in the state medical association and highly respected.

We met at the seller’s office. It was very cordial until the seller presented us with the asking price, $250,000. The equipment was minimal and old, the office lease wasn’t assumable, the receivables weren’t included and the profit never reached $250,000 in any year. The practice didn’t warrant that amount. We decided to meet again in a few days.

My rules regarding the price of a practice are, the floor is what it would cost to set up a similar office and the ceiling is the current year’s net.

My client and I were discussing our strategy and trying to figure out where the number came from. Suddenly it hit me. The seller must have taken a huge loss in the stock market and needed that money to replace his retirement fund.

Sure enough, the next time we all met, the seller confessed. That is exactly what happened. I gently explained, no matter how much my client respected the seller, he could not make a living if he bought the practice at that price. We declined the deal.

The older physician never did sell his practice.

Lesson: The price of a practice can’t be based only on the seller’s needs and certainly not on his mistakes.