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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.

Click here to request a professional medical practice appraisal.

There are many reasons to value a practice including but not limited to:
- 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
- Divorce
- Insurance & estate planning
- Economic damages in litigation
- Curiosity

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.

Evaluating an appraiser

Even though business appraisal is not a licensed activity, there are a number of professional trade associations that recommend standards of compliance and ethics, or provide credentials. If you hire a professional appraiser, you should expect that person to belong to one or more of those associations. They include the Institute of Business Appraisers, American Society of Appraisers, the National Association of Certified Valuation Analysts, and the American Institute of Certified Public Accountants. If an appraiser represents membership of other associations as credentials, check out the credential requirements of the association. There are other associations that may be legitimate, but there are also "degree mills" offering appraisal certification merely for paying a fee, just as in other fields.

Being a "Certified" appraiser of a valid association does not insure competence in the specialty of medical practice valuation, nor does lack of Certification indicate incompetence. Check the credentials, experience, and references of the appraiser. "Knowing the business", (in this case the medical business) is a key ingredient of competence for a specialty appraiser. You want your appraiser to know the difference between a General Practice and a General Surgeon.

Using medical practice benchmarks

A medical practice valuation requires comparison of the subject practice's statistics to specialty benchmarks. It is inaccurate to lump all physician practices together as a common entity, as financial statistics differ radically by specialty. If you attempt to value a practice using generic or inappropriate benchmarks, finding the correct value will be a matter of luck rather than skill. Also, beware using outdated benchmark reports to save money on buying the current reports, another common error, as the accuracy of your valuation may suffer.

Demand use of a scientific method

Another standard that can be applied to an expert's valuation opinion, especially for courtrooms, is that of the Daubert court case. The core issues of Daubert are twofold: 1) the information must be relevant (for example, the profitability of the practice related to its value) and more importantly 2) the valuation must be "grounded in the methods and procedures of science" or, as the Daubert opinion also puts it, "the inferences and assertions embodied in the testimony must be derived by the scientific method" and "supported by appropriate validation." I once was able to have a bad appraisal by a crotchety old CPA thrown out as evidence in a divorce case because a blatant error in methodology in his valuation was defended by him with the statement "that's how we've always done it around here"! Any lay person should be able to read and understand the valuation report and follow the scientific method of how the final value was achieved, and it should make sense!

Using a scientific approach to value a practice is an excellent way to lead a buyer and seller to a mutually agreeable price (or to respectful, knowledgeable disagreement) by carefully reviewing all the facts and assumptions. A valid assumption to disagree-upon for example is whether capitation will come to a particular market, and what its effect will be on profits.

Physicians typically respond well to scientific inquiry - just like having a good physical exam, vital signs, lab reports, and imaging on a patient is valued prior to rendering a confident medical diagnosis.

Reality check - finding a reasonable medical practice valuation

In the end, a valuation should be "reasonable". A common test of reasonableness is that the purchase of a practice should pay for itself, above the income available from simple employment, within 5 years at most. Another is the "principle of substitution". A buyer (investor) will not pay more for an asset -and get a lesser return- than that available from purchase of a substitute asset. In other words, a knowledgeable medical practice buyer won't pay more for a practice than the cost of starting a substitute competing practice; nor will they pay money to buy a practice with income equal-to or less-than employment-without-purchase. They would just put the money into the stock market or T-bills instead, or start a practice across the street.

Exceptions to the rule start changing the valuation to other standards of value other than Fair Market Value, like Strategic Value; such as when a specific buyer brings synergy to the transaction. For example, a half-full practice might pay more than Fair Market Value for the other half-full practice next-door that is for sale, because it would make the purchaser's practice full without extra fixed overhead. That's strategic value to a specific buyer.

Buy, sell, or join - which is best value?

The "principle of substitution" applies to buy-ins too. You will often see practice buy-ins under the terms of working for an income less than the owners for the first 3-5 years, then the buy-in is for "just a percentage of the furnishings and equipment". All things being equal, the fair market value of this buy-in versus practice purchase versus start-up are pretty similar. You can work for less money for 3-5 years, or buy a practice and pay it off with extra profit over 3-5 years, or start a practice and pay off the start up costs over 3-5 years.

I teach practice management and other courses on faculty for a number of medical associations and residency programs. A common question asked is "should I buy a practice, join a practice or start a practice". The answer from a financial standpoint is that it is all pretty much equal "at market rate". There are overvalued and undervalued opportunities in "buy, start or join". Paying too much to buy or join a practice is usually a terrible investment, and many practice offerings are overpriced.

The most important issue is that you will be spending most of your waking hours at work, and your family time and free time is precious. Go into practice in a location where, when you leave the office at the end of the day & lock the door & and turn around, you are where you want to be. With good practice management, the numbers will work out.

If we are valuing a practice for buy-in to a minority share, the issue of a discount for lack of control can be very important. The bigger and more democratic the group, the less important it becomes. It is critically important if the solo seller is offering a 49% ownership share for buy-in, since that share may be worth as little as zero, due to what is referred as "senior doctor rights". Consider this case: the senior doctor won't give up any income and gets all the new patients that walk in the door or respond to the yellow pages or come from existing referrers; the new doctor gets no salary & has to find his own patients somehow, plus pay 49% of all the expenses, the details of which are not disclosed, and may include the senior doctor's car, health insurance, or home computer; and the senior doctor has 100% of the decision making authority including changing the new doctor's hours, staff, income and expense formulas. 51% ownership = 100% control. Is 49% of this practice worth anything at all???

Start Your Own Practice

If you can't find a practice for sale or a buy-in in your desired location at a fair price, you can start your own from scratch. It's not that hard, and 100% financing is often available.

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ABOUT THE AUTHOR

Author Keith Borglum has been a licensed healthcare practice broker, appraiser, and practice management consultant nationwide for over 20 years; a profession he continues to this day.

His practical & detailed knowledge of the every-day "business" of medical practice makes him a popular speaker on faculty for a number of medical associations nationwide.

Keith is co-author of two other medical practice business books, and contributor to hundreds of books and articles on practice management, profitability, and valuation.

Most notably, Keith's credentials include:

- Licensed Business Broker since 1983
- Member of the Institute of Business Appraisers
- Member of the California Association of Business Brokers
- Member, American Medical Association's Consultant Network, 1993-2005 (closure)
- Member, American College of Physicians' Advisory Network & Experts Panel, 1995-closure
- Member, American Academy of Ophthalmology Executives Consultant Panel 2002-present
- Founding Member, American Academy of Family Physicians Consultant Network 1992-present
- Faculty, American Academy of Family Physicians' Scientific Assembly Programs, 1998-present
- Faculty, AAAAI, Practice Management & Valuation Courses, 2004-present
- Faculty, American Academy of Dermatology; Residents' Management Programs: 1998-present
- Faculty, American Academy of Dermatology; Practice Management Regional Courses: 2006
- Faculty, American Urology Association Western Section Annual Meeting 2006
- Member, Director & Faculty, National Association of Health Care Consultants 2000-2006
- Member, National Society of Certified Healthcare Business Consultants; Marketing/Membership Committee Chairman; current
- Contributor & Medical Industry Expert - The Business Reference Guide to Pricing a Business, 2004-2007, Business Brokerage Press; (the main annual reference book on business valuation for licensed business brokers)
- Affiliate, Medical Group Management Association, CalMGMA, NorCalMGMA 1987 - present
- Editorial Consultant to Medical Economics Magazine, 2004- present
- Co-founder, Director and Interim-President, MedicalSuppliesUSA.com
- Editor, Open Directory Project ; topic: Business Appraisal; (approving content for Google, AOL, etc)

________________________________________

Keith Borglum can be reached for valuation, consulting and lecturing services via his website at http://www.MedicalPracticeAppraisal.com where related articles are also available.

________________________________________

Reprinted courtesy of the author and Practice Support Resources Inc from the book: Medical Practice Valuation Appraisal Guidelines & Workbook http://www.practicesupport.com/Merchant5/merchant.mvc?Screen=PROD&Store_Code=PSR&Product_Code=293

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