Putting a Price Tag on Your Practice
What's it Worth, When You Need to Know
For many health care professionals, their most valuable asset is their private practice. Surprisingly, most are not aware of this very important fact and its implications. While it is true that on a day to day basis the value of your practice is not likely to be a major concern, certain situations do call for you to put a price tag on your professional practice.
Some common situations that require the valuation of a practice are its purchase or sale, financial planning, an application for a loan, and a divorce proceeding.
There is no magical formula to valuing any business, although a good starting point is cash flow. The yearly revenue, after all expenses are paid, is a good method of getting a feel for the practice’s potential and worth.
A good rule of thumb is that a health care practice is worth anywhere from one to four times its net earnings. A practice netting $300,000.00 after expenses might be worth anywhere from $300,000.00 to $1.2 million.
Some factors that account for the range in value are the practice’s location, the patient base, the professional’s area of specialization, and the manner in which payments are received from patients and third party payers. Tangible assets such as equipment and real estate owned by the practice should also be taken into account. A MRI machine can be a very valuable asset.
The Reason for the Valuation
Depending on the reason for the valuation, you and your accountant will want to stress different factors.
In the case of divorce, you will want to highlight the relatively few number of years the practice has been in existence, and the profession’s uncertain regulatory climate.
In selling the practice, you would want to focus on factors such as a prime location and the trend of growth in income. One of the benefits of private practice is the tendency towards continued growth in income with each passing year.
Anti Kickbak Rules
The sale of a practice must comply with both the fraud and abuse (anti-kickback) provisions of the Medicare Act and the physician self-referral prohibitions of the so-called "Stark" legislation.
At a minimum: 1) The purchase price must reflect fair market value for the acquired practice; and
2) the purchase price may not reflect an amount for past or future referrals by the selling physician.
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The Basis for Practice Valuations
An appraisal that is done by a professional will assess the following items and also compare them with industry benchmarks.
• Gross Revenue
• Physician compensation
• Profit margin
• Equipment and supply expenses
• Payroll and benefits
• Patient visits per year
• Payor mix
• Staffing ratio
• Receivables
• Equipment leased and owned
• Location
• Lease versus ownership
• Liabilities
Additional reasons for establishing a value for your practice are estate planning and obtaining financing.
For financial planning purposes, a valuation is important for a purchase and sale agreement among partners or shareholders. In the event of the death of one of the partners, life insurance will pay the deceased partner’s estate for the value of his share of the practice.
The benefit to the surviving partners is that they will not have to scramble to make a large sum available to purchase the deceased partner’s share of the practice.
You also need to know the value of your practice for estate tax purposes. The tax on your estate can be up to a whopping 50% of the value of an asset. And if your estate isn’t liquid enough to pay the tax, your heirs may be forced to quickly sell the practice at a discounted price to pay the tax bill and avoid penalties and interest.
Getting A Loan
If your practice is being evaluated for the purpose of obtaining a bank loan, the most telling sign as far as the lender is concerned will be the cash flow.
The average monthly revenues will be compared to monthly obligations. Any surplus will gauge the size of the loan the lender will be willing to make.
Most lenders will also consider making a loan based on the value of collateral such as real estate, accounts receivable and expensive machinery.
Copyright 2000-2004 by Gary Gauthier, Esq.