Seven Reasons To Appraise Your Practice
- Volume 17 - Issue 8 - August 2004
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When Your Practice
Or Family Situation Changes
4. Buy-sell agreements. Ideally, physician partners should put a buy-sell agreement in place when they have an amicable relationship. This establishes the terms for departure before they are required and is akin to a prenuptial agreement in a marriage contract. Disagreements most often occur when a doctor leaves the group and they are often acrimonious. This may contribute to a decline in the operations of the practice not to mention the morale of partners and employees. Feuding factions can spill over into the office and the practice begins to implode, creating a downward equity spiral.
Therefore, it is smart to obtain valuations of the practice every two to three years or as the economic circumstances of the practice change. This enables you to get an independent, credible assessment without any emotional overtones.
5. Disputes over physician partnerships. Medical practice appraisals are often used in partnership disputes such as breach-of-contract or departure issues. Obvious revenue declinations are not difficult to quantify. However, revenues may not immediately fall since certain CPT code reimbursements may actually increase. However, upon verification, lost business may be camouflaged as the number of procedures performed or the number of patients decreases after a partner’s departure.
6. Divorce proceedings. Physicians who are getting divorced should get a practice appraisal. Either side may hire the appraiser although a court will occasionally order an expert to provide a neutral valuation. Undertake such valuations in light of both court discovery rules and IRS requirements for closely held businesses. Generally, this requires consideration of the following eight elements: practice specialty and operating history; economic and healthcare industry condition; estimates of practice risks and future returns; book value and financial condition of the practice; practice future earning capacity; physician bonuses, dividends and distributions; intangible assets; and comparable practice revenue.
Sometimes, a spouse may even desire a lifestyle analysis by a forensic accountant or appraiser in order to evaluate the potential for underreported income. A family law judge is often the final arbiter of different valuations and because of varying state laws, there may be 50 different interpretations of what the practice is really worth.
Ensuring The Growth Of Your Practice
7. An ingredient for additive value and organic practice growth. Not infrequently, medical practice appraisals can add value where little actually exists or, more importantly, add value where it is not obvious or readily apparent.
For example, some doctors may believe their practice is worth more than it actually is in the modern climate. Upon appraisal, they are devastated and can’t understand the reasons for its minimal value. Consultants can work to leverage practice assets to greatest advantage. For example, they may suggest …
• identifying tasks that require less labor;
• the outsourcing of human resources;
• dropping service line segments according to CPT code reimbursement rates;
• using paraprofessionals as substitutes; and/or
• automating office processes to increase profits.
Even successful practices can use periodic valuations as an ingredient for future growth. Some basic concepts to grow a medical practice through additive value measures include: establishing goals and a time frame; having a strategic plan; addressing financial issues early; and remaining flexible and responsive to changes in health care.