Understanding The Factors That Influence The Value Of A Practice

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When one employs the modified book value approach to determine the value of a practice, the goodwill valuation plays a key role but is influenced by several factors.
The personal goodwill of the seller is a factor. A DPM who is involved with the local community or has been named “Best Podiatrist” in a survey may receive more money for the sale.
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Author(s): 
By Kevin McDonald, DPM

   Most podiatrists focus intently on providing excellent care for their patients. However, when the time comes to purchase or sell a podiatric medical practice, podiatrists generally lack the knowledge and experience to competently assess the value of podiatry practice, and the terms of a proposed sales agreement.

   If you spend sufficient time looking at real estate, you will find that homes “for sale by owner” are frequently overpriced. The owners are in love with their own house, overly optimistic and a tad bit greedy. One frequently sees this scenario when evaluating podiatric practices for sale.

   Those who are in the market for a custom home for the first time often underestimate the time and expense that are required to build a high quality home. This is also the case for many freshly minted doctors of podiatric medicine, who are often deeply in debt and hoping to get something for nothing.

   With this mind, let us take a closer look at the more realistic expectations of prospective sellers and prospective buyers of podiatric medical practices.

Pertinent Insights On Valuation Methods

   Professional appraisers often use several different methods to calculate the value of any asset including medical practices. Here are some of those methods.

   • The market approach. This method compares the asset for sale to recently sold similar assets and makes adjustments based on their differences. This method works best when there are many similar properties sold publicly. Therefore, one has a reference base to contrast and compare. Unfortunately, this method is often difficult to apply to podiatry practices.
   • The cost approach. This method estimates the amount of money that would be required to duplicate the asset in question. This method relies on assumptions that one cannot make with a high degree of confidence when assessing medical practices. Therefore, the cost approach is typically a secondary method for podiatry practice appraisals.
   • The excess earnings approach. If you hired someone to take your place in the practice, how much would you have to pay him or her? If you subtract this amount from the total net income of the business, you arrive at the “excess earnings” number. Your accountant can multiply these earnings by a capitalization rate to arrive at a practice value. This practice value is how much an investor would pay to obtain a yearly return equal to your “excess earnings.” This is not the primary method for medical practices.
   • The book value approach. The book value is the sum total of the cash, supplies, furniture, equipment, leasehold improvements, real estate, liabilities and accounts receivable based on both fair market and depreciated costs. This method of practice valuation is typically not used for ongoing podiatry practices but is appropriate in certain instances such as when the practitioner dies unexpectedly and the practice is not currently seeing patients.
   • The modified book value approach. This approach takes into account that an active podiatric medical practice has a value greater than the sum of its hard assets minus its liabilities. In this scenario, one must modify the book value by the controversial but undeniably present goodwill. It is this modification to the book value of a podiatric medical practice (i.e. the goodwill value) that comprises the remainder of this article.

Assessing The Various Factors That Influence The Goodwill Valuation

   Calculating the goodwill value of a podiatric medical practice is an inexact science as there are many factors that influence this valuation. The various factors are as follows.

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