Understanding The Factors That Influence The Value Of A Practice

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.    Macro location. The demographic characteristics, level of competition and the overall desirability of a community have an effect on the sales price of a practice. A strong, diverse local economy has a positive effect on value. A moderate level of competition allows room for practice growth while a high level of competition makes it difficult for new practices to thrive. Both of these levels can raise the valuation. Little to no competition may actually lower the value of a practice. A potential buyer might just decide to open a new practice. Obviously, a practice located in Malibu, Calif., will likely command a higher price than an identically profitable practice in the swampy backwoods of any number of states.    Exact location. The neighborhood, neighbors and visibility of a practice location play roles in the valuation process. The length of time the practice has been present at this location and the terms of the existing and proposed leases are important for assessing the future prospects of a practice.    Statistical trends. A practice that consistently exceeds the previous year’s numbers for gross and net income is typically more attractive than a flat or declining practice. A practice regularly drawing many new patients into the office is a good sign. However, it is important to determine the reasons behind these trends when calculating the valuation adjustments.    Fees and payer mix. A practice coding analysis that reveals the use of lower level E&M codes is more attractive than a practice that codes 99214 for the diagnosis of tinea pedis. A newly trained podiatrist taking over for a retiring 70-year-old DPM can often increase the scope and complexity of services, and accordingly raise the income of the practice. Practices with a heavy reliance on one or two types of insurance reimbursement are usually not as valuable as a practice with many revenue sources.    Type of practice. A general practice grossing $400,000 is probably more valuable than a strictly surgical practice grossing $400,000. It is easier to convince current patients and referral sources to try a new doctor for diabetic foot care than for reconstructive foot surgery. A practice getting most of its referrals from patients is more valuable than a practice that relies on the current doctor’s golfing buddies for new patients.    Terms of the deal. An “all cash” deal will tend to lower the price of a podiatric practice. Sellers who carry back the debt from the buyer take on more risk and accordingly should be rewarded with a higher price. Few potential buyers have the cash.    Access to insurance plans and hospital privileges. Areas with insurance panels closed to new practitioners tend to have depressed valuations. Certain states or hospitals may not allow podiatrists to practice the full scope of foot and ankle care. This decreases the local job applicant pool and may depress practice sale prices.    Practice financials. An upfront presentation of the practice profit and loss statements and practice tax returns for appraisal purposes reflects favorably on the valuation. Indeed, this information is required to do an appraisal. The breakdown of practice expenses should allow the examiner to determine the total physician compensation from the practice. The overhead percentage of the practice plays a crucial part in the overall valuation.

How The Current Staff And Owner Figure Into The Equation

   Employees. Well-trained and happy employees of the practice who want to work for the new owner add to the value of a practice quite a bit. The receptionist, billing clerk and chief medical assistant are particularly important in the eyes of the potential buyer of the practice.    Practice management. When a practice is well organized, HIPAA- and OSHA-compliant, “insurance company approved” and technologically current, it will sell for a higher price than a practice still catching up with the regulations. Accounts receivable management that limits the total A/R to less than two months worth of billings demonstrates good management that will be rewarded in the sales price.    Special seller characteristics. Sellers who are extremely productive or have a special skill that is impossible to replace may not get the full value for their practice because no doctor can be found to truly replace them. Workaholics who keep the overhead low by making their own orthoses, doing their own payroll, filing their own insurance claims and cutting the grass on weekends will not reap additional rewards during a practice valuation.    Seller’s personal goodwill. If the seller cannot stay with the practice during the transition of ownership, the price goes down. A seller who was president of the local chamber of commerce and was voted “Best Podiatrist” in a community survey can probably get more money than the podiatrist who just ran off with the hospital OR nurse and has the PICA phone number on speed dial.

Other Factors To Consider

   Office furnishings, equipment, decor and overall image. An updated, attractive, spotless office reflects well on a practice. Tattered upholstery, obsolete equipment and dead flies within the florescent light fixtures tend to lower the price.    Practice name. If the name of the practice is specific to the seller’s name, the name will probably have to be changed when the practice is sold. This results in a loss of practice goodwill.

Closing Notes

   If you hang around the lobby of a hotel hosting a podiatry conference, you will likely hear talk about a magic formula to ascertain the value of a podiatric medical practice quickly. Usually, this formula is mistakenly expressed as some percentage of the gross income of a practice. Well, the gross income is not as important as the net income and there is no quick and easy calculation to accurately estimate the value of any given practice. There are simply too many variables in the equation.    It is often a good idea to begin with the end in mind. A doctor who opens a podiatry practice will probably want to sell it eventually. Podiatrists should spend significant time designing and developing the systems of their practices to increase operational efficiencies and goodwill. This investment of time and energy will result not only in a higher practice valuation but also in a more enjoyable (and profitable) professional life. Dr. McDonald is in private practice in Statesboro, Ga. He is a Fellow of the American Academy of Podiatric Practice Management and serves on the Education Committee of the Georgia Podiatric Medical Association.

Add new comment