Understanding The Factors That Influence The Value Of A Practice
- Volume 18 - Issue 4 - April 2005
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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.