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.
By Kevin McDonald, DPM

   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.

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