How To Obtain Premium Value For Your Practice

By John V. Guiliana, DPM, MS

   Many podiatric physicians are suddenly realizing the importance of their practice as a retirement asset. The sale of a practice, its value and the associated terms of the sale can either substantially supplement a retirement nest egg or be the source of retirement delaying frustration. Understanding the process of a practice transaction or sale, and having a deliberate and proactive strategy to enhance the value of the practice are likely to reduce the stress and frustration in addition to providing some supplementary retirement funds.    There are a myriad of issues to consider when selling a medical practice. One must think about the valuation of assets, continuing patient care and, in the case of retirement, the emotional aspects of leaving the practice, just to name a few key issues. More often than not, physicians do not allow enough time for this process. Indeed, finding the right fit for their replacement and completing the steps to ensure maximum practice value may take up to two years.    Doctors have various options and which one you choose will be based on personal preference. In consideration of retirement, a physician might hire an associate and integrate that person gradually into the practice before selling it. A physician might choose to merge with another practice. An obviously poor yet occasionally pursued option is gradually cutting back on the number of patients. However, with this option, patients will ultimately go to other practitioners and as result, the staff begins to leave. By the time of the sale, the practice’s value will be compromised.    Aside from these fundamental choices, physicians approaching retirement need to understand how their medical practice will be valuated. During this process, it is critical to engage the expertise of consultants, accountants, attorneys and financial planners in order to prepare properly for this next phase of life. Understanding the valuation process is a prerequisite for understanding how to enhance the value of the practice.

What Are The Components Of Practice Valuation?

   Valuation of a professional practice is both a science and an art. It is a science because all the tests and procedures utilized have been documented for usual business appraisals. It is an art because valuation of a medical practice is quite different from an ordinary valuation since it involves intangible assets. Intangible assets, or goodwill, lend value to a practice but often lead to questions as to whom or what that value is derived from. Quantifying the goodwill often becomes the most challenging task during the valuation process.    With this in mind, there are four main components in the valuation of a medical practice. They are as follows:    Tangible assets. Tangible assets are items of equipment, cash, accounts receivable and other property that the practice owns.    Intangible assets. Intangible assets include all the characteristics that contribute to the success of the medical practice. These are collectively termed “goodwill.” This may include the reputation of the physician, the practice’s location, the relationships the practice has with various insurance companies and the management systems that contribute to low overhead costs.    Liabilities. Liabilities are debts that the practice has incurred and for which there is a future obligation to pay. Principally, these are accounts payable or loans.    Equity. Equity is the difference between what a practice owns (its assets) and what it owes (its liabilities). It is the residual value of stock and retained earnings.    There are many methods of calculating a practice’s value. The rule of thumb governing the valuation is based on the percentage of revenue concept. In short, it is equivalent to saying that $1 in revenue should translate into a specified amount in cents on the bottom line.

A Guide To Traditional Methods For Determining Value

   Asset-based valuation. Asset-based valuation begins with the construction of an adjusted balance sheet in order to determine the book value of the tangible assets. The asset-based valuation should also examine and determine the value of intangible assets. One may ascertain the intangible value by measuring factors such as reputation, name recognition and location. It is often difficult to quantify. The value of goodwill may be more consistently and logically determined by examining its effect on profitability and cash flow. One would combine the valuation of tangible assets with certain measures of intangible assets to yield a complete picture of the value of the medical practice as a business.    Income-based valuation. A popular approach by which appraisers value businesses in general is the income-based valuation. With this valuation, the appraiser looks at the historic revenue stream and projects future revenue streams to come to an understanding of value on the basis of future benefits. This method is particularly relevant when it is clear that the new entity has a chance to gain improved revenues due to increasing productivity, decreasing costs or other major value-adding features.    Market valuation. The third classification builds on the previous two approaches but asks the question: “What is it worth in the market?” The more often that such transactions occur in the market, the easier it is to ascertain a ballpark figure for the value of the medical practice.

How Personal And Corporate Goodwill Can Bolster Value

   With the development of managed care and the need for integrated systems and a strong management infrastructure, an appraiser must ascertain how much of a practice’s goodwill is attributable to personal goodwill and how much is attributable to corporate goodwill.    This determination enables one to estimate how reasonably a buyer will be capable of replicating the present revenue. Personal goodwill is a result of a physician’s relatively unique charisma, personality and/or unique medical skill. These attributes may not be transferable to some buyers. Corporate goodwill, on the other hand, is easily transferred in the transaction.    Aside from the tangible assets of the practice, corporate goodwill constitutes much of what a buyer is purchasing. Corporate goodwill is mostly created by “factors of revenue production,” which include location, payer mix, referral base, the practice’s historic growth pattern, visit volume, collection ratio, effective management systems, etc. Strategies designed to maximize the value of a podiatry practice should therefore place a great deal of emphasis on these factors.

Have You Invested Enough In The Day-To-Day Structure Of Your Practice?

   Throughout the lifespan of a practice, a practitioner’s financial focus is often too narrow as he or she usually concentrates solely on revenue production. All too often, they become disappointed in the valuation at the time of their retirement. This disappointment is often the result of deficiencies in management systems and tools that enable a future buyer to easily replicate the revenue stream. Throughout the span of their career, practitioners often fail to invest in the management infrastructure of their practice. As a result, the value of their practice is compromised.     “The foundation for the development of value within a podiatric medical practice is through infrastructure,” notes Mike Crosby, the CEO of Provider Resources, Inc., a company that specializes in appraising podiatry practices. “The infrastructure includes people who are well trained, motivated and work cooperatively together in an environment designed to promote their personal and professional development. While podiatric medical practices are not large organizations, there is opportunity for training and development to occur on a consistent basis, which will improve the overall operation and performance of the practice.”    What are the key areas that could benefit from appropriate investment and accordingly enhance the value of your practice?    • Facility    • Staff    • Reputation    • Technology    • Billing/collections systems    • Policies/procedures    • Compliance (medical, OSHA, HIPAA, ADA)    • Vertically integrated services    • Financial records    • Exit plan

How Do People View Your Facility?

   Facility. The design and maintenance of the facility itself is important for a practice’s inherent reputation. Periodic investments into the office structure as well as aesthetics are long-term, value added decisions.    Crosby notes “the location of a practice plays an important role in the overall view and perception of the practice within the market. Key considerations in the location of a practice also include the office aesthetics, how the practice is viewed from the street, the entrance and exit, the overall appearance of the facility and the equipment. In addition, convenience to the local medical community is a critical factor.     “Many practices are located in suburban areas, which are accessible to the medical community, or on the hospital campus, lending the credibility of being part of the medical and professional community.”

Be Sure To Emphasize Staff And Reputation

   Staff. In the typical medical practice, the supporting staff should be considered the most valuable asset. Patients often spend more time with them than with the physician. If one can keep staff turnover to a minimum during the transaction, patient retention will usually be higher and result in greater value for the practice. In addition, a well trained staff leads to significant revenue production and good people are costly to replace.    Reputation. The building block of a practice’s value is its reputation. In today’s environment, it is extremely critical that physicians maintain their reputation from both a clinical perspective as well as a brand recognition standpoint.    According to Crosby, “practices which are not designated by the names of their physician owners have more transfer value because individuals are referred to the practice instead of a specific physician. Although patients will develop individual relationships with specific physicians, patients will indicate to others that they use a particular practice versus a particular physician.”    Integrated services. Successful podiatrists have one important trait in common. They recognize the need to periodically “reinvent” podiatry as a means of offsetting declining reimbursements. One can bolster profitability and enhance the practice’s value by integrating patient focused services such as therapeutic diabetic shoes, vascular testing, wound care, physical therapy and in-office dispensing of value added products.    The provision of these services is often facilitated by the construction of practice protocols or clinical pathways for the most common conditions treated by the practice.

Why No One Can Afford To Fall Behind On Technological Advancements

   Technology. In today’s economy, a medical practice cannot survive, let alone thrive, without technology. Not too long ago, computers were the top technological investments being made by medical practitioners. We have evolved into a time where the need for technology is far greater in order to remain competitive. Digital X-rays are rapidly replacing their ancestors and diagnostic ultrasound now allows for greater treatment plan accuracy.    At the forefront of prudent technological investments that enhance a practice’s value are electronic medical records (EMRs).    Implementation of EMRs allows for both cost containment as well as quality improvement with regard to the documentation process. It allows for more accurate and legible documentation that might elevate coding to a more profitable level. It surely provides a return on the investment during a practice valuation. In addition, electronic records are more secure than paper charts, and are easily recovered should a disaster such as a fire or flood occur.

Be Sure To Stress Sound Policies, Procedures And Record Keeping

   Billing and collection systems. A key factor of production capable of having a significant impact on profitability and value involves the practice’s efficiency at collecting money. The management of a practice’s accounts receivable (A/R) is easily measured and benchmarked. Whether a practice outsources A/R collection or is one of the functions handled by your staff, less than 10 to 15 percent of a practice’s total A/R should be aged accounts (over 90 days). Missing this benchmark may indicate the need for improved structure and consistency in the billing and collection process. Creating fiscally sound and consistent financial policies, and having an effective system of dealing with accounts as they progress through the aging cycle is crucial for A/R management and cash flow.    Policies and procedures. A fairly constant finding during the analysis of a medical practice is a deficiency in operational policies and procedures. An employee manual, supplemented by a responsible policy and procedure manual, may add significantly to a practice’s valuation.    Written policies regarding the practice’s scheduling protocol, payment expectations, referral management as well as all human resource issues should be well documented and available. One should ensure that these manuals are current and the staff should be trained to refer to them anytime issues arise.    Compliance. A highly profitable practice made up of a revenue stream built upon noncompliance is virtually worthless to an ethical buyer. The practice should perform and document periodic internal audits of medical records. During this internal audit, one should compare randomly selected medical record documentation to the charge entry and assess documentation for medical appropriateness. Physician feedback and education should follow any findings of deficiency.    Practices should ensure strong documentation of OSHA and HIPAA compliance that is available for review.    Financial record keeping. Diligent record keeping and maintenance of important financial documents, such as tax returns, bank statements, profit and loss statements, balance sheets, and practice data reports, will facilitate and add value to the appraisal process.

Do You Have A Sound Exit Strategy?

   Exit strategy. One of the simplest ways to transfer at least some of the personal goodwill created by the seller to the buyer would be to develop an exit plan that is conducive to that transfer.    Integration of the buyer into the practice prior to retirement is an obvious method. Formal and informal introductions of the buyer to both patients and the medical community are necessary. If feasible, practicing with the buyer for a period of time can help patients and staff members overcome some of their “separation anxiety.”

In Conclusion

   After considering all of these factors, the end result may positively impact the practice’s cash flow, which is the single most important factor affecting the practice’s value. Cash flow can be defined as the amount of cash flowing through the business that can be used for the owner’s reasonable compensation plus the amount of money remaining to make debt service payments. Value is the sum of the practice’s components that help yield the resulting numerical value and is ultimately determined by cash flow.    Today’s podiatric practice, whether large or small, has value. Physicians who plan on selling their practice should have the practice’s value evaluated at least two years prior to the decision to retire in order to determine if maximum value is being yielded based on the resources committed.    Dr. Guiliana is a nationally recognized speaker and author on topics pertaining to medical practice management. He holds a master’s in health care management and is a Trustee and Fellow of the American Academy of Podiatric Practice Management. He is the CEO of SOS Healthcare Management Solutions, LLC and practices in Hackettstown, N.J.

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