How To Obtain Premium Value For Your Practice
- Volume 19 - Issue 9 - September 2006
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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.