Selling Your Practice: What You Should Know
- Volume 24 - Issue 10 - October 2011
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Too often, the success of a practice is the direct result of the physician owner being involved in every aspect of the business. This is often a problem for other physicians who want to buy your practice and do not have the proper skill set to run a practice. This means making sure that all the managerial functions of the business are not dependent on the selling physician and you have adequate personnel who can make the transition seamless to the purchasing physician. It is an advantage to have seasoned staff that can run the practice with or without you, and all you need to do is have a plan to transition the new physician seamlessly into the practice.
I have also personally witnessed situations when one of the non-managing partners or associates buys the practice only to have the practice decline dramatically when the selling managing partner retires and leaves the practice. This is one of the most devastating events that could happen to a practice.
How To Increase The Practice’s Valuation
Now that you know what is necessary in preparing your practice for sale, it is time to understand how practices are valued and what you can do to increase you valuation. Regardless of which methodology you use in valuing your practice, it all comes down to what the buyer will pay and what the seller will accept.
There are three general approaches used to valuing a practice. These approaches include the cost approach, income approach and market approach. Usually, blends of all three can help determine a final number. If you ask 1,000 experts to place a value on your practice, you will probably get 1,000 different answers. It is very important to understand this one very valuable comment: “Value is determined. Price is negotiated. Don’t ever confuse value with price.”
The cost approach. This is based on the value of assets in the practice. The first method in the cost approach is the book value of the practice, which is the aggregate value of all assets minus liabilities that equals the equity of the practice.
The net asset value method is more commonly used. This involves adjusting the value of tangible assets and liabilities to their fair market value. This method reports greater value of assets than net book value on the balance sheets and accounts for intangibles. What do we mean by tangible assets versus intangible assets? Tangible assets relate to property, such as equipment, cash, accounts receivable, land and office buildings. Intangible assets are non-monetary in nature. Examples of intangible assets would be the doctor’s skill, reputation and management qualities.
(For examples of this valuation, see “A Basic Primer For Using The Book Value Method” and “A Guide To The Adjusted Book Value Method” at right).
The income approach. This approach employs one of two common methods: the discounted cash flow or the single period capitalization of income method. The bottom line is that with these approaches, the practice’s worth is directly related to the present value of all future cash flows or earnings that the practice should produce.
This can get quite complicated but ask yourself what you would pay today for all projected future cash flows from the practice for the next five years. Take into account some type of discount rate to account for risk, such as reimbursement changes, location risks, competition risks, contract risks, etc. For example, let us say that a practice will generate $400,000 in profit over the next five years. What would you be willing to accept today to forgo all future profits (i.e. sell the practice)? The higher the risk and the smaller the practice, the higher the discount rate. A 30 to 50 percent discount rate is not uncommon and that could put a value range of $200,000 to $280,000 for that practice.