How Much Is Your Medical Practice Worth?

This article is the first in a two-part series on how to value your practice.

Do you know how much your medical practice is worth? More importantly, do you know why it’s beneficial to recognize its value? There are many reasons you should know the current value of your medical practice, from aiding in the preparation of a retirement strategy to taking on an associate who has partnership dreams in mind. But perhaps the most important reason is because of what you will learn from the process of determining the valuation.

“With the valuation, you will learn the characteristics of your practice that detract from it receiving a premium value,” says Ken Ducey, chief executive of Fairfield Capital (www.fairfieldcapital.com) in Ridgefield, Conn. Fixing those negative characteristics will “make the practice a better overall practice for you even before you decide to exit,” he adds.

Why You Should Know

Amy Galloway, a director with the Ft. Lauderdale, Fla.-based law firm Tripp Scott (www.trippscott.com), says that with many physicians there is a strong disconnect between what the physician believes his or her practice is worth and how the market values the practice. “Sometimes, [learning the value of a practice] is a reality check,” she says.

If you plan on retiring in four or five years, figuring out the current value of your practice will provide you with a benchmark from which you can determine whether your practice is increasing or decreasing in value. Those are numbers any potential buyer is going to want to know up front.

“It’s always good to look at your company through the eyes of a potential buyer, look at the value, and then determine what it is you could do to make it more valuable to that buyer,” Ducey says.

Even if retirement is 15 or more years away, your practice may have grown to the point where you’re considering bring on a junior physician. Part of that negotiation, says Galloway, especially in practices with fewer than five physicians, is that the incoming physician is going to want a partnership opportunity.

“Younger doctors have a pretty good value of what their annual worth is,” she explains. “They want something more concrete than a promise to talk in three years.” And there’s no way you can begin to negotiate if you don’t know what the numbers are going in.

How to Get Started

The first thing you must do to calculate your practice’s value is to assess risk, Ducey says. The more risk that a new buyer has to take on, the less value he or she is going to put on your practice. If you can prove to a potential buyer that the practice is going to grow 10% or 20% over the next 10 years, the practice will have an infinitely higher value than if you can’t prove that the existing revenue stream will increase, or even be maintained.

Firms like Fairfield Capital will examine a practice to see what level of marketing has been done in recent years. Is a significant amount of the practice’s revenue concentrated in a small number of patients? Even an assessment of how much money is tied up in the latest state-of-the-art equipment.

“At the end of the day, it’s what the buyer is willing to pay,” Ducey explains. “If the buyer is not willing to give you back the full value of that equipment, then you’re going to have to pay back that equipment. If I look at the practice and I’m going to value it based on things like the revenue of the practice, the loyalty of the patients, and other factors, I’m going to come up with a value outside of what the equipment is worth. And if you still owe on a certain amount of equipment, that’s almost going to be a subtraction of the value of the business.”

The opposite is also true. If equipment is old and antiquated, a prospective buyer knows he or she will have to come in and replace that equipment. That replacement cost will also detract from the value of the practice.

Focus on the Numbers

Surveying patients to determine their wait time on the phone while trying to make an appointment is important, but not as important as the bottom-line numbers, says Ducey. If there’s a problem with patient satisfaction at a particular practice, it will show itself in the numbers via patient turnover.

“When [a prospective buyer] values your practice, I’m not sure they’re going to care as much how a particular patient may or may not feel,” Ducey explains. “They’re going to care more how much revenue is coming from that patient, and how loyal that patient is to the practice. So, if I had a choice of a practice that had a number of very unhappy patients, but they were consistently coming back to me and paying the fees I charge them, versus the practice with a lot of satisfied patients who weren’t as loyal, I’d rather go with the unhappy patients. So, the point is to focus more on the numbers.”

Next week, I’ll cover steps to take to improve the value of your practice.