How much is your medical practice worth?

Key Points

Buying or selling a medical practice is a lot like buying or selling anything else. Both parties in the transaction want to know they're getting a fair price. And just like any other product or service, the price is determined by a variety of factors. For example, if you're buying a car, you want to know the year it was built, how many miles it has, any major mechanical problems, the sale price of comparable vehicles, and so on.

When it comes to purchasing or selling a medical practice, there are 4 significant elements that determine its value: tangible personal property and other assets in excess of liabilities, patient accounts receivable, the office building, and goodwill. Let's examine them in more detail.

TANGIBLE PERSONAL PROPERTY AND OTHER ASSETS LESS DEBTS

Supplies inventory also may have significant valuation, and the items in inventory should be valued at their historic cost. In addition, prepaid expenses and security deposits are considered assets. Prepaid malpractice insurance may be significant. If insurance has been paid in advance for a term of 12 months, and only 2 months of the policy's life have elapsed, the remaining 10 months' premium should be included as an asset (5/6 of the premium).

PATIENT ACCOUNTS RECEIVABLES

If patients have medical insurance, the insurers pay according to their fee schedule. The amounts charged in excess of the schedule usually are contractual allowances, which need to be written off. If services are not covered by a patient's medical insurance, their payment depends primarily upon the patient's or guarantor's financial responsibility. To determine collectible patient accounts receivable, multiply the number of services that have not been paid for patients covered by an insurance plan by the amount to be reimbursed.

Review the aged accounts receivable trial balance, which lists each patient by insurer and time since charged.

In valuing patient accounts receivables, assign no value to accounts that have been turned over to collection, or on which no charge or payment has been made in the prior 6 months.

The above method is thorough, but very time consuming. In some situations this much effort is not warranted. A much quicker and often reasonably accurate method of measuring patient accounts receivables is to multiply the gross patient accounts receivable (excluding uncollectible accounts) by the percentage of charges collected by the practice in the last year.