Practice Valuations & Appraisals
Medical Practice Valuations
MPB offers a variety of valuation reports and services, including litigation support & expert witness testimony for divorce, oppressed shareholder, partnership dispute, and other legal matters. For information on our appraisal services click on the link(s) below:
- Valuations for Sellers
- Valuations for Buyers
- Valuation Request Form
Why are Practices Valued?
Practice valuations are performed for a variety of reasons, including the following:
• partner buy-in or buy-out
• merger with another practice
• partner/stockholder disputes
• retirement planning
• tax purposes
• eminent domain actions
What's the Difference between a Valuation and an Appraisal?
The terms valuation and appraisal are used interchangeably. Both refer to determining the value of a business or practice. In recent years the term ''valuation ' has become more popular. However, using 'appraisal' is equally acceptable. The term 'evaluation' is however an incorrect use of the term, and is often confused with the correct terms (i.e., valuation or appraisal). A trained valuation professional would never use the term 'evaluation', and is usually an indicator of lack of formal valuation education.
What do Practices Sell For?
There is no single magic formula to value any business. And professional practices are generally more difficult to value than most businesses as they tend to have a wider range of values. Though people frequently ask for a rule-of-thumb, even knowing they are imprecise and may not apply to your situation. Here are a couple rules-of-thumb:
• Most practices will sell for between 1x to 4x annual net earnings.
• Most practices will sell for between 20% to 80% of annual gross income.
The problem with rules-of-thumb is, "How do you know if your practice is the norm or the rule-of-thumb may not apply to you. Also, different practice types have significantly different average price ranges. The average practice range/ratio is significantly different for a primary care medical practice when compared to a medical specialty practice, or a general dentistry practice, or an optometry practice. Even within a particular practice type, we often see practices sell for ± 2 standard deviations above or below the average sales price. This means that a practice that might have an average sales price of 30% of annual gross income might have a common price range of 10% to 50% of annual gross income. Further, there can be outliers even above/below this range. Will your practice sell above or below the average?
Why is the Price Range so Wide?
There are dozens of factors that influence practice value. A key factor is practice type. Average pratice price ratios vary greatly between practice types: medical, dental, chiropractic, optometry, or even between a family practice and a cardiology practice. Beyond practice type, numerous factors influence value. Some sample factors are shown below:
• Profitability. A practice netting 35% of gross will sell for less than a practice netting 50% of gross. How do you compare with your industry standard?
• Location. Practice in rural or particularly high cost of living areas may sell for less.
• Facility. Practices located in larger, modern facilities tend to sell for more than practices located in cramped, run down facilities, on the bad side of town.
• Equipment. Practices with lots of new, expensive, modern equipment tend to sell for more than practices with old equipment or very little equipment. Have you implemented an EMR system yet?
• Hours worked. Are you working 20 hours per week or 50 hours per week to generate $XXX,000 of revenue.
• Reimbursement projections. How is fee reimbursement trending for your specialty? What is your procedure mix?
• Technology advances. Have recent technological advances made your equipment or procedures performed obsolete?
• Staff. Do you have well-trained staff with good tenure, or poorly trained staff with high turnover?
• Payer Mix. Is yours an all cash practice, or all Medicaid, or a blend of traditional insurance and PPO, or captitation?
• Financial History. Is your practice income increasing or decreasing? Is the current growth rate sustainable?
• Referral Base. Is your referral base broad and deep? How well will new patient referrals transfer to a new buyer?
• Personal Goodwill. How much of the practice revenue is tied to the doctor's individual reputation or personality? Will patients/referrals accept another doctor?
• Sale Terms. Will it be a stock sale or an asset sale? What is included or excluded from the sale?
• Financing. What type of financing is available? Commercial loan or seller carry? How much down payment? Interest rates?
• Competition. Did a competitor just open down the street? Are you the only game in town? Is the hospital competing with you?
- At Medical Practice Brokers, LLC we consider over 40 different factors when valuing your practice.
Who does Valuations?
There are several categories of people who perform valuations:
• business appraisers
• accountants (CPAs)
• business brokers
• college professors
• commercial real estate appraisers
• investment bankers
Each category has it advantages and disadvantages. Although, the better appraisers tend to be educated in business valuation and also have an understanding of the various issues involved in valuing a business for the stated purpose (e.g., buy/sell, divorce)
Why not just have my CPA do it?
Accountants often do not have significant experience or training in performing valuations. The vast majority of CPA's nationwide have little or no training or expertise in business valuation. While they are very familiar with financial statements, many are uncomfortable making the forecasts that crucial to valuation. Further, their experience tends to be in the tax value, which is usually quite different than Fair Market Value or Fair Value is in divorce. They usually do not have real world sales experience to understand how terms of sale, or loan requirements, or current buyer trends will alter practice value.
How about a general business broker?
General business brokers most often use generic rules-of-thumb to list and sell businesses. However, rules-of-thum can be dangerous as they do not take into consideration the specifics of a particular situation. Also, many business brokers lack the formal valuation education and have limited understanding of business financials. Finally, most general business brokers are not familia with professional healthcare practices and have difficulty assessing the variations unique to professiona practices. Most business brokers will just tell you that a practice will sell for X times net or gross--this usually will give you a dramatically wrong answer to practice value.
How about those Valuation Software Programs?
Low-end software-driven products should be approached with caution. In general, valuation programs are designed to give quick, and not necessarily accurate answers. Futher, by design, they deny the user the expertise of a qualified appraiser's many years of valuation wisdom. While valuation software tools can be an effective time saver in the hands of a trained professional, their use is problematic when used by individuals or untrained part-time appraisers who do not understand the appraisal process or the tool itself. The old axiom of 'Garbage In - Garbage Out' often describes the result. You may find it interesting to know that most certified business appraisers rarely use purchased valuation software as the crucial element in valuation is the experienced interpretation of information.
There are several organizations in the United States that certify business appraisers:
- International Society of Business Apprasers (ISBA)
- Institute of Business Appraisers, Inc. (IBA)
- American Society of Appraisers (ASA)
- National Association of Certified Valuation Analysts (NACVA)
- American Institute of Certified Public Accountants (AICPA)
Several MPB Brokers and affiliates are members of, and/or are accredited by professional valuation organizations listed above. Additionally, our experience in practice sales/brokerage gives us a rare perspective as to true practice fair market values. All of our brokers have access to our internal network of sales and valuation expertise.
What is a Practice Worth?
Of course, the question has crossed your
mind, "If you were to sell your practice today how much would it
bring?" Or "Am I paying too much for this practice?"
Understandably, that's not a simple question in today's dynamic
market. Every practice is unique. For sellers, pricing your
practice is a tricky matter. If you ask too much, buyers will
look elsewhere. Yet, if your price is too low, you'll cheat
yourself out of thousands of dollars. For buyers, how
do you know if you are paying a fair price?
For buyers, how do you know if you are paying a fair price?
Don't be burned by outdated pricing rules!
Using any one formula or rule to determine practice value is a setting you up for a potentially costly mistake. There are numerous factors that influence practice value: equipment, goodwill, profitability, financial history, staffing, buyer debt service, etc. The old rule of thumb "a practice is worth one year's gross" simply isn't true any more. Where does your practice stand? If real estate is involved then you have to determine if the practice income can support the fair market value of the real estate. Will you have to delay retirement another 5-10 years?
Sadly, some doctors think their practice is worth much more than the practice will actually sell for in today's market. Unfortunately, some have based their retirement plans on an over inflated value only to discover they cannot retire as they had planned. This is particularly sad when health reasons or "burn out" don't allow the doctor the extra years needed to attain their retirement goal. Even CPAs sometimes miscalculate medical practice values by as much as 100% by using IRS formulas that have no basis in what buyers and lenders will pay for a practice. One might say, "It probably makes as much sense to hire a general-purpose CPA to appraise your house as it does a medical practice, since he/she probably has never marketed or sold either." Is your CPA is a specialist in medical practice sales? You need to know!
Can you see the forest for the trees?
Sometimes a person is so close to something it is difficult to form an objective opinion. Medical practices are no exception. Unless you have had exposure to numerous practice financials, sales data, and industry financing trends, it is unlikely a person will be able to determine a fair market value in today's practice marketplace. You might have to spend hundreds of hours doing research just to figure out what factors will make a significance difference to buyers and their lenders. Did you adjust the sales price to compensate for the doctor's spouse working part-time for free? Did you adjust to normalize for the amount of vacation and hours worked? Are the practice financials sufficiently documented to attract a buyer? Do you know if the practice income after debt service will support the value of the real estate? Do you know what "add backs" can be used in your situation to maximize the sales price? How much will a buyer pay for "potential"? Does this practice warrant a top dollar price, or only a middle of the road price, or something less? Can a buyer get financing to buy your practice?
Pick the valuation service you need
We offer a range of valuation services to allow you to choose the most cost effective solution tailored to your needs and budget. The difference between these services is related to the time involved, the extent of the investigation into the business and report detail.
2nd Opinion Valuation Service
The 2nd Opinion Service ($4,450) is for someone that wants an economical “ballpark” practice value. This report reflects the appraiser’s limited opinion as to practice value. It is considered a preliminary report under the Standards of the Institute of Business Appraisers, by which the analysis and investigation is intentionally limited as a cost and time saving measure. This service includes a 12-15 page written opinion of what the practice would likely sell for on today's market, and a description of selected practice characteristics and where the practice is over performing or under performing. We use the last 2-3 years of business financial data and information from proprietary questionnaire, and at least two valuation approaches to determine Value. The 2nd Opinion Service is ideal for
• smaller practices where more expensive solutions are not cost effective
• sale to an associate already familiar with the practice
• retirement planning or insurance purposes
• periodically tracking practice value
• for a buyer/seller simply looking for a third party opinion or sanity check and does not require the greater accuracy provided by the other services
• for internal planning (e.g., retirement or estate planning) where you just need to keep a pulse on practice value
Practice Valuation Opinion Letter
The Practice Opinion Letter ($5,995) is for someone that wants a more detailed analysis and conclusion, but desires to reduce the cost of valuation by using a short-form report. This 30-35 page report uses the last 5 years of business data and information from a proprietary questionnaire, and uses at least three valuation approaches (Market, Income, and Asset Approaches) to determine value. The normal standard of value used is Fair Market Value, but may be requested for other standards of value that might be appropriate for divorce, oppressed shareholder, or strategic investor purposes. The Practice Opinion Letter is ideal for
• those looking to sell or buy a practice where they are not currently an associate
• those who need a more detailed analysis for decision making
• those who might want review and input from an advisor or CPA
• non-contentious divorce or partnership situations
Comprehensive Practice Valuation Report
The Comprehensive Practice Value ($7,000 - $ 12,000) is for someone that wants a long-form report with detail sufficient to permit the reader to reasonably replicate the appraiser's procedures. This 60 – 100 page report is based on essentially the same analysis as that used in the Practice Opinion Letter, but the report fully documents the analysis and intermediate steps, and rationale behind decisions. Additionally, this service usually includes a personal site visit and owner/management interview process, whereas the 2nd Opinion Service and Practice Opinion Letter do not include a site visit in the advertised price. For those wanting a Comprehensive Practice Value we prefer to discuss the situation with both you and your attorney/CPA to ensure the report will meet your needs. In general, we prefer not to take engagements where we will be required to testify in court. If you anticipate this need, contact us to discuss our availability and expert witness support fees. The Comprehensive Practice Value is recommended for
• purchase/sale of practices exceeding $2M in gross revenue
• those needing a valuation for divorce, estate, tax purposes, litigation, partnership dispute
• those needing the replicable detail not provided by the other services
We also offer Hourly Consulting for those when our standard services or reports don’t fit your situation; or if you don’t require a formal report. Our hourly consulting rate is $325/hour. Call for more information about our litigation support and expert witness on-stand testimony rates. If you are on a tight budget, want an analysis and informal verbal or email conclusion, are just looking for help in identifying 'red flags' in the practice, or have specific questions that you want answered, the hourly consulting model is a good fit.
Valuation Critique ($1,995): We will review and critique another written valuation report. Perfect if you have been given a valuation report and want a second opinion. This is not an independent opinion of value, but rather a sanity check on what has been done before. We'll tell you if we find the conclusions and methods cited in the report to be reasonable or off track. Is the valuation credible? Did they review the right information from which to draw their conclusions? Why wonder? Get a second opinion today!
Get your opinion of value today!
Call now. Before it is too late! This is too important for guesses.
Copyright 2019 Medical Practice Brokers LLC. All Rights Reserved.
Employing Broker: David N. Greene for Medical Practice Brokers
Colorado Real Estate License #EI40008892
Texas Real Estate License #487627