A primer on valuations
As a valuator, “my job is to project into the future,” Mr. Barraza said. “I am trying to see how the practice will fare going forward.”
Mr. Dietrich agreed, with one caveat: “As Yogi Berra said: ‘It’s difficult to make predictions, especially about the future.’ ”
The formal valuation assesses the practice in three ways: measuring income, assets, and what other practices sell for, called the market approach.
With the income approach, the most used measurement for practices, one tries to determine future income, which is what buyers are most interested in, Mr. Dietrich said. The income equals revenue (total collections) minus operating expenses and overhead.
“You are then left with all the money the physician is paid,” he said. “The issue is, how much is attributed to the physician’s own labor and how much to his or her ownership of the practice? This second category helps determine the value of the practice.”
The market approach is often used as a way to double-check the accuracy of the income approach. The appraiser looks for the prices of similar practices that have already been sold and then adjusts the price on the basis of differences with the practice up for sale.
The asset approach may be used when the practice has no positive cash flow. It establishes a price for tangible assets, which are often much lower in value than the values that the other approaches come up with. The asset approach can be a lower-priced alternative for practices that can’t be measured under the income or market approach.
“Equipment appraisers can do an inventory of your equipment,” Mr. Wood said. “Generally, equipment that is more than 3 years old, such as computers, is not that valuable, but an ultrasound machine probably has some resale value.”
Will the buyer pay for goodwill?
Many practice owners hope they can get money for the “goodwill” of their practice when they sell. Goodwill basically represents the reputation of the practice, which is difficult to pinpoint, and Mr. Wood said buyers often don’t want to pay for it.
“The goodwill is a wild card,” Mr. Wood said. “It can range from zero to crazy numbers. There is a Goodwill Registry – a list of the goodwill in other practice sales – that you can consult.”
One simple way to calculate the goodwill, he said, is to take the value of the practice based on examining income and remove the value of tangible assets. What is left is considered the goodwill.
Another form of intangible asset that is sometimes lumped together with goodwill is the value of the practice’s trained staff. “Some buyers agree to pay for the staff in place, because they plan to use that staff,” Ms. Kadan said. In one large deal she was involved with, the buyer agreed to pay something for the selling practice’s staff of 180 people.
Another item that buyers also do not typically pay for is the practice’s accounts receivable. They may also not pay for any liabilities the practice holds, such as the facility lease, equipment lease, and maintenance contracts, Mr. Barbo said. “The buyer then often stipulates that all liabilities are left to the practice, or stipulates any specific liabilities that it may assume.”