Many physicians who have established medical practices reach a point when he or she starts to think about exit strategies and possibly selling their practice. The physician has a lot of options to consider, some of which are listed below:
- Hire a younger physician who will eventually buy the owner out.
- Sell to a larger healthcare organization such as a large medical group or a hospital system that employs physicians (or has other arrangements).
- Potentially be part of a roll up into a large medical super group typically put together by private equity.
Many physicians know that they have value in their practice and want to make sure they find the optimal situation for exiting the practice they have worked hard to develop. An appraiser can assist the physician by performing a business valuation of the practice.
There are three primary approaches used to value any business including medical practices. These approaches are the:
- Income Approach – This is an approach based on the normalized earnings of the practice, with all discretionary, non-operating, and non-recurring expenses (or extraordinary revenues) removed. A normalized level of earnings is developed as well as an appropriate capitalization rate which is a rate of return anticipated by an investor based on the risk of the practice. A value is determined by dividing the normalized after- tax earnings by the capitalization rate. (This is a one-year model; there is also a multi-year model called discounted cash flow analysis).
- Market Approach – The appraiser will look to find similar type practices, in the same medical specialty, which have sold recently or in the past few years. The appraiser uses criteria, such as collections, region, and other criteria of the subject practice to find comparable transactions. There are various databases that an appraiser can use to find comparable transactions. Typically, market multiples from the transactions are developed and then applied to the subject practice being valued.
- Asset Approach – The appraiser will review the tangible assets and any liabilities of the practice and adjust to reflect the fair market values of the net tangible assets. The appraiser will also consider the intangible assets of the practice, including patient volume, staff in place, systems and billing in place, name recognition, phone number, profitability, etc. These intangible assets are included in the valuation, and often categorized as goodwill. The value of goodwill is added to the net tangible assets to develop a value conclusion for the practice.
The appraiser also has to consider if the practice has any significant risks, including:
- What is the nearby competition?
- Is the practice current in terms of technology and what it offers patients?
- Is there any anticipated change in reimbursement policy?
An appraiser will interview the physician and the owners of the practice to have a thorough understanding of the practice’s operations, strengths, weaknesses, opportunities and threats. After calculating the different approaches to value, the appraiser considers all of the approaches, and then can weight the different approaches based on the reliability of the information, certainty of assumptions, etc.
The medical practice industry looks very different today than it did ten years ago. For those physicians interested in joining a larger organization, there are many more large health systems employing physicians and multi-specialty medical groups that employ or bring physicians in as partners. Certainly, there are incentives for physicians to become part of larger groups as these groups can take over certain administrative and financial responsibilities from the physician to enhance the physician’s lifestyle, and can negotiate better contracts with insurance coverage providers. The downside is the potential loss of autonomy and not being satisfied after the first contract re-negotiation with the employer. The physician must make sure he or she has considered all of the possibilities and done his or her personal due diligence before making a decision to join a larger group.
Feel free to call us or email to learn more about physician practice valuation and other health care valuations we can perform for you or your client.
