There is no doubt that your medical practice has a value. The magnitude of this value can be established using several different, but accurate methods. All of them should be considered to establish a fair market value.
Knowing the fair market value of your practice is an important part of your planning. And as a wise man once said, "If you fail to plan you are planning to fail." The failure only becomes apparent in a critical situation (illness, retirement, disability, etc.) and in most cases it is too late to do anything to prevent a substantial loss. You can avoid this loss easily.Fair Market Value
Fair market value is the price at which a willing buyer and a willing seller would agree when:
- Both have knowledge of all relevant facts
- Neither is under any compulsion to act
- Negotiations are fair and at "arms length"
This definition is the guideline used by the IRS.Valuation Methods
Generally, there are three methods of valuing a medical practice. These three are utilized in valuing all business. The methods are:
- Replacement cost
with each evaluating the practice from a different perspective.Replacement Cost
The replacement cost method develops a current Fair Market Value for the indivdual assets:
- Accounts receivable
- Inventory of supplies
of your practice. This approach is based on what another user (not a dealer or wholesaler) would pay for a used item. These values are totaled and the debts (accounts payable, notes payable, etc.) are deducted to determine the net value of the tangible assets.
In addition to this amount, the intangible assets should be valued. Among these intangibles are:
- Patient records
- Referral network
which are also know collectively as goodwill. Determining the cost of an intangible asset is difficult and less precise than a tangible one and therefore, these items often aren't valued. By combining the current net market value of the tangible and intangible assets, the value of your practice is established.Income
The income method is the most widely used and accepted. It is based on the premise that the current fair market value of any business is the total of all future benefits which the owner receives. These benefits are obtained by analyzing historical results. A forecast of the future results based on history is prepared. These future results are converted to current dollars by means of process referred to as discounting.
Discounting is based on the principal that a dollar received today has greater value than a dollar to be received tomorrow. This process is applied to all future expected benefits to establish a total current market value. The factor used to discount the future benefits is the expected rate of return which a prudent person would expect to earn on an investment. The amount of the rate is directly related to the level of business risk present. Low risk means low rate, while great risk requires a high rate of return.
The value obtained by discounting all future benefits s the current Fair Market Value of the business providing these benefits.Market
The market method is based on a comparison of recent actual sales transactions of similar businesses. This method is recognized as the most accurate. The critical factor is the level of comparability of the market. Comparability is influenced by a wide range of factors:
- Industry (services provided)
- Geography (region of country)
- Location (city, suburb, country)
- Size (sales volume)
- Earnings (profitability)
- Risk (potential for failure)
and many others. A selection of the most critical factors should be made and applied to ensure valid comparisons. Based on similar sales transactions, a fair market value can be determined.Valid Valuations
An accurate fair market value should consider all three methods of determining value. As a minimum, the income and market methods should be utilized to ensure a valid result. If only a single method is used, there is a high potential that the resulting value will harm either you or the other party in the transaction.Conclusion
Your medical practice does have a value. At a minimum, it is worth the selling price of all its tangible assets. A more accurate (and usually greater) value is established by considering the results of three separate methods -- replacement costs, income, and market. The resulting fair market value will allow you to make realistic decisions and be a part of equitable, "win-win" transactions.
The physician who believes that their practice has no value is basing their opinion on inaccurate information. Their lack of knowledge costs them money and, unfortunately, harms their loyal staff, devoted patients, faithful suppliers, and local community. Knowledge and planning can avoid all of these negative factors.