As much as assuring investors of a healthy return after the sale, getting a proper, independent valuation of your medical practice can set the stage for its survival over the long run.

 

Mike Eggett, representing Professional Management Company, LLC, a Sanford, Fla.,-based consulting firm for management, valuations and mergers & acquisitions, says understanding the market value of a medical practice helps doctors structure sales and acquisitions, bring on new partners, and in short, ensure a lasting, vibrant practice.

 

"I see doctors with the attitude that 'I've built a multi-million dollar practice so why can't I sell it to someone?'" Eggett said. At the same time, new doctors face the risk of paying too much or working too hard for too little. "I've seen people be given only token ownership and the result is they skip and go to the next place."

 

Eggett has led valuations for estates and gifts, ESOPs and purchase/sale businesses, consulting for mergers and acquisitions and early stage intellectual property licensing and commercialization. He has particular experience in valuing surgical centers.

 

Eggett says the need to value a medical practice usually comes about because of a life event for either the medical practitioner, or the medical practice itself. When there's a retirement of a partner, a death, a divorce that requires distributing assets, a lawsuit or even expansion that brings in a new partner, an accurate assessment of the value of the practice is needed to fairly distribute assets or set the terms for buying the assets.

 

Owners should realize, he says, that medical practices can have different values for different reasons, often related to the profitability of the work performed, the types of payments received and the mixture of services offered.

 

"Invariably a person finds out that Fred down the street got a certain price and they don't know why they can't get the same price," Eggett said. "They don't take into account some of the non-obvious factors such as location, location, location and the complexity of the practice."

 

Other differentiating factors include cash available to the investor, over-staffing or under-staffing, whether the practitioners pay rent or own the building and receive the rent payments from the practice.

 

Smaller medical practices with a lead doctor nearing retirement face the additional challenge of building a business that can sustain itself after the doctor is enjoying retirement. If that's not done, the practice has a lower value without its marquee talent.

 

"Usually all of the patients fall in love with the owner, and the owner loves that," Eggett said. "But the owner doesn't think about the fact that as soon as he walks out the door the patients go with him."

 

Patient exodus chokes off the value of the practice, leaving new doctors unable to gain a foothold.

 

"You can't just suddenly, magically walk away," Eggett said of retiring owner doctors. "Who does the selling when you are gone? The transition has to be fair, and if it's not fair, people will walk."

 

Eggett says sole practitioners and small practices wanting to gain the optimum value of their practice need to begin strengthening the business and building capacity – by adding equity partners or additional services – as many as five years before the planned transition. Creating a more profitable practice entices new doctors to want to join and increases the overall valuation.

 

Fair arrangements based on a fair market value of the practice will allow young partners to earn a decent income and acquire the practice.

 

"The arrangements I've seen that are fair have been profitable practices," Eggett pointed out. "Practices are stronger and more profitable when new people are coming in."