Assigning or defining the value of a Family Practice is not something that’s easily done. Nor is it something most physicians think about until forced to. Knowing the value of the Family Practice is part of practice management. It can serve as a measuring tool for evaluating practice growth in good times. Should death, divorce or other circumstance force a sale, correctly valuing the Family Practice is important.
Standard Valuation Methods: Comparison
One way to value a Family Practice is to compare the Practice to others in the local area. While this may work for realty situations involving homes or buildings, it doesn’t work in this case. The problem with this method of valuation for Family Practice is that there are too many intangibles involved. Not all Family Practices are the same size or serve the same patient base. There are too many variables to arrive at a reasonable sum.
Standard Valuation Methods: Inventory
The inventory method of valuation looks like a simple one. All assets are inventoried and a value is assigned to them. The values are added and the total liabilities are deducted, leaving a valuation sum. The problem with the inventory method of valuing the Family Practice is, again, the presence of intangibles. It’s hard to assign a definite value to an intangible.
Standard Valuation Methods: Cash Flow
Cash flow valuation of the Family Practice takes income and accounts receivable into consideration. Too large a sum in the accounts receivable column can negatively affect cash flow figures and the attitude of potential buyers.
Standard Valuation Methods: Appraisal
Professional business appraisers usually take several issues into consideration when valuing the Family Practice. Cash flow and a potential practice growth in years to come are part of the process.
Standard Valuation Issue: Goodwill
One intangible asset that may be overlooked in the family practice valuation process is goodwill. Goodwill is an asset that is often defined by charisma and an inherent talent that invites trust. Goodwill includes the ability to attract and keep clients, reputation, etc. Some professional appraisers add goodwill to the valuation, others do not.
According to some reports, the assigned value of many Family Practices is 20 to 50 percent goodwill. This is an important figure. If the physician operating the practice is a large part of the reason the practice is successful, what would the family practice be without that physician?
Professional goodwill is a conglomeration of experience, reputation, charisma, skills, abilities, etc. of a physician. Practice goodwill is based more on location and the nature of the family practice and how long it has been in business.
One commonly used method of calculating the value of goodwill in a family practice is comparing the family practice to that of another physician with similar background and specialty. The low number is subtracted from the higher one. The resulting sum is then divided by 20 percent. The result is the goodwill dollar value.
If the need to value the family practice should arise, a general valuation or valuation method will be available. If a professional appraiser is chosen, it should be one who does use the goodwill factor.