How Much is My Medical Practice Worth?
How Much is My Medical Practice Worth?: You are going to need a figure for the value of a medical practice if you want to buy into it, cash out of it or get a divorce, to mention just a few reasons. Given the amount of money at stake, it is critical that you get it right.
Popular Valuation Approaches
There are several ways to evaluate a medical practice, and which one is the most accurate in your case depends on the circumstances. Below are three of the most popular valuation methods.
The Asset Approach
The asset approach attempts to calculate the book value of the assets and liabilities of the practice at fair market value. There are three common asset approach methods you can use:
- the Adjusted Book Value Method;
- the Net Asset Value Method; or
- the Asset Accumulation Method
The asset approach is probably the best method to appraise the value of a medical practice that has purchased a lot of expensive equipment but is not very profitable — one that you are cashing out of, for example.
medical practice that has purchased a lot of expensive equipment but is not very profitable — one that you are cashing out of, for example.
The Market Approach
The market approach bases its calculation on the value of a medical practice by comparing it with other similar practices that have already been sold, on the assumption that the market values of these practices are similar to the market value of your practice. The Direct Market Data Method is the most popular method. The market approach might be the best approach if your practice is for sale and you are trying to determine the appropriate sale price.
The Income Approach
The income approach works something like valuing a thoroughbred racehorse — a value estimate is derived from estimating future income and then discounting it to present value. If your practice is a going concern and if it is expected to remain so indefinitely, this is probably the approach you are best off using if you want to evaluate your practice for tax purposes.
“Goodwill” is an extremely important component of the value of a professional services company such as a medical practice. It is also among the most nebulous of concepts when it comes to appraising the value of any business. Put vaguely, it represents something like the difference between the value of the business as it is now, over the value that it would have had if it had just opened yesterday.
Factors involved in calculating “goodwill” include (among others):
- the “going concern” value;
- the value of the seller’s name;
- any applicable covenants not to compete;
- patient lists;
- credit rating;
- ongoing patient care contracts; and
- employee contracts.
Think carefully before deciding on how you will value your medical practice — and be sure to seek at least one outside legal professional opinion.