What you need to know about practice valuation
THOMAS R. VANCE, JD, LLM, FRANK L. WASHELESKY, CPA, JD, CVA, PFS
Although there is no direct tracking of medical practice closures, a survey by the Physicians Foundation estimated that about 8% of U.S. physician practices closed because of the COVID-19 pandemic — approximately 16,000 practices in total. Even with the recent rollout of vaccines, more practices may close before the economy recovers.
You may be considering buying a practice, merging with another practice or possibly selling your own. If so, the first step is to establish an estimated value of your practice and any practice you may buy or merge with. Keep in mind that a practice valuation should be done by a professional appraiser who is accredited through any of several reputable associations, such as the National Association of Certified Valuators and Analysts.
What does the practice need to provide?
As the owner of the practice, what is your role in the process? You will typically need to provide a variety of items, including:
- Last three years’ business tax returns;
- Profit/loss (P/L) statements for the previous three years;
- End-of-year balance sheets for the previous three years;
- Previous year’s payroll data;
- Equipment purchases over the last three years; and
- Owner perks and other discretionary items paid out of the business.
In addition, a description of the practice is key: What does the practice focus on? The description should include the practice’s infrastructure; for example, the number of treatment rooms, square footage and whether the seller owns the building or is a tenant (if a tenant, you will need a copy of the lease agreement and a determination of whether it is transferable). You will also need details such as how many new patients per month the practice has seen over the past 12 months, the total number of patient visits, the top ten Current Procedural Terminology (CPT) codes used and the top five referral sources, insurance accepted and percentage of practice by the insurance carrier.
What are the possible valuation methods?
There are four fundamental approaches to a medical practice valuation:
- Asset Approach
This looks at the assets and liabilities of the practice. The essential question is: What would it cost to create another practice just like this, based on its assets and liabilities?
- Market Approach
Similar to a real estate appraisal, the market approach asks, “What will the market bear for this practice?” It will be compared to similar practices sold.
- Income Approach
This approach is the most common. What can I expect my return on investment to be? The key element is to determine the practice’s ability to create profits above and beyond the owner’s fair market salary. Sometimes income is measured as earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA takes the practice’s net income with interest, taxes, depreciation and amortization added back in. Doing so forms the foundation for how the practice is valued based on a multiple of EBITDA.
Is the value reliable?
Buying or selling a practice is a big deal and should not be taken lightly. Engage experienced professionals with proven practice valuation expertise to make sure the numbers are reliable. Understanding how the practice is being valued is a key step in getting the right price.
Sidebar: Ensure compliance with rules and laws
Buying or selling any business can be complicated, but medical practices have unique issues to be aware of. Be sure to do your due diligence before you consider buying – or selling. Relevant issues include:
Health Care Compliance
Running a medical practice falls under many federal and state laws and regulations involving business referrals, how bills are submitted to private insurers and public health care programs, and privacy laws such as HIPAA. Consult with your attorney to evaluate the practice’s current compliance plan, whether any current or future compliance complaints exist, and any other potential problems that need to be addressed.
Make sure the practice has all current medical licensure required for the medical practice and document the ongoing status of those licenses.
Ensure compliance with the laws regarding patient notification. Patients should be informed of their rights to access and control their medical records after a sale with a HIPAA-compliant authorization required to transfer medical records. The sale agreement needs to stipulate who owns the medical records after the sale and for how long.
You will also need to evaluate any managed service organization agreements, open contracts with vendors and third parties; any open litigation; ongoing lease or rental agreements; and contracts with employees and independent contractors.
Keep the Patients Coming
Kevin Omahen, CPA
Marketing and branding are common terms you may hear in the business world. Although a medical practice does not serve customers but instead treats patients, the efforts in bringing in new business are not that different from other industries.
Stick to what your good at
Many medical practices are specialized in a certain expertise. Do not venture far from your expertise. Patients come to you because they believe you are great at what you do and they know that the service you are providing them is something that you have done before.
A large determining factor for patients when they select a doctor — or stay with the doctor they currently have — is their faith in the medical professional. Knowing that “he/she’s the best in the industry” or “he/she’s been doing this for years” is what makes patients sleep at night. Patients want to know that they are being treated by someone they can trust. Ultimately, the patient is putting all of their faith in the professional so it is important that the professional is accomplished at what they practice. This is what keeps patients coming to your office.
Related Read: Always Be Closing: Internal Marketing and Tracking
Defining what type of practice you have and whom the practice is serving is a way of determining the practice’s brand identity. And, of course, clarifying and creating the practice’s “brand” helps shape the marketing campaign. Who are you marketing to is the first question to ask. If it is a younger demographic then social media could be your best option. If targeting an older demographic, perhaps newspaper ads are an option.
There are many marketing outlets. Examples include a practice website, an updated social media page on a carefully chosen platform, the yellow pages, local or regional newspapers, direct mailings, and radio and TV.
Networking is also important. Consider presenting at a seminar, attending networking events or having lunch with another physician who may utilize you as a referral source.
Determining the kinds of patients you are likely to attract and getting a handle on your brand identity can help with the process of selecting the most appropriate marketing targets and outlets.
Related Read: A Good Business Plan Can Help Your Practice Thrive
Is it working?
How effective are your marketing efforts at hitting your target audience? Once a yellow pages ad was a must-have, but now, thanks to the Internet, many physicians feel these ads are not worth the price — especially when a professional website is relatively inexpensive and can be tied to a patient portal and scheduling system.
TV and radio are other streams of potential marketing; however, these are expensive.
Whatever means of marketing you are using, it is important to try to quantify if your additional marketing expenses have provided any returns. Evaluate your patient listing and see if there are any positive increases in patients subsequent to the start of the marketing effort.
Getting professional advice
Your expertise is providing medical care, not marketing your practice to potential patients. So consider obtaining the services of a professional to help you reap the most benefits from your marketing campaign — and avoid any potential pitfalls.
Marketing is simply a communications strategy. When properly used, it can increase public awareness of the care and expertise your practice has to offer — and motivate more patients to walk through the door.