On one hand, most physician practice owner-physicians hold a strong awareness of the cash flow within their practice. On the other hand, understanding all the factors involved in determining the actual value of a practice goes far beyond looking through the credits and debits on a balance sheet. To accurately discover the complete picture of what a business is worth, the process of valuation by credentialed business appraisers is necessary.
Through the valuation process, physician practice clients often become more aware of the mechanisms that drive the value of their practices. These factors may include the following:
- The specialty(ies) of the physicians in the practice
- Possession of state-of-the-art technology and equipment
- The range of services provided by the practice and whether those services are provided at the practice or at a hospital
- A staff that is familiar with coding
- Efficient patient scheduling and flow
- Leveraging the use of mid-level providers
Practice Valuation: Key Points to Consider
At first glance, the value-driving mechanisms would appear to be intuitive methods for building a good practice. However, in looking deeper at the actual value of a practice, quantifiable knowledge of how each owner-physician brings revenue into the practice may be necessary in the following circumstances:
- Admitting a new partner
- Buying a partner out of a practice
- Selling or considering selling the practice to a hospital or other entity
- Entering litigation — whether brought about by a shareholder’s dispute or a partner’s divorce
Given that a body of state-specific case law applies for valuations for divorce — versus shareholder disputes — and that a myriad of regulations apply to hospital acquisitions, the purpose or reason that the valuation is being performed is highly significant. A thorough and accurate valuation requires a great deal of specialized knowledge, which makes the selection of a qualified, experienced business appraiser one of the most important decisions a practice can make.
As an example, consider a sale and post-transaction employment scenario in which the valuator examines the proposed employment contract and purchase agreement to determine whether the terms align with fair market value. As part of the valuation process, financial information is reviewed and both tangible assets — such as accounts receivable and equipment — and intangible assets such as goodwill are considered.
The valuation process may also include comparing the practice to similar regional practices using benchmark analyses by the Medical Group Management Association, American Medical Group Association and others. In a series of steps, including looking at trends in the top procedure codes, accounts receivable and payer mix information, the valuator ultimately reaches an understanding of how the practice makes money and why.
In its simplest terms, valuation is a process of information gathering and analysis. From the information that is gathered, an understanding of the practice and its ancillary services is obtained. The process can also offer insightful, third-party perspectives on the practice’s competition and how the market is changing. A comprehensive valuation considers current trends in reimbursement rates and looks into the areas from which patients are drawn.
At the completion of the process, valuators consider all the information and work with clients to help them not only understand the value of their practice, but also the drivers in their practice generating income. The valuation process can also pinpoint opportunities for cost reduction or areas in which the practice is particularly efficient to boost value in the future.
We Can Help
If you find yourself in need of a physician practice valuation, contact the healthcare valuation team at Elliott Davis Decosimo at (423) 266-7230 for a practice valuation.