Appraisals: What’s Your Practice Worth?
Get a Quick Appraisal
To get a quick, very rough estimation of what your practice might be worth in today’s marketplace, try out what Sacher calls, the ‘back of the napkin’ rating. This bare bones approach looks at available cashflow and the rate of return a hypothetical investor might expect for buying your practice.
Step one: Define your practice’s free cashflow. That’s the total of cash remaining after paying operating expenses (staff and nonphysician provider wages, rent, leases, loans, insurance, etc.) and the fair market recompense of the doctors.
Say you have a three-physician primary-care practice that draws in $1.5 million after contractual adjustments. Effective costs are $900,000, leaving $600,000 for the three of you to divvy up. You each take $185,000, which leaves $45,000 in total cash. That $45,000 puts you well above the median for single specialty groups in terms of lucrativeness, according to Medical Group Management Association yearly reviews of group practice cost. Or maybe your profit is a bit below $5,000, which is closer to the MGMA median for many small primary care group practices.
Step two: Suggest a requisite rate of return on investment (ROI). While 30-year Treasury bills may yield a little less than 5 percent today, investors who take large business risks will look for returns closer to 20 percent per annum, Sacher says.
Step three: Divide the cashflow ($45,000) by the ROI amount (0.20). The result is the value of the practice ($225,000).
“That kind of calculation may get you in the church, but it won’t get you into the right pew,” Sacher says.
Depending on the purchaser, you also may have room to negotiate on other matters, such as your practice’s location, the quality of its management, patient growth rate, payer mix and other factors, Sacher says.
Even when you try out all the various varieties of appraising a practice, you still won’t know what it will get on the market, says Robert Bohlmann, a consultant and principal with the MGMA Health Care Consulting Group.
“I often run into doctors who believe their practice should sell for its appraised value, but that’s not invariably the case,” he says. “If you want to get a good deal, start thinking about life after the sale and how you’ll have the opportunity to get compensated for what you do as opposed to what’s left on the table after all of the practice costs and contract deductions are taken out.”
Adds Reiboldt, “the toughest thing to convey in presenting assessments is that it’s just business. It’s not personal, but to many individuals, hearing what their practice is worth is like we’re saying their child is ugly.”
And for now, purchasers seem to be getting the upper hand in determining what your baby — your practice — is worth.
Documents That Help Appraisers Value Your Practice
A valuation team inspecting your medical practice will want to learn a lot more about your operations than what’s your recent profit and loss statement. Expect appraisers to ask for:
• State and federal income tax returns (up to 5 years worth)
• Bank account statements
• Corporation bylaws and articles of incorporation
• Partnership accords
• Employment contracts
• Doctor compensation agreements
• Retirement program commitments
• Revenue and disbursement reports
• Collections and allowances accounts
• Aged accounts receivables and payables reports
• Remunerator contracts
• Fee schedules
• Cashflow statements
• Lease agreements
• Mortgages and other loans
• Supply inventory