In the past, valuations of physician practices were mostly done when a new partner is added, a divorce occurs or the owner would like to retire. But with consolidation and integration on the priority list for hospitals and large physician groups, valuation has become more commonplace.
Monica Kaden, principal at Fischer, Barr & Wissinger P.C., said physician practices interested in being purchased are evaluated like any private business, and, depending on the wishes of the buyer, can expect at least one of three valuation methods.
Kaden said the most likely form of valuation physicians can expect is the income method, where the practice's normalized cash flow is looked at and discretionary spending is cut out. The value of the practice is determined by dividing the normalized income by the investor's potential rate of return.
"These transactions are generally revenue driven. A purchaser generally is most focused on receivables that are generated by the selling entity, both actual and potential," said James Robertson, partner in the health care practice of McElroy, Deutsch, Mulvaney & Carpenter, in Morristown.
Other methods, which are less accurate for medical practices but can be used in conjunction, include the asset method, which looks at just the tangible assets of the practice and establishes a "floor value"; and the market approach, which considers the price other practices have been sold for in the area.
"It's the approach of last choice for medical practices," Kaden said. "Everybody loves the idea of finding transactions that have occurred out in the marketplace, and how can we apply those … (but) the issue with the market approach is you have very little detail on the transaction."
Kaden called the market approach more of a "sanity check."
That valuation then can be translated either into fair value, the value to the holder of the practice, or fair market value, which is what the practice is worth to a willing buyer and a willing seller.