The Importance of Value Standards When Valuing Professional Medical Practices

For years, medical practices were almost always transferred between medical practitioners, with the senior member slowly selling his or her interest in the business to the younger member. Today, however, transfers are taking many different shapes, ranging from the traditional manner of transition through larger firms acquiring smaller firms to management companies purchasing private practices.

With the current changes in the business succession landscape the importance of obtaining an accurate value for a medical practice has become critical to ensure that the selling healthcare provider obtains the true value of his or her business. This in turn has brought the importance of the value standard in the business valuation to the forefront.

Traditionally, such practices have been sold under the “Fair Market Value” Standard. This standard assumes that both the buyer and seller are willing to sell and buy the business and that both have full knowledge of the practice in question and neither is under coercion. However, there are numerous value standards that can be applied to a business valuation. For example, if the assets of a medical practice are going to be sold through bankruptcy, the standard a business appraiser will apply is most likely the “forced liquidation” standard, which assumes that all of the assets must be sold in a very short period of time and that the seller is under serious coercion.

More pertinent to the sale of a successful practice is the “Investment Value Standard.” To be stated simply, this standard looks at the business to be valued from the subjective point of view of the investor or purchaser.

Let’s look at an example. Say that a cosmetic surgeon in Beverly Hills has the exclusive license to use a new non-invasive breast enhancement procedure in the West Los Angeles area. This surgeon is of retirement age and looking for someone to purchase his practice. There are two possible buyers for his practice. One is a surgeon who has just moved into the area and plans on being a sole practitioner primarily working in emergency cosmetic surgery. The other is a near by full service cosmetic surgery clinic with 15 doctors. Due to the fact that both of these potential purchasers fall within the exclusive license geographical area, neither will be allowed to use the non-invasive procedure license unless they buy this specific practice.

Here is where the different value standards come into play. Whereas the recently arrived doctor would certainly do a few of these procedures, it’s not an area of specific interest and its doubtful that he would pay a huge amount extra for the practice. Thus he would only be willing to pay “fair market value” for the practice. Whereas, the large clinic, which caters almost exclusively to elective surgery clients, believes that the new procedure would be an absolute gold mine and eliminates competition. Clearly, the larger clinic would pay a great deal more for the practice that owns the license for its own strategic reasons.

So how does this apply to today’s health care practitioner who is considering selling his or her practice? When determining a value for your specific practice, in conjunction with your attorney and CPA, contemplate who would be the most likely purchaser for your practice. If you believe that there is a greater chance that you will be purchased by another practice or management company for strategic business reasons, you should consider having the practice valued under an “Investment Value” standard as well as or rather than under a “Fair Market Value” standard.

Written by: Mark Burton, JD, CSBA, CMEA - exclusively for Med.Business Exchange

Mark Burton is In-House Counsel and Director of National Operations for Business Evaluation Systems, a nationwide appraisal firm, focusing on the valuation of businesses, machinery and equipment and intellectual property. Mark has personally advised on more than 100 business transfers and valued several hundred businesses ranging in size from $20,000 up to $40 million. While Mark was in private practice he served business clients in the areas of corporate and business transactions, labor law, estate planning, and business succession. Since then, Mark has headed up operations for a consulting firm, has been an editor and publisher for the Daily Journal Corporation and acted as Vice President of Business Development and Marketing for a software firm. Mark currently serves on the boards of several companies, both for profit and non-profit and speaks nationwide on the business transfer process, expert witnessing and avoidance of liability in merger and acquisitions for privately held firms and business succession.

He is a licensed attorney and is certified as both a business appraiser and a machine and equipment appraiser