When you should put a price on your practice
What’s it worth to you?
More and more practices are being taken over or are merging with other practices. But how can you be sure you are getting a good deal if you don’t know what your practice is worth? In a market where others are constantly trying to get their hands on your assets, a good practice valuation is vital to your success.
There are five situations in which a valuation is needed, says Gerald Benjamin, CPA, chief executive officer of Premier HealthCare in Atlanta:
• initial public offerings;
• divorce proceedings in states with no community property law;
• mergers or acquisitions;
• estate and tax planning;
• professional divorces between business partners.
In the latter case, he says, there should be some sort of exit agreement in place before a partnership is formed that may even preclude having to do a valuation of the practice.
"If it’s going to take you into a situation where a disputed value of the practice could land you in court, then you need to have a valuation done," says Jim Sacher, CPA, a partner with the Cleveland accounting firm SMR & Co.
In some cases, however, the valuation can be a rougher estimate, Sacher says. For example, for tax and estate planning and succession arrangements, a ballpark estimate of current practice value should be enough. "It can be looked at every two years or so, whenever the partners’ personal financial plans are reviewed."
If you don’t have any transaction or divorce pending, Benjamin says, don’t have a valuation done. "It’s not necessary for every practice to have one."
Sacher agrees, although he notes that a good practice administrator and physicians who keep an eye on their practices will have a strong sense of what the business is worth in their particular market. "But you don’t have to have a valuation done just to know that."
Benjamin and Sacher agree that a professional should always do a valuation. "If you are in a sales situation, you don’t want the hospital buying you to put a value on the practice," Sacher says. "Nor would they want you to do the valuation."
And if a court case is involved, Benjamin says you should be sure the person doing the valuation has the confidence of the judge and any jury involved. "Someone with a good credential is less likely to be challenged."
The first people to ask about a valuation are your practice’s legal counsel and accountant. In most cases, neither will have the experience or qualifications to do a valuation, but they might know someone who does, Sacher says. "We think you should use a certified valuation specialist," he says. "They have specialized training and should know your market very well." Certified valuation specialists can be found by looking in the phone book under professional appraisers or by contacting your local chapter of the American Society of Appraisers.
Benjamin also suggests contacting either the Medical Group Management Association in Englewood, CO, or the Healthcare Financial Management Association in Westchester, IL, for guidance on how to find an appropriate valuer. (See SourceKit, at right.)
"In some cases, an accountant may have the requisite experience," Sacher explains. "But you don’t want your valuation to be anyone’s first. A mistake can lead to criminal prosecution."
If a practice is overvalued for purchase by a hospital or clinic, he explains, the federal government and Internal Revenue Service could argue the physicians were being paid for client referrals, which is against the law.
A valuation requires practices to provide certain specific data to the valuer. Benjamin says you should be prepared to hand over several years of financial data, operational data such as the number and type of patient encounters, fee schedules, collection reports, and employee information. The valuer also will need access to the office, he says.
Sacher also requests tax returns for the practice and its principals for the last three to four years, as well as "softer" information. "I want to know who you refer to and who refers to you," Sacher says. "I want to see your major contracts, and I want to see employment contracts for any non-physician owners of the practice."
With good, clean, organized data, Sacher says he and his team can have a valuation done in a week under emergency circumstances, although it usually takes about three weeks in most cases.
The cost of a valuation depends on your market, the size and complexity of your practice, the experience of your valuer, and how organized your data are, Benjamin says. The range is from $2,500 to $25,000.
If you think you might need valuation in the future, you might want to consider getting your information together in advance. "You should know what things will affect the value of your practice," Benjamin says.
Specifically, know how productive your staff are and know your overhead structure and referral patterns. Be aware of the impact your systems have on the value of your practice and keep up with what practices in your area are selling for.
"In this market," Benjamin says, "preplanning is a really good idea."
• Jim Sacher, CPA, partner, SMR & Co., Cleveland. Telephone: (216) 442-8642.
• Gerald Benjamin, CPA, chief executive officer, Premier HealthCare, Atlanta. Telephone: (404) 816-0049.
• Medical Group Management Association, Englewood, CO. Telephone: (303) 799-1111.
• Healthcare Financial Management Association, Westchester, IL. Telephone (708) 531-9600.