For sellers and buyers, as well as practices constructing buy-in/out agreements, an accurate practice appraisal is critical to the success of the whole transition. Our firm recognizes this, and we understand what it takes to produce a fair and accurate appraisal.
Understanding the Concept of Value
The value of any business, including any professional medical practice, is a function of the amount of income that it produces for its owner--what we refer to as the cash-flow.
And, it's important to remember that income is more than just what appears at the bottom of a tax return: it is in reality the sum of all benefits that an owner receives from the practice.
Our Methods for Valuing a Practice
At New England Practice Transitions, we rely primarily on the Asset Summation Method to appraise a professional medical practice.
Asset Summation Method. This model requires that the value of each category of tangible and intangible assets of a practice be valued separately and then added together to determine the overall practice value.
To determine the value of the intangible assets of the practice, or what is often referred to as the "goodwill" value of a practice, the income or "true economic benefit" that a practice has provided its owner is multiplied by a factor specific to that practice and that profession.
Some of the considerations that go into determining the multiplier to use are the practice's location, new patient numbers, demographics of its patients, area competition, use of computers, quality of equipment, and the longevity and expected stability of the staff after the transition.
Having determined the value of the intangible assets of the practice, a value is then placed on the tangible assets of the practice, which include items such as equipment, furnishings, inventory and supplies on hand. Sometimes, leasehold improvements are also included.It's important to realize that even fully depreciated assets have some inherent value to the practice as an on-going business.
At this point, one simply adds up the value of the intangible and tangible assets to determine an overall practice value.
There are other methodologies by which to value a professional medical practice, and sometimes we do use other methods, but we urge buyers to beware of "rule of thumb" methods that may or may not apply to a specific practice. Statistically speaking, it may be correct to say that most dental practices, for instance, sell for between 60%-70% of gross earnings, (more if closer to a major city), but those parameters say nothing about location, practice size, overhead, and a host of other factors.
Asset Allocation and the IRS
It is not until the practice is actually sold that the seller and buyer have to assign specific values for each asset in each category, and this is more for tax purposes than anything else. It is however this "Asset Allocation" that has the greatest impact on how the seller is taxed and how the buyer gets to depreciate or amortize the assets he or she just acquired.
Please contact us with any questions or concerns you may have about your situation. We are happy to provide a no-cost initial consultation.