Value Drivers for a Medical Practice
Determining the value of a medical practice can be complicated. However, through understanding the basic economics of your practice, you can increase the value of your company. Here are several factors that impact the value of your medical practice.
A business appraiser will want to know the historical physician compensation as a starting point for estimating projected physician compensation. This impacts the cash flow of future earnings. A potential buyer will be interested in knowing the level of earnings the practice generates and how much of the available earnings are being applied to a physicians’ compensation. According to some, this is the single largest driving factor in the value of a practice.
The level of goodwill can vary greatly from practice to practice. It is generally the most subjective and variable asset when valuing a medical practice. It is based on many unique factors. For instance, community involvement, strong reputation, and recurring patients may all be considered. Learn more about how goodwill can impact your business valuation.
Size of Practice
A practice that is run by a single doctor as opposed to multiple doctors, will generally have a lower valuation multiple. If the practice is overly dependent on the practitioner’s personal skills, abilities or contacts it is less valuable. This is because the ability to transfer the skills, abilities or contracts into future cash flows with the new doctor becomes questionable. This dependence is known as “personal goodwill.” As such, it reduces the valuation multiple a potential buyer would be willing to pay for your business.
Practices with a large support staff including nurse practitioners, medical assistants, and office staff tend to have less personal goodwill. As such the value is typically higher. This is because the transition is easier when key staff members remain through the sale of the business. Whereas in single-doctor practices, patients are most susceptible to attrition when the doctor leaves the business.
Lastly, large group practices typically have strategic or investment value buyers which drive up the valuation multiple.
Insurance Payer Mix
The mix of payment methods often impacts the value of the business. Practices with high revenue from government-sponsored healthcare generally have a greater risk. Government-sponsored insurance payments are often unnegotiable because of state or federally mandated rates. This limits the overall profitability of the practice. Keep in mind each state may vary in regulation. But, when the practice’s primary source of payment is from Medicaid this risk is higher which lowers the value. However, additional research on regulations may be required for each specific company being valued.
Specialty vs General Practitioners
Specialty practices typically charge more for services. This leads to higher margins. However, because of the nature of their relationships with patients being more volatile, it leads to higher attrition rates.
General practitioners generally charge less which leads to lower margins. However, these patients tend to be more recurring with longer-term relationships.
Depending on the market the practice operates within, higher competition will yield a lower valuation multiple. Competition may include alternative medicine providers as well as other practitioners. Office location also plays a part as a rural practice is typically worth less than a suburban practice, all else being equal.
While every situation is unique, understanding what can impact the value of your medical practice can help you take steps to increase the value. Peak Business Valuation has worked with several physicians to provide a business valuation when buying or selling a medical practice. We are happy to answer any questions you have. Please reach out via email or through a phone call.Schedule Your Free Consultation Today!