Buying and selling a medical practice isn’t as easy as cutting a check and shaking hands on the deal. It’s quite a lengthy process to determine the fair market value of a medical practice as many factors come into play. Before buying or selling a medical practice, it’s important to engage a healthcare business valuation company to assess the medical practice market value.
Here are three factors that come into play when determining the fair market value of a medical practice.
1. Is It Viable To Work as a Doctor in the Practice or Owning the Practice?
A healthcare business valuations company will help you determine whether it’s more feasible to own your medical practice, or working as a doctor. When deciding to buy a medical practice, first determine how much the partners earn from their shares. Compare that to the average income that doctors in the same capacity working in the same area, or the same practice earn.
Consider if it’s more lucrative to work as a physician as opposed to owning the medical practice. However, you should also assess the future earning potential of the practice. The current net cash flow may be low because of several economic or administrative factors that may change with time. For instance, if the medical practice was just gaining traction, the current earning capacity may be less, but the future returns would be impressive.
These are the financial metrics that a healthcare compensation valuation company will weigh when determining what is the fair market value of a medical practice. This will help you make an informed decision when buying or selling a medical practice.
2. Valuation of Tangible Assets and Intangible Assets
All physical assets under the practice’s management are called tangible assets. They include the office building, furniture, medical equipment, office supplies, cash in the practice’s bank accounts, medical reference books, and drugs on hand. You may conduct a medical equipment appraisal to certify the condition of some of the equipment. Some of these machines such as X-ray machines are expensive, and it’s necessary to ascertain their operating condition before transfer.
Intangible assets include goodwill, employees’ contracts, and working agreements with other businesses. Goodwill is broader and more complex to value because it entails many factors. These include the experience and reputation of the practice, the location, and the profitability of the practice. Additionally, goodwill is also influenced by the ability of the previous owners to refer patients and the expectation that existing patients will continue to use the practice.
3. Legal Implications
Many legal considerations come into play when establishing the fair market value of the medical practice. You must be fully aware of the Stark Law and the anti-kickback regulations that guide healthcare business valuations.
If the seller intends to fully walk away from the medical practice and not practice medicine again after the buyout, the Stark Law and anti-kickback regulations may not apply. However, if you’re buying in as a partner, the rules will come into effect. You must also adhere to the tax laws as directed by the IRS.
Other factors such as medical malpractices that may have legal implications down the line must also be addressed. If you buy or sell the medical practice, who will be held accountable for previous malpractices that may be pending a determination in court?
There’re many more factors that come into play when assessing the fair market value (FMV) of a medical practice. While there’re FMV calculators and FMV tools to help in healthcare business valuations, it’s more intricate than that. When buying or selling a medical practice, you’re better off hiring healthcare fair market valuation professionals.
As of 2018, healthcare contributed 18.2% of United States GDP, which is a considerable jump from the 5% contribution in 1960. This makes it a lucrative industry for all the stakeholders. Physicians are the dominant players in the healthcare industry. It’s important to determine the fair market value of a medical practice before selling or investing in one.