4 Important Considerations in the Valuation of a Medical Practice

When buying or selling a medical practice, it is vital to conduct a healthcare business valuation to establish the fair market value of a medical practice. Healthcare business valuations involve tangible asset valuation, medical equipment appraisals, and intangible asset valuation.

Even though you’re better off hiring a healthcare business valuation company, you should know the factors that come into play during the valuation of a medical practice.

Here are the most important considerations.

1. Current and Future Cash Flow of a Medical Practice

If you are buying a medical practice, cash flow is one of the most important factors to consider. You should consider how much you’ll earn from the practice after the healthcare compensation valuation. This becomes clear after the healthcare fair market valuation is completed. Determine how much cash flow the practice will generate after you pay all the expenses involved in the acquisition.

These expenses include the cost of acquisition for the medical practice, compensation for other physicians under the practice who may not continue after the acquisition, and the cost of replacing or repairing medical equipment as guided by the medical equipment appraisal. Physician compensation is guided by Stark Laws and anti-kickback legislation.

Additionally, you must consider the effect that the acquisition will have on the future cash flow of a medical practice. Weigh the following factors. Will the doctors under the practice continue to work with you after you buy the practice? Will the seller stay with the practice for some time to facilitate a smooth transition? Will the seller continue to practice medicine in some other capacity? These are some factors that can affect a practice’s cash flow after an acquisition. Luckily, a top healthcare advisory firm will see you through the healthcare fair market valuation process.

2. Tangible Asset Valuation

Valuation of tangible assets is key in establishing a medical practice market value. Medical equipment is a big investment in a practice because they are usually costly to replace or repair. Tangible asset valuation determines the value of crucial assets such as diagnostic and exam room equipment, therapeutic equipment, software and internal technology, imaging equipment, and surgical instruments and equipment. This is done through medical equipment appraisals that document the condition of all the essential equipment in the medical practice.

Tangible asset valuations also help you establish other assets such as office buildings owned by the practice. If the practice has leased office space, look into the terms and conditions of the lease. This also applies to the leased medical equipment, if any. A tangible asset valuation helps you establish what the practice owns. This goes a long way in establishing the market value of a medical practice.

3. Valuation of the Intangible Assets and Goodwill of the Medical Practice

The goodwill of a medical practice is the most important intangible asset that you should determine. Practice goodwill is based on variable factors such as the reputation of the practice, stable staffing, a solid patient list, prime location, and other factors that affect the earning power of a practice. If you can earn more by owning the practice than being a non-owner under the practice, then you will pay more for goodwill. The amount you pay for goodwill is determined by the earning potential of the practice compared to what you would earn as a physician working under the practice.

4. Legal Consequences

Besides establishing the cash flow of a medical practice, and conducting intangible and tangible asset valuation, also consider other legal consequences. These include insurance policies, legal suits for medical malpractice, and taxes. For instance, non-profit hospitals that defy the Community Health Needs Assessment standards may pay a $50,000 fine and also endanger their future tax exemption privileges.

Before buying a medical practice, you should conduct an extensive healthcare business valuation. You don’t want to overpay or buy a practice that will have negative legal and financial implications down the line.