Selling your practice: How to determine its value
A basic understanding of the valuation process is critical, as perspective can vary among potential buyers
In the first installment of our three-part series on selling a practice, we discussed reasons to sell, preparing your practice for sale, options other than selling, timing, and the universe of potential purchasers.
This article will discuss the concept of practice valuation and how to go from abstraction to dollars or how to make dollars and “cents” of the process of putting a dollar value on a urologic practice.
For a young physician transitioning into a practice, the decision could end up becoming the largest financial transaction that doctor will ever make. And to a retiring physician, practice valuation may decide the amount of sweat equity built over a career.
What is your practice worth?
Needless to say, every urologist believes their practice is worth far more than any young urologist or hospital is willing to pay. After all, they have worked a medical lifetime to nurture, build, and create. They have amassed several thousand patients who have been loyal to the practice and might continue as patients of the future practice. So how does the retiring doctor decide the value of the practice, “cast his net” to the marketplace, and hope to find a willing buyer who will not only pay the asking price but transition the practice smoothly into the buyer’s practice?
In a pure sense, the value of any asset is what a potential purchaser is willing to pay. In medical practices, as we discussed in part 1 of this series, the universe of potential purchasers is limited. That universe could include a newly recruited physician, a larger single- or multi-specialty group operating in the area, the local hospital where you primarily practice, and other local hospitals where you may or may not maintain some level of privileges.
From a value standpoint, the price each of these potential purchasers will be willing to pay varies based on the specifics of the situation, regardless of what a valuation or practice appraisal might indicate.
For example, once your plans to retire become known, why would a young physician agree to pay $X for your medical records? They know both your patients and your referral base will seek urologic care somewhere once you have retired. A little advertising and persistence with your referral base may cost a lot less than the amount you are asking and, after all, the patients are there for the taking.
A hospital may take a similar tack but more often will be willing to pay a fair market value for your practice. Hospitals, however, can't legally pay more than fair market value as determined by an independent appraiser.