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    Selling your practice: How to determine its value

    A basic understanding of the valuation process is critical, as perspective can vary among potential buyers


    Valuation methods

    The valuation of any business is generally looked at in three ways: market, asset, or income. For perspective, it is often helpful to think of these in the context of real estate, such as your personal residence or a rental home.

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    Market approach. Anyone who has bought or sold a personal residence understands this concept. The "market" in real estate is simply what someone is willing to pay. Appraisers look at comparable sales of similar homes and come up with a range of values.

    If you own your office real estate, the market approach is one method a real estate appraiser will likely use to establish a fair market value. Beyond any office real estate, the market approach is generally not applied in the valuation of medical practices.

    There isn't a database of comparable sales that you can refer to for a range of values. While resources available for sale on the Internet claim to offer either surveys of prices or a rule of thumb to calculate a value, don't waste your time or money. The "market" is still what someone is willing to pay in your situation or the value determined by an independent appraiser that a potential hospital purchaser will engage. Even in third-party valuations, the "market" approach is seldom used in valuing medical practices because of the lack of reliable and comparable sales information.

    The asset approach simply values the individual assets of your practice based on their current market value.

    The individual assets of a medical practice include what are referred to as tangible and intangible assets. Tangible assets are those you can touch, see, and feel. They primarily consist of your furniture, equipment, and any office real estate you own.

    The fair market value of used furniture and equipment is most often valued using a replacement cost approach. The value of these items is limited and generally starts at 50% of the cost of purchasing new furniture or equipment of the same utility and then goes down from there based on age and condition.

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    Major equipment items that might be found in a typical urologist's office, such as an ultrasound or urodynamics machine, often have a market value based on similar items for sale or recently sold in the secondary equipment market.

    Other tangible assets might include your accounts receivable (A/R). A/R represents payment for work you've done that hasn't been collected yet. Most purchasers aren't interested in paying for A/R and assuming risk of collections. Generally you should expect to retain your A/R and work out an arrangement for their collection by the purchasers, often for a small or nominal fee, after you have retired.

    Intangible assets include all of the things most physicians value in their practice: their name, phone number, reputation, referral base, trained staff, and medical records—in short, the propensity of patients to return to your practice. Sometimes this intangible value is referred to as goodwill or "blue-sky" value.

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    Some purchasers may be willing to pay for some of these intangible assets while others will not. Unfortunately, the trend today is for sellers not to be able to reap any value on these intangible assets.

    Next: The income approach

    Neil H. Baum, MD
    Neil H. Baum, MD, is a urologist in private practice in New Orleans. He is the author of "Marketing Your Clinical Practice-Ethically, ...


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