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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

     

    The income approach is based on the premise that the value of any business resides in the income the business generates for its owner. In other terms, the value under the income approach is a multiple of the cash flow the business generates after expenses.

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    In our real estate analogy, a home that rents for $30,000 a year is worth more than one than rents for $15,000 a year. The higher the income stream, the more a potential purchaser is willing to pay. It is important to note that the value of that income stream most often exceeds the value of the underlying home itself because of the future income potential.

    This is the essence of intangible value or goodwill: the value of the business—the rental home in our example—is more than the value of the underlying tangible asset (the home itself). That difference is the goodwill or intangible value. Stated another way, the goodwill value is the value of the future earnings potential in excess of the underlying tangible assets.

    The problem in applying the income approach to a physician practice is that, unlike a rental home, there generally isn't any income left after you pay yourself. Any "profit" has always been part of your personal income and any future income stream is dependent on you. If you are retiring, the future income stream will be uncertain and fully dependent upon your replacement, who will be doing the work.

    Virtually no physician practice has an earnings stream under the income approach because the physicians take any earnings home each year.

    Many health care appraisers take the position that if a practice has no earnings, then it has no intangible value. This means that intangible assets such as your name, reputation, trained staff, and medical records have no value.

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    Other health care appraisers take the view that, even lacking earnings, certain intangible assets have value based on the principle of substitution. This principle holds there is value in buying something that already exists rather than building it from scratch. A good example would be a trained office staff that knows your practice and patients and has expertise in urology coding and billing and the clinical services you provide.

    Next: Estimating your practice's value

    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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