Practice Valuations. Welcome To The Digital Learning Center. Today s Presentation. Course Faculty. Presented by. What s Your Practice Worth?

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1 Welcome To The Digital Learning Center Presented by Your Partner In Building High Performance Practices Today s Presentation Practice Valuations What s Your Practice Worth? Course Faculty R. Thomas (Tom) Loughrey, MBA, CCS-P Chairman, CEO & Co-Founder of Economedix Certified Coding Specialist BS Degree from Pennsylvania State University Earned an MBA in Health & Hospital Administration from the University of Florida Former Hospital Administrator Former Owner of a Medical Billing Company Consultant to Physician Practices & Medical Societies Member of Various Professional Organizations Dealing with Medical Practice Management Developed and Presented Thousands of Seminars & Workshops Dealing with Practice Management 1

2 Today s Course Practice Valuation o Reasons to Value Your Practice o What Drives the Valuation o Review of Practice Assets o Review of Valuation Methodologies o Case Study - Example o Summary Reasons to Value Your Practice o The Purchase or Sale of The Entire Practice o The Purchase or Sale of a Portion of The Practice o The Allocation of Equity in a Merger o The Asset Allocation in a Dissolution o Estate Tax Planning Reasons to Value Your Practice o Financing Collateralization o Marital Dissolution o Claims of Fraud or Misrepresentation Following a Purchase o Bankruptcy o Compliance With Buy-sell Agreements 2

3 What Drives Value In a Practice? Location and Demographics Patient Persistence Dependence on Referrals Vs. Direct Patient Contacts Contractual Relationships Supply and Demand for Similar Practices Reputation What Drives Value In a Practice? Facilities and Technology Employees Physician s Work Habits Proportion of Business From Nonassignable Contracts (Managed Care) Potential for Ancillary Income What Are The Practice Assets? Tangible Equipment Supplies Real Estate Leasehold Improvements Cash Net Receivables Intangible Assets Contracts Patient lists and database Telephone number Favorable leases / location Trained and assembled workforce Goodwill 3

4 What Is Goodwill? Tends to be personal and may vary from one partner to another in a group Varies with the ability and willingness to transfer the goodwill from the seller to the buyer Requires the seller to be cooperative in introducing the buyer May take time and may vary depending on the nature of the valuation (such as a marital dissolution) Elements of Goodwill Earnings levels that can be expected in the future Competition Referral base Patient typology Work habits of the physician seller / buyer Fees earned compared to others Location of the practice Employees General marketability of the type of practice being sold Future Earnings What makes up the earnings or lack of them in the practice currently? How does the physician s income compare to the incomes of similar practitioners? What has been the historic growth of earnings? Will that rate continue? What environmental economic conditions can influence future earnings? 4

5 Competition How does the supply of physicians in the specialty in the area compare to national norms? What Are the demographics of the competing practices? What niches are underserved in the population and how is each competitor positioned for them? What market advantages and disadvantages exist for the practice? Referral Base What is the source of the current patient base? What is the status of the referring practices? What is the size of the referral base? What percent of patients are directed by their insurance plan to the practice? Is the contract assumable? Physician Work Habits How closely matched are the buyer and seller in terms of their work habits? How closely matched are they in terms of their practice style? (Bedside manner) Is there room for differences? What type of patient is attracted to the practice? 5

6 Financial Performance What percent of fees are collected (gross and net)? What is the delinquency rate on the receivables? How many days of charges are in the accounts receivable? How does all this break down by payer type? Practice Location Convenience for patients and doctors Aesthetics of the location Proximity to referral base Desirability of location for buyer s residence Community demographics Employees Can be a plus or a minus Creating a knowledgeable and trained workforce is time-consuming and expensive How long have employees been on the job? What is the likelihood they will stay? What are their pay and benefit levels? What contracts do professional employees have? Do the employees own the goodwill or does the seller? 6

7 Marketability How easy is it to enter the specialty in this locale without a purchase? What is the economy like in the area? What is the overall demand for the specialty in the area? Are other practice opportunities available in the same area? Valuation for Marital Dissolution Practice is not being sold so some factors in valuation are not considered (referrals for example) State court rulings require Goodwill be valued as part of practice assets (Lopez v. Lopez). Considerations include: Age and health of physician Demonstrated past earning power Professional reputation Comparative success Nature and duration of the professional s practice. Valuation Methodologies Income Approach Discounted Economic Return Capitalization of Economic Return Market Approach Multiple of Revenues Comparative Transactions Asset Based Approach Capitalized Excess Earnings Asset Accumulation 7

8 Discounted Economic Income Focuses on the differences in Net Cash Flows Assesses the difference between buying a practice with a known cash flow or just starting a practice from scratch Value is the net present value of the annual differences in cash Capitalization of Economic Income Focuses on the capitalization of pre-tax earnings after a fair salary is allocate to the physician and, Total earnings including the physician s salary The capitalization rate will be different for each method Requires astute determination of the capitalization rate and careful analysis of economic capacity of the practice. Multiple of Revenues This has been used often because of its simplicity It should not be used alone and is frequently calculated after another valuation methodology is used This method is often used to compare practices for sale. 8

9 Comparative Transactions This is not a formula in itself It places a value based on the valuations of other similar practices It assumes the practice in question is typical It usually compares the practice on the basis of multiples of revenues. Buy-ins often use a comparative methodology based on the buy-in formula from others in the group. Capitalized Excess Earnings Often used in Marital dissolution valuations Calculated based on Total Earnings Total earnings includes: Net income of the physician including salary and benefits plus Nonrecurring expenses less non-recurring income plus Excess expenses not related to the generation of practice income. Compare the Total Net income to the Net asset value of the practice using an industry rate of return. Capitalized Excess Earnings Example: Net Asset Value of $300,000 Earnings of $200,000 Return of 15% Earnings attributable to assets (.15 X $300,000) $45,000 Excess Earnings: $155,000 Capitalization rate of 25% ($155,000 / 25%) $620,000 9

10 Asset Accumulation This is another way of saying the value of the practice is the adjusted net worth of the practice considering tangible and intangible assets Requires accurate valuation of tangible assets and accurate evaluation of the intangible assets such as goodwill Rule of Thumb Methods The most common methodologies are comparatives using The Goodwill Registry It categorizes total intangible value as Goodwill Expressed as a percent of Revenues For example, Average Goodwill reported for General Surgery is 29.04% of revenues General Surgery Example Revenues of $800,000 Goodwill value of $232,320 (.2904 X $800,000) Net value of tangible assets: $200,000 Value of collectable A/R: $120,000 Total Value of the practice: $552,320 This method is often used as a simple way to determine value for a buy-in or buy-out It also used as a quick method for determining the value of two groups that may be merging so as to determine equity differences among the principals. 10

11 So How much is your practice worth? The answer is It depends Why is it being valued? What is the purpose? What are the circumstances? What is the time-frame? What are the numbers? Thank you for participating in this seminar presentation from Economedix! Please direct questions to To earn CME credits for this course please complete the Evaluation / CME Form and FAX it back to Economedix within 7 days of the teleconference. 11

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