Q&A: A practice's monetary value -

Q&A: A practice's monetary value - - ModernMedicine

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A: Most physicians enter medicine as an ethical profession through which they can help people and earn a good income. They don't enter practice to create business value that they can sell at some point, as might be the case with many businesspeople in other fields. The result is that many medical practices have little to no value for the purposes of a sale.

Creation of value in most medical practices is the result of understanding how value is created, followed by purposeful execution of business-oriented actions. Economic value is created primarily by the generation of "dividends" that are a return on investment (that is, equity or ownership) instead of a return on labor. In other words, if the practice doesn't earn the owner more than he or she could earn through simple employment (for example, by working for a super-group or hospital), then there is no economic value to ownership; a knowledgeable physician simply would take employment and invest elsewhere, somewhere that a return on investment would be more assured at less risk.

Some solo practices create dividends through excellent practice management, quality coding efforts, and a top-notch staff. A more dependable way to produce value is to leverage the labor of others and/or to leverage ancillary services. A simple example of this method is the employment of other physicians and mid-level providers who are paid less than what the employed providers earn for the practice. In this example, income created for the owner does not depend on the owner's personal labor. Adding laboratory services, echocardiogram capabilities, x-ray services, prescription dispensing capabilities, physical therapy services, Holter monitor testing, and even ambulatory surgery and other reimbursed services also adds to non-labor profits and thus adds dividends that result in business value at the time of sale.

Answers to our readers' questions were provided by Medical Economics consultant Keith Borglum, CHBC, of Professional Management and Marketing. He has been a licensed practice broker, appraiser, author, and management consultant to physicians for more than 25 years; is based in Santa Rosa, California; and practices nationally. Send your practice management questions to medec@advanstar.com
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Comments from our Readers

Alan Donnenfeld / Wynnewood, PA, UNITED STATES
Posted 2010-05-13 14:07:52.0
I appreciate your comments on determining a practice's monetary value. Would the value of a practice be determined in the same way if a soon to be ex-spouse is looking for compensation as part of a divorce settlement, assuming she is entitled to half the value of the joint estate (which includes the husband's private practice which is set up as a limited liability corporation?