The problem with "Rules of Thumb" in Valuation and Asking Price Determination of Healthcare Professional Practices

The business valuation of healthcare professional practices is a widely discussed and contentiously debated topic among business appraisers, healthcare business consultants, accountants, brokers, lenders, buyers, sellers, and various other involved parties. This is attributable to a combination of competing interests and general confusion when it comes to valuation and asking price determination. This phenomenon is not uncommon in a field where seemingly innumerable variables exist in wholly different practice settings which can render even the best approach to valuation ineffective. With the inherent difficulty in accurately assessing the value of a healthcare practice and determining an appropriate price point which reflects market reality, the use of a "rule of thumb" as a substitute for due diligence can be severely problematic. Using an easily applied method in the absence of comprehensive data and analysis comes from the desire to simplify and compartmentalize complex ideas into bite-sized pieces. Rules of thumb are commonly seen as generalized ratios of earnings, price, overhead, financials data, or other key practice statistics. While potentially accurate over a large swath of aggregate data, the low volume nature of comparable healthcare practice transactions makes these rules of questionable effectiveness. In the hands of unknowlegable parties, they can be highly inaccurate and especially problematic when misapplied across different health fields (Valuing an optometry practice with a ratio used for medical practices is a common such example). No ratios or rules can encompass the intricacies of multiple healthcare disciplines, specialties, market factors, geographic locations, valuation purposes, size/scope of potential buyer pools, economies of scale, or purchase price allocation. With the difficulty in accurately and rapidly determining practice value, it is understandable that buyers and sellers of practices can become frustrated and overwhelmed in the process. This can be resolved by hiring a professional who is aware of current trends and can assess a practice for the party's given purpose. This is the most crucial aspect to obtaining an accurate and relevant valuation that can be actually utilized to achieve a specific objective (business move, retirement, lifestyle change, divorce, etc....). Appraising a practice "in theory" without considering the moderating effets of true market dynamics is a waste of time.

Selling your medical practice to take an employed position

The need to sell a medical practice can arise for various reasons: lifestyle change, retirement, health concerns, or new opportunities. Some private practice physicians discover that academic or employed positions can present them with unique opportunities that are too good to pass up. In such cases where a practice must be sold in order to take a position, timeframe and pricing become crucial to realizing any potential value in the sale of the practice. Under normal circumstances the timeframe to sell a practice can be 9 to 12 months. Add-in other variables such as speciality and geographic location and the timeframe can become even longer. It is imperative that sellers be flexible on selling price and transition assistance, or risk realizing little to no value for their practices. Making such concessions can be difficult especially when a practice has good earnings and might otherwise warrant a premium from buyers under normal market conditions. In conclusion, sellers of private practices must allow enough time and be flexible to ensure that all their objectives are met prior to moving on to the new opportunity.