Medical Practice Valuations
Professional practices are different from other business types and therefore present unique challenges to the appraiser. A profession is a vocation or occupation requiring special, usually advanced, education, knowledge and skill. The labor and skill involved in a profession is predominantly mental or intellectual, rather than physical or manual. The value of a professional practice is generally the sum of the physical assets and the intangible assets, of which the latter typically comprise the greatest contribution to the practice.
The intangible assets of a professional practice (often referred to as goodwill) consist of two types. The first is institutional in nature, since this is associated with the practice as a business structure. Also known as practice goodwill, this includes intangible elements such as business location, computer systems and library resources, operating procedures and policies, the presence of a trained and assembled support staff, and an established client base and the client/patient records that accompany same. The second, known as professional goodwill, is that intangible value primarily associated with the practitioner’s personal knowledge, experience and reputation (after deduction for a reasonable salary consistent with such knowledge, experience and reputation).
Professional practices are more complex to value than ordinary businesses for three reasons. First, since much—in some cases virtually all—of the value derives from the talents, knowledge and reputation of the practitioner, the very concept of value varies according to the purpose of the appraisal. If the purpose is for marital dissolution, the practice must be valued including the professional goodwill, giving attention to the age and health of the practitioner, his past earning power and his reputation for judgment, skill and knowledge.
Second, many factors influence the value of a professional practice. Some of the value drivers include: location and demographics; client persistence; degree of dependency on referrals and basis for said referrals; facilities and technology; work habits of the practitioner; and supply of and demand for acquirable practices. These and other potentially key factors may be especially important in distinguishing the value of a particular practice from its counterparts.
Finally, particular problems are posed by the fact that most professional practices use cash-basis accounting and are more constrained to a limited life than are most businesses. Professional practices are more dependent on one or a few individuals than is usually the case for most businesses and, as a result, the contribution of these individuals to the practice is an important factor in the valuation.
At SPARDATA we attempt to quantify the above factors, rather than use the prior sales transaction method to estimate intangible (goodwill) value.
