What is my practice worth?
What is my practice worth? This is a question that doctors and other healthcare practitioners confront at various times in their medical careers. Unfortunately, we tend to think about this question not on a continuum but at inflection or crisis points in our practice history. Examples include entering a new practice, moving from a paid employee to partner (with or without a $ buy-in), retirement from a practice, sudden loss of a partner, and sale of the practice to a hospital system or other business entity.
At these critical times we are often faced with the need to obtain a quick valuation of our practice from a reputable source such as an accounting firm or other industry consultant. These consultancy services can be very costly but are often necessary to show an ‘independent’ assessment of the value of the entity so to maintain the good will between the negotiating partners.
It is essential for practitioner-owners to consider the valuation of their medical practice on a frequent basis and not just at the time of a crisis. Knowing what drives the value of your company will also create opportunities to accelerate the growth of your business through targeted marketing efforts, creation of new business verticals within the practice, and other measures.
As an example, we recently reached a time when our newest partner was scheduled to ‘buy-in’ to our Ambulatory Surgery Center (ASC). We were excited to include him as a partner in our ASC as he had proven himself to be and exceptional physician and an excellent business associate.
The first step in determining the dollar amount of his buy-in was to obtain valuation parameters for the ASC. What was our center worth and how do we assess its value? (Figure 1)
Our first stop was to approach our ASC business partner Amsurg for their input. They conducted a review of their recent GI ASC partnership transactions. Amsurg co-owns 185 GI ASCs nationally, so their experience is deep in the area of physician ownership transitions. They indicated that the going range for their ASC valuations was based on a multiple of earnings (EBIDTA) ranging from 3.5 to 8 times EBIDTA.
Of course, we wanted something more formal in order to make a decision that would be acceptable to all parties. We hired an accounting firm to perform a ‘formal’ assessment of the value of our ASC. In this very formal document they listed the various methods used to value an ASC. Included was a market-based valuation based on a multiple of EBIDTA (6.5 to 8 X). Interestingly, they chose a more complex method known as income-based valuation as the primary endpoint for their research. This is calculated based on the expected income (cash flow) of the entity discounted to the present value at a risk-adjusted rate. The cost of this very nice, formal document and consultant services was approximately $12,000!
As it turns out, the transaction data for ASCs is widely known and published. The going rates are determined by market-based valuations at 6.5 to 8 X EBIDTA.
So what did we learn from this exercise? We should have done the research necessary to make ourselves comfortable with using market-based methods to determine our ASCs valuation as we could have saved $12,000 on consultancy fees. Additionally, we were reminded that the value of our ASC was directly tied to the centers profitability. As it turns out, for every $1 increase in profit the value of the ASC increases by $7. This has inspired us to consider all avenues that can improve our centers profitability (Figure 2).
It is critical for practitioners to consider practice valuations at all stages of their company’s history and to frequently assess the value drivers in their particular practice. Knowing these parameters will make physician transitions smoother and help to maintain focus on the valuation drivers of the business.
ASC Valuations Questions
- What is the value of my center?
- How is valuation best calculated?
- What are the range of valuations and trends with other Amsurg partners?
- How do we factor in ‘sweat equity’ into the buy-in equation?
- How do we gauge our $buy-in based on historical buy-ins of other partners?
- Is a formal valuation of our ASC necessary and worth the cost?
- How do we enhance the value of our ASC?
- How does a retiring physician exit an ownership position in an ASC
ASC Valuation Drivers
- Improve managed care contracts
- Recruit new physicians
- Case cost: know the cost and reduce it
- Improve billing and collections
- Create new ASC revenue vertical