Physician practices are typically appraised using one of two methods, the discounted cash flow (DCF) method of the income approach, or the adjusted net assets method of the cost approach.
Under the DCF Method, value is measured as the amount of income that is expected to be earned through ownership of the practice after paying all expenses, including a market level of physician compensation. In developing the DCF models, key assumptions that drive value typically include (but are not limited to):
- Overall revenue and profitability trends
- Diversification of physicians, medical specialties, and/or service lines
- Presence and utilization of midlevel providers (NP, PA)
- Existence and profitability of ancillary services (e.g., imaging, lab, etc.)
- Payor mix and reimbursement rates
- Staffing levels and retention rates
- Revenue model (e.g., FFS, managed care, concierge, etc.)
- Expected continuity of providers and staff
- Physician compensation model
Under the Adjusted Net Assets Method, all of the assets and liabilities held within the practice are restated to market values. Therefore, key value drivers under this approach include:
- Age and composition of tangible assets (equipment, buildings, furniture, etc.)
- Existence and value of identifiable intangible assets (e.g., trade name, favorable contracts, assembled workforce, etc.)
- Expected continuity of providers and staff
- Amount of debt and other contractual liabilities (if debt are to be assumed)
Practice valuation involves a myriad of variables and can often result in a wide range of opinions on value based on the models used. Ultimately, the most important factor to consider is selecting the right source to successfully appraise your practice so that you arrive at an accurate fair market value.
At Root Partners we specialize in helping physician leaders successfully navigate business and employment transactions to that their value is fully realized. If your organization needs help conducting a valuation for your physician practice contact us.