Practice Valuations What is Your Practice Worth?

Transcription

1 ACS Sponsored Practice Management Teleconference Series July 27, 2005 Practice Valuations What is Your Practice Worth? There are a few critical times in the life of any medical practice when it is vital to know the market value of your practice as a going business concern. These valuations are vital when bringing in new partners, discussing the acquisition or merger with another practice, preparing for retirement or in the unfortunate instance of divorce. In general it is quite difficult to measure the true value of a service business, including the practice of medicine. This course is ideal for physicians, surgeons and their financial advisors to get a full and better understanding of the complex elements going into the valuation of a medical practice. You ll learn when and how to proceed with formal valuations and what it takes to maximize the value of your practice. This Practice Management Teleconference is just $99 for ACS Fellows & their Practices: A 90-minute live teleconference including a formal presentation and time for Q&A The course is given twice, on Wednesday July 27th (convenient for your staff) and followed by an On-Demand version of the same program via the internet. Your $99 registration fee covers either one or both presentations and handout materials. The ability for ACS Fellows and practice managers to follow-up questions to Economedix Practice Management Advisors for personalized responses Sponsored by the American College of Surgeons Course Objectives - Completion of this Practice Management Course will provide: 1. A broad understanding of elements involved in a formal Market Valuation of a medical practice 2. Knowledge of when it is vital to seek a formal and professional valuation 3. Processes to use valuations whenever changes in ownership of the medical or surgical practice contemplated 4. A roadmap to defining ways to maximize the value of a medical practice 5. Case studies highlighting critical elements of practice valuations CME Certification Statement - This activity has been planned and implemented in accordance with the Essential Areas and policies of the Accreditation Council for Continuing Medical Education (ACCME) through the joint sponsorship of the American College of Surgeons and Economedix, LLC. The American College of Surgeons is accredited by the ACCME to provide continuing medical education to physicians. The American College of Surgeons designates a maximum of 1.5 Category 1 credits toward the AMA Physician's Recognition Award, for successful completion of this course. To earn the CME credits through the American College of Surgeons, the individual must dial into the teleconference, remain on the telephone line for the full 90-minute session, then complete the combination Evaluation / CME Form that will be included with the course materials. The Evaluation / CME form must be completed and FAXED back within seven days following the date of the teleconference. Faculty - The faculty for the course is Mr. R. Thomas (Tom) Loughrey, MBA. Mr. Loughrey is CEO of Economedix and a noted practice management consultant to physicians, medical offices and medical societies. For over a decade, Mr. Loughrey has provided consulting services to the College as a part of the Consultant s Corner at the annual ACS Clinical Congress and regularly is engaged by ACS to speak and teach at meetings and workshops throughout the country. Registration & Information - This completed form can be Faxed Toll Free to ; or mailed to Economedix William Pitt Way - Pittsburgh, PA 15238; For complete details and secure On-Line Registration simply go to: Thank you for your interest in this Program! Practice: Address: City: State: Zip: Contact: Phone: Fax: PM Program: [ ] Practice Valuations What s Your Practice Worth? we plan on attending the following: [ ] Wed July 3 PM Eastern, [ ] On-Demand Course or [ ] Both Presentations. Form of Payment: [ ] Check Payable to Economedix, LLC & mailed to: 297 Valley Rd. # Wexford, PA or [ ] Credit / Debit Card (MC, Visa, Discover or American Express) Card Number (15 or 16 digits): Expiration Date: / Name on Card:

2 American College of Surgeons Practice Valuations What is Your Practice Worth? Dates: July 27, 2005 EVALUATION / CME FORM NAME: Telephone #: ACS Fellow #: Address: Please circle one number for each statement Strongly Agree Agree Neutral Disagree Strongly Disagree 1. Program topics and content were consistent with printed objectives Program topics and content was relevant to my educational needs Presenters were informative and added knowledge to the session Discussion time was adequate and enhanced understanding of subject Acquired knowledge will be applied in my practice environment Supplemental written materials helped clarify course content I will seek additional information on this subject Very Good Good Fair Poor Very Poor 8. The quality of the audio presentation was Overall this Practice Management Course was General Comments for this Course: Surgical Specialty Years out of Residency Training Primary Type of Practice [ ] Colon & Rectal Surgery [ ] Pediatric Surgery [ ] 1-5 [ ] Private Practice [ ] General Surgery (includes Oncology and Trauma) [ ] Plastic Surgery [ ] 6-10 [ ] PPO/HMO [ ] Neurological Surgery [ ] Thoracic Surgery [ ] [ ] [ ] Obstetrics/Gynocological Surgery [ ] Urological Surgery [ ] [ ] Group Practice Academic Institution [ ] Ophthalmic Surgery [ ] Vascular Surgery [ ] Over 30 [ ] Hospital [ ] Orthopaedic Surgery [ ] Other - Please Specify Below: Military [ ] Otorhinolaryngology Other - Please Specify Below: Please FAX this Evaluation / CME Form Toll Free to: within 7 days following this Teleconference to receive CME recognition from the American College of Surgeons. Thank You!

3 Sign In Sheet Educational Activity: Practice Valuation What s Your Practice Worth? Dates: July 27, 3 PM Eastern Faculty: R. Thomas Loughrey, MBA, CCC-P of Economedix, LLC Sponsor: The American College of Surgeons

4 Practice Valuation What s Your Practice Worth?!" # $%&' % ( # )$ *!*+, (,- # -*+!,.,, # ). ) %. % #, ) + )/)*-)!,* #, ) %' # 0.,%!12+ +, ) Reasons to Value Your Practice The Purchase or Sale of The Entire Practice The Purchase or Sale of a Portion of The Practice The Allocation of Equity in a Merger The Asset Allocation in a Dissolution Estate Tax Planning 1

5 Reasons to Value Your Practice Financing Collateralization Marital Dissolution Claims of Fraud or Misrepresentation Following a Purchase Bankruptcy Compliance With Buy-sell Agreements What Drives Value In a Practice? Location and Demographics Patient Persistence Dependence on Referrals Vs. Direct Patient Contacts Contractual Relationships Supply and Demand for Similar Practices Reputation What Drives Value In a Practice? Facilities and Technology Employees Physician s Work Habits Proportion of Business From Nonassignable Contracts (Managed Care) Potential for Ancillary Income 2

6 What Are The Practice Assets? Tangible Equipment Supplies Real Estate Leasehold Improvements Cash Net Receivables Intangible Assets Contracts Patient lists and database Telephone number Favorable leases/location Trained and assembled workforce Goodwill What Is Goodwill? Tends to be personal and may vary from one partner to another in a group Varies with the ability and willingness to transfer the goodwill from the seller to the buyer Requires the seller to be cooperative in introducing the buyer May take time and may vary depending on the nature of the valuation (such as a marital dissolution) Elements of Goodwill Earnings levels that can be expected in the future Competition Referral base Patient typology Work habits of the physician seller/buyer Fees earned compared to others Location of the practice Employees General marketability of the type of practice being sold 3

7 Future Earnings What makes up the earnings or lack of them in the practice currently? How does the physician s income compare to the incomes of similar practitioners? What has been the historic growth of earnings? Will that rate continue? What environmental economic conditions can influence future earnings? Competition How does the supply of physicians in the specialty in the area compare to national norms? What Are the demographics of the competing practices? What niches are underserved in the population and how is each competitor positioned for them? What market advantages and disadvantages exist for the practice? Referral Base What is the source of the current patient base? What is the status of the referring practices? What is the size of the referral base? What percent of patients are directed by their insurance plan to the practice? Is the contract assumable? 4

8 Physician Work Habits How closely matched are the buyer and seller in terms of their work habits? How closely matched are they in terms of their practice style? (Bedside manner) Is there room for differences? What type of patient is attracted to the practice? Financial Performance What percent of fees are collected (gross and net)? What is the delinquency rate on the receivables? How many days of charges are in the accounts receivable? How does all this break down by payer type? Practice Location Convenience for patients and doctors Aesthetics of the location Proximity to referral base Desirability of location for buyer s residence Community demographics 5

9 Employees Can be a plus or a minus Creating a knowledgeable and trained workforce is time-consuming and expensive How long have employees been on the job? What is the likelihood they will stay? What are their pay and benefit levels? What contracts do professional employees have? Do the employees own the goodwill or does the seller? Marketability How easy is it to enter the specialty in this locale without a purchase? What is the economy like in the area? What is the overall demand for the specialty in the area? Are other practice opportunities available in the same area? Valuation for Marital Dissolution Practice is not being sold so some factors in valuation are not considered (referrals for example) State court rulings require Goodwill be valued as part of practice assets (Lopez v. Lopez). Considerations include: Age and health of physician Demonstrated past earning power Professional reputation Comparative success Nature and duration of the professional s practice. 6

10 Valuation Methodologies Income Approach Discounted Economic Return Capitalization of Economic Return Market Approach Multiple of Revenues Comparative Transactions Asset Based Approach Capitalized Excess Earnings Asset Accumulation Discounted Economic Income Focuses on the differences in Net Cash Flows Assesses the difference between buying a practice with a known cash flow or just starting a practice from scratch Value is the net present value of the annual differences in cash Capitalization of Economic Income Focuses on the capitalization of pre-tax earnings after a fair salary is allocate to the physician and, Total earnings including the physician s salary The capitalization rate will be different for each method Requires astute determination of the capitalization rate and careful analysis of economic capacity of the practice. 7

11 Multiple of Revenues This has been used often because of its simplicity It should not be used alone and is frequently calculated after another valuation methodology is used This method is often used to compare practices for sale. Comparative Transactions This is not a formula in itself It places a value based on the valuations of other similar practices It assumes the practice in question is typical It usually compares the practice on the basis of multiples of revenues. Buy-ins often use a comparative methodology based on the buy-in formula from others in the group. Capitalized Excess Earnings Often used in Marital dissolution valuations Calculated based on Total Earnings Total earnings includes: Net income of the physician including salary and benefits plus Nonrecurring expenses less nonrecurring income plus Excess expenses not related to the generation of practice income. Compare the Total Net income to the Net asset value of the practice using an industry rate of return. 8

12 Capitalized Excess Earnings Example: Net Asset Value of $300,000 Earnings of $200,000 Return of 15% Earnings attributable to assets (.15 X $300,000) $45,000 Excess Earnings: $155,000 Capitalization rate of 25% ($155,000 / 25%) $620,000 Asset Accumulation This is another way of saying the value of the practice is the adjusted net worth of the practice considering tangible and intangible assets Requires accurate valuation of tangible assets and accurate evaluation of the intangible assets such as goodwill Rule of Thumb Methods The most common methodologies are comparatives using The Goodwill Registry It categorizes total intangible value as Goodwill Expressed as a percent of Revenues For example, Average Goodwill reported for General Surgery is 29.04% of revenues 9

13 General Surgery Example Revenues of $800,000 Goodwill value of $232,320 (.2904 X $800,000) Net value of tangible assets: $200,000 Value of collectable A/R: $120,000 Total Value of the practice: $552,320 This method is often used as a simple way to determine value for a buy-in or buy-out It also used as a quick method for determining the value of two groups that may be merging so as to determine equity differences among the principals. So How much is your practice worth? The answer is It depends Why is it being valued? What is the purpose? What are the circumstances? What is the time-frame? What are the numbers? Thank you for participating in this seminar presentation from!"#$ %& 10