2011 update: Goodwill value is still there in many successful practices, but you need to accurately value it. And payment for goodwill value by a hospital is not per se illegal to my understanding (I don't render legal advice - ask your own attorney - but not the hospital's attorney), it just can bring closer scrutiny by the Feds - which many hospitals wish to avoid. (and who can blame them?) The Goodwill Registry is a tool, like a scalpel. It has value when used correctly, but can be harmful when used incorrectly. The most-commonly used Registry report is a simple printed report that presents goodwill value as a percent of the average of the past 10 years' collections by specialty, but this view can be very misleading to the uninformed reader relying on it for valuation. As an example; blindly applying a median goodwill:revenue ratio of 25% to two practices, each with $1,000,000 in collections, with one being a well managed cash-practice in an excellent location with a $500,000 profit, and one a poorly managed Medicaid practice in a terrible location with a <$100,000> loss, yield the same goodwill:revenue value; which is clearly illogical. The simple view of Registry sales data also does not identify historic trends; up or down, even though many specialties that are heavily dependant on Medicare -and PPOs that base reimbursement on a percentage of Medicare- have been hurt by broad reimbursement cuts since 2004. In addition; specific code reimbursement -like what has happened in Mohs surgery, ophthalmology, allergy, cardiology, and other specialties- have further reduced reimbursement and profits during the past decade. It is erroneous to think that current business value in a market that has fallen has the historic average value. For example using the stock market as an illustration; a stock whose value has fallen from $10 to $3 over the past decade does not currently have the average or median value of around $6. It has a current value of $3. The Registry data also includes non-sale data that should be excluded in fair-market-value valuations; like data for tax-settlements, estate-planning, divorce, litigation, and other undisclosed non-sale reasons. We should also exclude any data that has been "tainted"by any underlying relationship or intent of the parties that involved any expectation of referral, or Stark violation, or Anti-Kickback violation. Another weakness in simply using the goodwill:revenue data is that it excludes all transactions with zero ($0) goodwill value from the median or averages; which range as high as 28% by specialty. Also, subspecialties are not always segregated, nor are "cash-practices" identified. Upon expert analysis, we find that a mere application of the average goodwill:revenues value of the past decades' transactions has minimal-to-any relevance to a specific practice situation, except by chance. Many people confuse the concept of "sociological goodwill" with "financial goodwill". I am frequently asked by sellers why their practice has little-or-no dollar-value of goodwill, when they have an excellent reputation, a large patient following, and have poured "years of blood, sweat and tears" into their businesses. The answer is that if the sociological goodwill doesn't demonstrate itself in dollars (SDE or dividends), then the sociological goodwill has no measure or value when measured in dollars. According to valuation principals, an intangible asset needs certain characteristics to have value. "It should generate some measurable amount of economic income to its owner. This economic benefit could be in the form of an income increment or a cost decrement. There should be a specific bundle of legal rights associated with the existence of the intangible asset". So as long as your practice meets the proper criteria, it may well have some goodwill value. Keith Borglum, medical practice valuation author and lecturer Certified Healthcare Business Consultant Certified Business Broker Licensed practice broker and appraiser more on this topic at http://www.MedicalPracticeAppraisal.com
Appraisals: What’s Your Practice Worth?
Appraisals: What’s Your Practice Worth?
How much is your practice worth? Often, it depends on who wants to know and why.
Practice valuation professionals — often CPAs with specialized training — follow different tacks depending on whether a practice will be sold to another physician, valued for a divorce proceeding, or if practice partners just want to go their separate ways.
The traditional building blocks of practice value are:
- Hard assets — equipment, facilities, supplies, patient records (the cost of the files themselves, not the information in them), etc.;
- Cash — what’s left after expenses, including physician compensation;
- Accounts receivables — money due for professional services; and
- Goodwill — anything paid above the value of hard assets, cash, and A/R.
Appraisal professionals can follow several pathways to put a value on these four items. The market value approach — what other practices in the area sold for recently — is dandy for houses. But it can be an exercise in uncertainty to compare medical practices in different parts of the country.
Another approach is to try and project future cashflow, the component most important to business investors. While it works well for many types of businesses, cashflow valuation is of little help to the typical medical practice owner. Most have little cash left after paying for overhead expenses and physician compensation, explains Jim Sacher, a CPA with the accounting and consulting firm Skoda Minotti.
“Partners tend to take whatever’s left after expenses as their compensation,” he says. “If physician compensation is set at a fair market level for the same area but there’s never any cash left at the end of the year, then what’s it worth to an investor?”
Sacher explains that unless a physician earns substantially more than the fair market rate for his or her specialty and the area, that money is physician compensation, not profit. That’s why figuring in goodwill — the ability to make profits — historically was a major component in determining practice value.
That’s changing.
Goodbye, goodwill
Reed Tinsley, a Houston-based CPA, says goodwill isn’t that useful anymore as an indicator of what a practice will sell for. It’s losing ground because hospitals are moving back into practice-purchasing mode. They are setting the standard.
“Goodwill is tied to the performance of the practice,” Tinsley says. “The hospitals are now saying, ‘Why should I pay for that performance upfront when I can get you on the payroll for a small amount, see how your practice goes and pay you through compensation with performance incentives?’”
There’s another reason that hospitals won’t offer any goodwill for your practice: the Feds. Thanks to the Stark and anti-kickback laws, this intangible form of measuring the new owner’s profit opportunity just sounds too much like paying for future referrals. And that’s strictly forbidden.
Unfortunately, the practice values that physicians assumed would still apply when they were ready to sell were built on the concept of goodwill. Without it, the value of a medical practice is primarily found in its tangible assets: equipment, supplies, facilities, furnishings, etc. And those values depreciate during the valuation process, often by using a 10-year scale that leaves just a fraction of the original value after a decade of use.
Wait, you may be saying, ‘I have lots of patient records and very nice accounts receivable (A/R) to pass on to the new owners.’ Sorry. You’ll probably need to collect that A/R yourself — most buyers aren’t interested in handling your collections. Besides, you may need it for payables, like existing leases, if the purchaser doesn’t want them either.
As for medical records, don’t expect a windfall. Sacher says the Internal Revenue Service’s guidelines for setting medical record values between $12 and $22 is fairly accurate and widely followed. That’s about what it would cost in staff time and materials to rebuild the paper file. So, a family physician with 3,000 active (no more than three years old) patient records might hope to get $66,000 from a very generous buyer. Other specialists may be able to get credit for records as old as five years. All the same, buyers know that in most communities patients can choose other physicians and that insurance plan changes may steer them to find other providers anyway. Besides, in a legal sense you don’t really “own” your patients’ medical records, they do.
With goodwill off the table and cashflow equations usually of little help in establishing value, physicians must carefully scrutinize any valuations made of their practices. As they do, it helps to seek expert advice to be sure that every credible shred of value is accounted for.