Knowing value of practice assets can help grow your business

Practice owners should buy and maintain equipment with an eye to its long-term value.

A note from the Section Editor:

Whether you are selling, buying or buying into an ophthalmology practice, there are several value components to consider. The real property, equipment, furnishings and related tangible value elements of a practice are less-frequently disputed than the “goodwill” value, which has come under considerable assault in recent years.

John B. Pinto

Because of this, I find it is more important than ever for both sides of a transaction to find a starting point in negotiations where they can get to “Yes,” and the value of the practice’s tangible assets is an excellent starting point.

In finding a point of common agreement, the services of a professional appraiser are invaluable. If necessary, rather than applying rough “rules of thumb,” the appraiser can resort to real-world, comparable market values. Once these are nailed down, and one component of the total transaction value can be agreed upon by the parties, it can make the final arm-wrestling on the intangible, goodwill component much more genteel.

Jim Hamlett’s excellent discussion here will not only give readers a better appreciation for the process of asset valuation, but for the many other applications of these determinations.

Jim has many long years of experience not only in asset valuation, but also in ophthalmic valuations. His sense of historic trends and his understanding of which equipment holds its value are also of interest to doctors contemplating new purchases.

John B. Pinto
OSN Practice Management Section Editor

Regardless of the path your career may take, you are building a business for yourself and your family. The day you purchased your first piece of equipment, you started building value in your practice that will continue as long as the practice exists.

How much value? That depends on several factors. Knowing the value of what you have built and how to care for it are important for the growth of your practice and your business. This article reviews how to assess the value of your practice assets and how to maintain that value.

It is important to remember that value does not equal price. You maximize the value of your business by obtaining equipment that is the best value, not necessarily the equipment at the best price, and you maintain that value by caring for the equipment with continued preventive maintenance and cleaning to keep it in good shape.

Did you purchase the best available piece of equipment or the best priced? Is it cleaned and adjusted on a regular basis or only when it is in need of repair? Is it kept covered when not in use? Was it purchased new or used?

These are questions that any physician who wants to know the bottom line values of his or her practice assets must ask. Every item purchased — from the slit lamps in the exam lanes to the chairs the patients sit on in the waiting room to the copy machine paper — is an asset that adds dollars to the bottom line of your practice.

Acquisition

When you are considering purchasing a piece of equipment, think about long-term value, not short-term economy. In the long term, the better the equipment, the more value it will hold for you down the road when you sell or bring a partner into the practice.

Jim Hamlett

Take a slit lamp as an example. There are a range of choices available, from expensive models that are considered the standard of care to more economical basic units. Buying a good name-brand piece of equipment will save a lot of money in the long term and provide the quality you want. If you are buying a used instrument, be sure it has been well cared for.

When buying an instrument from another physician, you are more than likely to be on your own after the purchase, so inspect it carefully. If you are not able to inspect it, ask for a money-back guarantee that everything works properly. Stipulate that, if everything does not work, the seller will pay for a technician to come fix it at no cost to you. Get this agreement in writing to avoid confusion later.

If you are buying from a used equipment dealer, get a 6-month warranty with everything spelled out and agreed to. Once again, get it in writing.

Maintenance

Equipment needs preventive maintenance on a regular basis, just like the car you drive. Even the slightest bump can create a misalignment of optics, or a jam can occur due to dust collection on a part. Regular cleaning by a knowledgeable technician will extend the life of your equipment and keep it operating at peak efficiency when the patient is in the exam chair.

Have your techs wipe down all diagnostic equipment and make sure it is covered completely each day. Twice a month, have them give each piece of equipment an exceptional cleaning, even using cotton-tipped swabs to get into corners and hard-to-reach areas.

A thorough cleaning and alignment on an annual basis by a qualified technician is recommended to keep everything in proper working order and to avoid expensive repairs. Also, keep an ample supply of bulbs and batteries on hand, as you can count on needing them when you least expect it.

Selling

The time may come to sell your practice assets to another physician or to sell everything to a used-equipment dealer if the practice is being dissolved.

When selling one’s entire practice assets to another physician, the total value of all assets must be determined. This includes both hard assets (equipment, supplies and furnishings) and operational assets (practice management system, telephone operation system, security system, etc.).

The perception of everyone involved in a negotiation is that you can always buy at a lower value and you can always sell at a higher value. For this reason, it is wise to have an independent source determine the asset values.

When the asset value has been determined, you can use it as a negotiation tool between you and the seller. Use mediation to come to an agreement if necessary.

Merging practices

Two or more physicians can merge their practices, combining all assets to become one entity and forming a partnership. Assets include all items that are owned by each practice, from the chairs and stands in the exam lanes to the brooms and dustpans in the closets.

Each item in each location must be valued in the same terms, whether wholesale, retail or fair market value. If the appraisal is conducted in wholesale terms, make sure your accountant understands that the format is wholesale for business purposes only, not for insurance value. Valuation at the lower wholesale prices could present problems later, should a claim need to be filed with an insurance company.

Retail, wholesale, fair market value

Retail value is the price that would be paid for a piece of equipment through a distributor. This price includes the cost of the equipment plus profit for the distributor, commission for the salesperson and sales tax for your state.

Wholesale is the value of the item excluding profits, commissions and sales tax. If you are selling an item to a used-equipment company for resale, be prepared to be offered the lowest dollar amount possible so that the company can maximize its profits. Keep in mind that this figure is negotiable.

Fair market value is the dollar amount at which the item would be transferred or valued between two practices in a merger situation. Fair market value is determined by four criteria:

• Age of the item
• Operational condition
• Cosmetic condition
• Availability in the market

To return to our example, the retail value of a brand-new Haag-Streit R900 slit lamp is about $10,500. The wholesale or distributor’s cost is in the area of $8,000 to $9,000.

Fair market value for an R900 slit lamp in used condition would be somewhere between those two values based on the criteria listed above. An R900 in pristine condition that has been well cared for should be valued at about $8,500 to $9,300.

Pristine condition describes an instrument that is maintained on a regular basis by cleaning and covering and remains mostly scratch-free.

Haag-Streit slit lamps are among the best, and few are offered for sale, so for these instruments market availability helps maintain their value. Market values for less expensive and lower-technology models of ophthalmic equipment will drop, so invest in quality for long-term value.

Buying, selling used equipment

When you are adding equipment to your practice, consider buying from a used equipment dealer, but make sure you are dealing with a reliable dealer. Ask other physicians who they recommend. Look for a dealer who will support what he sells you in the event of a problem. Get everything in writing.

Selling used equipment is easily done by contacting equipment dealers, putting ads in professional journals or even listing it on eBay.

A little tender loving care will help extend the life of an office asset and maintain its value, which will pay off in the future. You don’t need a piece of equipment sitting in a storage closet waiting to be repaired.

Whether you are selling, buying or merging practices, take your time and do it right. This is your practice … and your life.

For more information:

• Jim Hamlett, the owner of Asset Appraisal Service, has been involved in the medical equipment and supply field in sales and management for 31 years and has been conducting appraisals on medical practices for 17 years. He can be reached at Asset Appraisal Service, 8905 Kingston Pike Suite 12-252, Knoxville, TN 37923; 865-250-1855; e-mail: appraise100@aol.com; Web site: www.assetappraisalservice.com.