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Contemporary practice values in a nutshell

ByJohn B. Pinto

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Forensic accountants are paid tens of thousands of dollars to opine on the market value of even quite small ophthalmic practices. If the stakes are high, as in contentious legal cases or deep disputes between partners, this formal treatment is certainly indicated. But for the majority of routine buy-in and buy-out transactions between companionate parties, the following thumbnail describes a reasonably approximate market value for the typical practice today.

1. There is rarely any dispute between buyer and seller with respect to the tangible value components. Such components are valued at fair market in the following typical manner:

1. Real estate, if present, is valued by a mutually agreed independent appraiser.
2. Capital equipment (medical and business equipment, computers, fixtures, furnishings, etc.) are valued based on their current market value. This is typically derived in one of the following two ways:
   • An appraiser with industry experience is called in.
   • A common “rule of thumb” expedient is employed, whereby all items are valued at their original purchase price, less 10% of the original price for every year in service, with a floor value of 20% of the original purchase price.
3. Accounts receivable are typically valued in one of the following two ways:
   • In the case of a doctor selling his practice to another doctor (as in retirement), accounts receivable are omitted and the buyer collects old accounts receivable on the seller’s behalf for a nominal 5% of the funds recovered.
   • In the case of the accounts receivable needing to be finitely valued, one typically multiplies the non-stale accounts by the practice’s historic collection ratio (typically in the range of 50% of the gross changes filed for payment by third-party payers such as Blue Cross or Medicare).
4. Medical supplies (drugs, disposables, etc.) are valued at their originally invoiced cost to the practice.
5. Marketable optical and contact lens goods are similarly valued at their wholesale price.
6. Working bank accounts and the like are valued as of the date of the transaction.
7. Items of a personal nature (art, furnishing, etc.) are omitted.
8. From the sum of the above value components, one then subtracts the practice’s liabilities: loans payable, trade payables, tax liabilities, etc.

2. The only commonly disputed value component is the goodwill value.
   1. It is generally still reasonable to assert a goodwill value for ophthalmic practices. Unlike orthopedic surgeons, who care for a patient’s acute needs with little ongoing care, ophthalmologists develop a longitudinal relationship with a patient base, which can last for decades.
   2. In the firm’s experience with real-world, consummated transactions, goodwill is still asserted and paid for in about two-thirds of all transactions today. Goodwill is completely absent in consummated deals about one-third of the time.
   3. When a goodwill value is paid, the average, usual and customary calculation is 50% of annual cash-basis profit available for MD-owner.
   4. This ±50% figure is adjusted downward in adverse settings — for example, where there are falling profits, contracts on the verge of being lost or the advent of material competition.
   5. This ±50% figure is adjusted upward in especially positive settings — for example, where profits are rising strongly, a new provider contract has been won or where there is a near-term opportunity for adding a profitable ancillary service.