Medical practice valuations are quite common and may be undertaken for a number of reasons, including:
- For Family Law Court purposes, where the medical practice becomes part of the joint assets of the husband and wife, which need to be divided between the parties.
- To confirm the asking price of the seller in a private sale. The buyer may be an outside doctor or perhaps an assistant already working within the practice.
- For stamp duty or capital gains tax purposes when restructuring the ownership of a medical practice.
All valuation reports should:
- Outline the purpose of the valuation
- Outline the date of the valuation
- Present at least two methods used in determining the practice value
- Be signed by the valuer.
In each case, the total value of the practice includes the goodwill and the tangible assets. The valuation method used and results obtained must be consistent with the market expectation and sales evidence. The traditional valuation method of medical practice goodwill is based on a percentage of annual gross fees of the practice.
Practice Market Value
Practice market value can be determined through:
- Capitalisation of “Earning Before Interest and Taxation” (EBIT)
- Future Maintainable Earnings (FME)
- Super Profits.
The scope, complexity and purpose of valuation will determine the methods used.
The multiples of pre or post-tax profits are reflective of expected market return on investment, considering the risks of buying the practice and maintaining the income and profits. The risk is assessed by the valuer through a comprehensive SWOT analysis. As the tangible assets are easily defined and listed, placing a realistic value on them is not too complicated. Goodwill is not as easily valued, however, as it is so intangible and its perception is influenced by various market pressures and expectations.
If the valuation is undertaken where there is no intention to actually sell the practice, the value to the principal/practice owner is determined using the Super Profits method. Goodwill is established as a separate component of the total practice value and it actually calculates the goodwill value of the practice to the principal. The “super-profit” is the difference between a principal’s earnings (“operating profit”) and what they would earn as a locum or assistant (“‘notional salary”). The “super profit” amount after being taxed at 46.5%, is referred to as the “after-tax super profit” of the practice. This super profit is then multiplied by a factor of between one and five, depending on the results of the SWOT analysis, with the resulting amount representing the total value of the practice. Goodwill value is then calculated by subtracting the value of the tangible assets.
Goodwill valuations of solo businesses, associateships and partnerships are undertaken under the traditional method. This method is used in the valuations of private sales and ownership restructuring in smaller to medium-size practices. Sales evidence and its interpretation form the whole basis of valuation, as it is the only real evidence of actual sales achieved. It’s important to understand that a goodwill valuation may not always be indicative of the final price negotiated and paid. In the process of negotiation, quite often a larger proportion of the full price is attributed to the tangible assets and less to goodwill.
Medical practices are already grossly undervalued in terms of other businesses. On this basis alone, it is unfair to negotiate a seller down even further below an independent valuation from a reputable registered valuer who specialises in the medical market.