Over the past eight years or so, hospitals and large medical groups have bought up many solo practitioner’s practices. For those still holding out on their own, it can be rare to find one that is profitable.
To ultimately succeed, a business must do, or offer, three things:
- A product that is desired in the marketplace
- Make a profit
- Be well positioned for 3 or 4 years down the road.
Terry Flanagan of Circumference Valuations in Sarasota, Florida, says he assesses these three issues when he’s carrying out a valuation of a practice. “I look at their books to see if I can find consistent income and I check their revenue history to see if it’s growing or declining. If it’s declining, is the practice losing value? I check their profit margins and see if they make sense. They could be using the practice as a piggybank to support their lifestyle. If the doctor is elderly, is he seeing fewer patients? Is the doctor running the practice efficiently?”
He maintains there are a variety of reasons why a doctor may want a business valuation:
- To sell it
- A divorce
- Partner buyout
- Gift tax
- Estate tax
Flanagan often submits an eight-page questionnaire to the doctor based on their specialty. Questions cover salaries, non-operational expenses, cash flow, size of space, number of exam rooms, whether there is an X-ray machine or lab onsite, type of employees, and number of patients. He needs to find out if the doctor is paying himself at the market rate and if he’s paying his staff at the market rate too. He’ll ask how quickly their insurance claims are accepted: For example, “What’s your first pass insurance rate claim?” He also looks at demographics, such as the average rent for a location in that part of town, and the value of assets, such as equipment, supplies, and furniture. Then, within a week, he’ll write a report with the results.
At the end of the day, revenue at a medical practice comes from the physician’s knowledge, skill, reputation, and personality.