The Problem with "Rules of Thumb" in Valuation and Asking Price Determination of Healthcare Professional Practices
Healthcare business valuation is a widely discussed and contentiously debated topic among business appraisers, healthcare consultants, accountants, brokers, lenders, buyers, sellers, and various other involved parties. This is due to a combination of competing interests and general confusion when it comes to valuation and asking price determination. This phenomenon is not
uncommon in a field where seemingly innumerable variables exist in wholly different practice settings which can render even the best approach to valuation ineffective. With the inherent difficulty in accurately assessing the value of a healthcare practice and determining an appropriate price point which reflects market reality, the use of a "rule of thumb" as a substitute for due diligence can be severely problematic. Using an easily applied method in the absence of comprehensive data and analysis comes from the desire to simplify and compartmentalize complex ideas into bite-sized pieces. Rules of thumb are commonly seen as generalized ratios of earnings, price, overhead, financials data, or other key practice statistics. While potentially accurate over a large amount of aggregate data, the low volume nature of comparable healthcare practice transactions and comparables makes these rules of questionable effectiveness. In the hands of unknowlegable parties, they can be highly inaccurate and especially problematic when misapplied across different health fields (Valuing an optometry practice with a ratio used for medical practices is a common example). No ratios or rules can encompass the intricacies of multiple healthcare disciplines, specialties, market factors, geographic locations, valuation purposes, size/scope of potential buyer pools, economies of scale, or purchase price allocation. With the difficulty in accurately and rapidly determining practice value it is understandable that buyers and sellers of practices become frustrated and overwhelmed in the process. This can be resolved by hiring a professional who is aware of current trends and can assess a valuation project for the given purpose. This is the most crucial aspect in obtaining an accurate and relevant valuation that can be utilized to achieve a specific objective (business move, retirement, lifestyle change, divorce, etc....). Appraising a practice "in theory" without considering the moderating effets of true market dynamics is of little utility when a performance-based objective is involved.