How are physical assets valued in a medical practice?
A medical practice has various components of value, some more apparent than others. The primary aspects which usually come to mind are the tangible assets comprising medical equipment, inventory, leasehold improvement, personal property, etc. However, the main component of value in a medical practice is typically the goodwill intangible assets which cannot be readily observed. Intangibles may be the product of the existing patient base, earnings, staff and systems in place, among other things.
Intangible assets are not always easily identified, but are commonly the most valuable assets within a medical practice. For most closely-held medical practices this is usually a product of the personal goodwill of the provider or the enterprise goodwill of the practice. Mostly it is a reflection of the continued patronage of patients and the resulting earnings or cashflow which arise as a result of this. Other intangibles which are not commonly seen in medical practices, but can exist, include patents, trademarks, and branded services or products.
A major determinant of how marketable a practice might be to potential buyers is the proportion of value present in tangibles versus intangibles. While some may argue that goodwill or intangibles are difficult to justify, a confluence of evidence suggests otherwise. Medical practices and clinics routinely sell for amounts above and beyond the market value of the tangible assets present within them. Large premiums can even be reached beyond market “norms” for practices with substantial earnings, market share, favorable contracts and other competitive advantage in certain markets. From a valuation perspective, tangible assets may be more important in a practice with a larger proportion of hard assets than income-driven value measured in cashflow or earnings. In an income driven practice the tangible assets are usually considered part and parcel of the entire practice value including intangibles, unless a method (such as the excess earnings method) can be used to separate the two. However, per IRS guidelines the excess earnings method is not favored if a better method is available.
From a practical standpoint the tangible asset value in most medical practices is of greater relevance when a different premise of value is used. As outlined by Pratt (2008), the four premises of value are: 1) Value as a going concern 2) Value as an assemblage of assets 3) Value as an orderly disposition and 4) Value as a forced liquidation. Unless a medical practice is being sold and purchased under a premise of value other than value as a going concern, the independent value of the tangible practice assets are usually of less concern. From an operational standpoint the buyer may certainly want to know the economic life of the medical equipment in order to apportion for future capital expenditure, but from the perspective of a transaction the physical assets be of less importance overall. As with any such transaction, it is important get a medical practice valuation which evaluates all the components of value within the specific context.