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Determine the Fair Market Value of Your Practice

Physician Compensation & Recruitment, April 16, 2009

Increasingly, health systems are acquiring private practices. Accordingly, it's more important than ever for physicians to understand what their practice is worth. That means they must understand the concept of fair market value (FMV).

Valuations are crucial to crafting buy-sell agreements, mergers, and regulatory compliance. The most important thing to have before embarking on a valuation is a good set of statements and balance sheets, supplemented with good statistical information, says Martin D. Brown, CPA, a shareholder at Pershing Yoakley & Associates in Knoxville, TN.

For example, if the charges are $400,000 per physician, identify how many office visits that represents. "It helps you get your arms around what's driving the numbers," he says, adding that although one or two years' worth of data is required, three is ideal. Brown offers the following checklist of data requirements as a starting point:

  • Practice financial statements
  • Charges, collections, and adjustments
  • Accounts receivable and payable
  • Fixed asset schedule
  • Notes payable and lease obligations
  • Payer mix
  • Patient volume and number of active charts
  • Physician compensation and any discretionary expenses
  • Employee list, job description, tenure, and pay rate

FMV is driven by future earnings and the risk associated with those earnings, so forecasts and trends are important. "For example, there is a severe shortage of general surgeons," Brown explains. "That's a driver that would likely increase the value of that practice."

The situation might be reversed for cardiac surgery, where the demand for open-heart surgery is declining because of the availability of other therapies.

For the purpose of financial projections, it makes sense to project an increase in the patient bad-debt expense, given the current economy. It also makes sense to factor in an increase in certain supply costs. Given the current trends, a practice will probably want to project flat reimbursement rates into its calculation.


This article was adapted from one that originally ran in the April 2009 issue of Physician Compensation & Recruitment, a HealthLeaders Media publication.