Physical Therapy Practice Valuation Appraisal of Value

There are many occasions when the valuation of your physical therapy practice value is important.
The most common are divorce, buy-in or pay-out, and sales.

There are a number of ways to perform a valuation of physical therapy practice value, including but not limited to:

(a) The Asset Approach,either adjusts the book value of the assets and liabilities to fair market value, or itemizes and values the individual items - which is often more accurate since abandoned items like old computers might still be on the Balance Sheet "books". It also includes the Excess Earnings Method codified in Revenue Ruling 68-609, for valuing intangible assets. It is more applicable to practices with a high amount of tangible assets, like radiology, rather than physical or occupational therapy. It is also used when no goodwill value is present, for example in physical therapy practices with inadequate income. You can think of asset valuation as "eBay value", which is where we commonly go to find market values of specific instruments sold at arm's length having allowed a wide market and time to sell.

(b) The Market Approach, including the Direct Market Data Method for closely held companies including physical therapy practices. The Market Approach applied to professional practices compares the subject to other practices that have sold.

(c) The Income Approach is a way of determining value by converting anticipated benefits into a current value. In other words, value is represented by the return on investment available above what you could earn through the result of your labor in simple employement. The IRS has published Business Valuation Guidelines in its Revenue Rulings 59-60 and 68-609 that clarify on the Income Approach. With slight modifications, those Rulings have become the standard for professional practice appraisal. The income approach results in a value that includes all tangible and intangible assets, including that described as goodwill. It does not separately seek to break out goodwill value, but to include it. The underlying concept is that when using income of the business as the approach for valuation, that income results from the value of both tangibles and intangibles together.

There is some confusion about including in the name of the "income method" a word or words which represents the stream of returns on earnings or income. These words have included the use of "earnings" (which excludes cash flow), "cash flow" (which excludes pure earnings), "discounted cash flow, returns, benefits, economic income", etc. Dividend-paying capacity is encouraged in Revenue Ruling 59-60 Dividend-paying capacity in medical practices is identified through the use of net cash flow after considering the equivalent market-rate compensation of the owner as if the owner were employed and the remaining cash flow was available to shareholders/investors.

"Goodwill" value is the area that generates the most controversy in physical therapy practice valuations. The value of intangibles, often described in a valuation as "goodwill", generally includes a favorable location; going concern value; use of seller's name; favorable leasehold; covenant not to compete; compensation for past managerial and entrepreneurial services; patient lists; credit records; patient care contracts; employee contracts; as well as assignment of future incomes from the practice. Goodwill value can be modified by a myriad of factors best determined by an impartial third party. Goodwill value is often also abused, at the risk of legal and tax complications to the buyer and seller.

(d) Rules of Thumb, such as "one times net", are virtually never used anymore because changes in the marketplace and the increasing diversity and complexity of the physical therapy marketplace have eliminated what minimal accuracy they might have once enjoyed. If any "rule of thumb" applies anymore, it is typically a multiple of dividends.

Practice Valuation

Practice valuation is an inexact science attempting to reach a value within a reasonable range; therefore, even knowledgeable people can differ in their opinions.

An important factor in professional practice valuation is why and how a value is achieved. Good reports generally contain background information and documentation so the protocols followed are clear, and data can be confirmed. The objectivity of an appraiser can often be determined by a close evaluation of his/her report, especially in comparison to other reports by the same appraiser.

If the result of your appraisal will flow through to your tax return, as it almost always does as the result of sale, buy-in, pay-out and divorce, you should use an IRS Qualified Appraiser writing a Qualified Report, typically to The Uniform Standards of Professional Appraisal Practice (USPAP).

You should demand to have the appraiser present the resources-used, the currency of his/her data bases, and the assumptions underlying the opinion. Many so-called appraisers appear to base their valuations on rumors and hearsay, with little-to-no substantiation of their opinions. I recently had a practice-broker tell me that the extraordinary value she placed on a physician's practice with her "appraisal" was based on "that's what the seller wants" (!).

When you ask "What is my practice worth?" a definitive answer may be elusive, but common sense, professional judgment and bonafide statistical analysis can result in a usable estimate.

Be aware that some states, notably Florida, require a state license to perform valuations, and it can be a thin line, easily crossed, into licensed practice brokerage activity for which even more states like California require a license, so don't be fooled by individuals saying they are a "transition consultant" or "intermediary". Its just like in physical therapy - you can be good, but without the state license, you can't bill for PT, no matter what you call it. (I'm licensed both in California and Florida, with reciprocal privileges in most other states).

 

Author Keith Borglum CHBC CBB is a medical practice appraiser with Professional Management and Marketing, 3468 Piner Road, Santa Rosa California 95401.

Phone 1-707-546-4433 for consulting and appraisal information.

Keith is one of the few consultants in America to be an IRS Qualified Appraiser and Licensed Business Broker specializing in healthcare and accepted at some point as a member of all of the following;
the Institute of Business Appraisers,
National Association of Certified Valuators and Analysts
National Association of Healthcare Consultants,
Society of Medical Dental Management Consultants (90-94),
American Medical Association's ConsultantLink© (93-05),
American Academy of Family Physician's Network of Consultants FPAssist (founding member),
American College of Physicians Consultant Network,
American Academy of Ophthalmology Executives' Consultant Network,
American Academy of Dermatology Residents' & Practice Management Faculty,
AAAAI Practice Management Faculty,
and the California Association of (Licensed) Business Brokers,

Permission is granted to reprint or quote any portion of this article provided that the author, firm, phone and city are named and two copies of the quoting journal are immediately mailed to the author at 3468 Piner Road, Santa Rosa CA 95401.


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