How Much Is My Practice Worth? Part 4: The Asset Approach
July 1, 2009

In our final installment of our discussion of physician practice value, we will take a look at the last of the most commonly used methods that may be used to measure the value of a practice. As a reminder, we’ve already covered the Market Approach and Income Approach. This month, we are covering the Asset Approach to value. The asset approach measures the value of an entity as a function of the value of the assets being acquired.

The asset approach is typically a method of that yields the least amount of value, as it would follow that a business should be worth at least as much as the fair market value of its various assets. Many times however, this method is the most appropriate in valuing a physician’s practice when:

there is a lack of sufficient market comparable data, and

the present value of the practice’s cash flows is less than the net value of the practice’s assets.

As described in our discussion of the market approach, there is typically little reliable data available to base a “market comp” for valuing any closely held business. Additionally, in our discussion of the income approach, closely held entities generally pass any net income at the end of the year on to the owners of the business in order to avoid paying taxes at the entity level. This results in little or no cash flow for the business, and as a result the business usually has little worth under the income method.

It is for these reasons that a physician’s practice may be best valued using the asset approach. So what does this mean exactly? Practices typically have some amount of medical equipment, office furniture, supplies, etc. which logically have some intrinsic value. This value may be determined by using an independent appraisal if there might be a significant amount of capital equipment used in the Practice (e.g. MRI, X-ray, Ultrasound, etc.). If the amount of equipment is limited to office furniture and miscellaneous office equipment, it may be more cost effective to rely on the practice’s depreciated book value for these items.

Sometimes it is appropriate to assign some value to the intangible assets of the practice as well. Depending on the specific circumstances, there may be value specific to acquiring a practice’s in-place workforce. Although the practice’s staff does not have a tangible value, it may follow that there may be a benefit in the forgone costs of recruiting an entirely new staff. Therefore, if the practice’s staff was to be acquired as part of the practice, the seller may be due some value for the in-place workforce.

In addition to the practice’s workforce, it is sometimes held that the practice’s patient charts also have some intangible value. Once again, depending on the specific circumstances, there can be an avoided cost to create patient charts in the acquisition of a physician’s practice. This value is dependent on the buyer’s ability to legally pay for patient charts due to federal regulations denying payments for patient referrals.

Although the asset approach to valuing a physician’s practice is generally the choice of least reliance, it is often the best method due to an insufficient amount of market data and the lack of cash flows typical of a closely held business.

If you have any specific questions regarding this article or if you would like to suggest a topic for upcoming articles, feel free to call or email Jeff Moffatt at 317.275.7405 or jmoffatt@blueandco.com.