This post is for those of you who want to go solo by purchasing a existing practice. It might also be useful for someone who is looking to buy in or out of a group. Keep in mind that these are general guidelines; the free market dictates the price. Just like Zillow’s zestimate doesn’t determine what your house will sell for.
Some folks think the practice isn’t worth more than the eBay price of the equipment, but if someone had picked a good location, equipped it, credentialed me, and had hired well trained staff, I wouldn’t have had to sit around for a few months opening my practice, and in the first few months I would’ve seen more than four patients per day. But sometimes you overpay for what you get, or the practice may need lots of changes. Here’s a post about the pros and cons of starting from scratch vs buying a practice.
When I posted this on our google groups, I was surprised at some of the responses I got. Some people thought my post was spot on, while others noted they overpaid for their practices but were nevertheless happy with the way things turned out. I have heard of one person underpaying for their practice.
A quick ballpark is 60-80% of last years collections.
By the way, the consultants charge several thousand for a rough valuation and up to $10-15k for full valuation and negotiation.
Basically, the value of the practice is accounts receivable plus equipment plus goodwill. Let’s break down each of the following:
Accounts receivable is the amount the practice is owed by patients and insurance companies. It can be dated by age. Obviously debts that are 0-30 days have a higher chance of collection vs debts over 120 days. So you can value a percent for each bucket depending on the age of it, or perhaps just value AR as debts under 90 days, rendering debts over 90 days as uncollectible. Personally, I’d be reluctant to purchase AR over 60 days
Equipment can be ball parked as declining 10 percent every year starting from the year of purchase, with a 20 percent floor, as long as the equipment is in use. So say I spent $200k on my equipment in 2013. At the end of 2014 it would be valued at $180k, and at the end of 2017, $120k. In 2020 and onward it would be valued at $40k. Now, obviously your phoropter, chair, gonioscopy lens would hold value over time, while your computers aren’t gonna be worth anything after about four years, and I doubt people would pay much for a EHR or PM system over seven years old, unless it’s been updated. But when you average everything out, this is a quick and simple way to figure out a number.
For equipment leases with $1 buyout, use the same formula but subtract the amount owed on the lease; you could be upside down!
The other way to do this is to hire an appraiser and value the equipment, and then find some way to value your computers, EHR, etc.
You then add the assets in the practice (office supplies, frames if you have an optical, etc; even the value of prepaid malpractice and business insurance), and then subtract any accounts payable such as payroll and future liabilities the practice may have (often retirement plan matches for employees that are paid once a year as a common liability).
Goodwill is the final component. Despite what people think, goodwill is very much a part of ophthalmology practice sales; not so much in internal med and peds. Basically it is compensation for the effort and sweat and lost wages for someone to start their own practice. According to consultants over 80-85 percent of practice sales have goodwill as a component.
According to practice brokers, the average goodwill for ophthalmology practices is 27-28% of what the practice has collected in he last year. So if your practice collected $800k last year the goodwill is approximately $215k.
There can be tremendous variation in goodwill. If you are in a rural area and the only ophthalmologist in the county, why should someone buy your practice when they can open up right next door and capture a lot of your business? Conversely if you are a cash only practice on the Upper East Side of New York, that is not easy to establish, and you can bet that there will be higher goodwill. Even if you’re in a saturated area, if your practice is predominantly glaucoma and there is a shortage of glaucoma specialists, it will lower your goodwill. The more competition and the harder it would be to establish a practice, the higher the goodwill.
If the practice is contracted with plans that are difficult to get on to, such as medicare advantage programs, and it can passed on to whoever buys the practice, this will increase goodwill. The negotiated rates with plans is another factor.
Other factors include: overhead (no one wants to inherit a practice saddled with high expenses), revenues, patient demographics (growing area?, even practice name and internet site (Santa Clara Ophthalmology and http://www.sceyes.com are more transferable then the Choi Eye Institute and corresponding internet site.) For groups with physician employees, restrictive covenants have value. In CA and MA where they are not enforceable, group practices have less goodwill.
Finally, in the case of a solo practitioner bringing on a partner, they recommend selling 50 percent so both partners are equal, to avoid resentment. But there will be a clause saying for X number of years (usually 5) if there are disagreements and the partnership is broken, he senior partner buys back and the junior partner leaves.
Usually in the instance of a junior partner buy-in goodwill is calculated as a percent of receivables (55/45 for instance) and spread out over five years to protect the junior partner from declining reimbursements.
A common question from someone looking to buy in is: “I’m the one that built the practice and now to buy in I have to pay a percent of what I made to become an owner?” Generally speaking, that’s the price you pay for not having to start a practice.
So as a summary, the average solo ophthalmology pracrice collects $800k a year, meaning goodwill is about $215k. Equipment for a solo doc might run $200-350k, so after five years let’s assume a price of $140k. And finally, for a efficient well run practice accounts receivable might run two weeks worth of collections, or about $30k. Adding these components gives you a ballpark of $385k, so if your senior partner tries to tell you your buy in is $800 grand, start asking hard questions, or start reading my post on the steps to start a solo practice!
I am curious to hear what those of you that have actually purchased a practice have experienced, so please feel free to share with us.