Developing Goodwill in Your Medical Practice
Medical practices in Sacramento, CA and around the country have a variety of intangible assets, including patient medical records, a workforce in place, and non-compete agreements. These assets are usually referred to as “goodwill.” Medical practice goodwill can be an important element in valuing a medical practice when an owner is preparing to sell.
How Does a Practice Acquire Goodwill?
The most significant component in calculating a medical practice goodwill typically is the expected earnings of the practice. As is the case on Wall Street, the companies with the highest expectations for future earnings are more valuable and will have more highly valued intangible assets.
Some practices for family physicians, internists, and pediatricians can be valued with net incomes between $400,000 and $500,000 per physician. These practices have a lot of medical practice goodwill that’s driven by those earnings. In contrast, there are practices in those specialty areas where the practitioner earns much less than $100,000 per year. This second group of medical practices generally have much less goodwill.
Of course, medical practice goodwill is an extremely subjective part of valuing a medical practice. In addition to anticipated earnings, other factors that influence goodwill include the competition level, the types of patients at the practice, physician work habits, the third-party payer mix and fee schedules, the location of the medical practice, other staff, and marketability. For instance, if a practice is in a location where the patient-to-doctor ratio for the specialty is at or below average—particularly where physicians earn a better than average income—the practice’s goodwill is apt to be more valuable. Compare this with a practitioner who wants to start a new practice or come into another practice. He or she is less assured of earning a typical income for that specialty. But in an area with a short supply of physicians in particular specialties, it can be less difficult for a new doctor to start a practice or join another and earn a good income. In those circumstances, even if physicians earn better than average compensation for their specialty, there may be some goodwill in the practice. In many instances, these practices are found in medically underserved areas. That’s due to the fact that they’re not traditionally desirable places for physicians to live and work. This could be a rural area with less educational, social, and cultural attractions…or in an inner city with a lower socioeconomic patient base and higher crime rates.
Which Practices Have More Goodwill?
Business experts like Sacramento’s Andrew Rogerson will tell you that medical practices with a large number of patients with chronic illnesses have more goodwill than those with fewer of these patients. By way of illustration, an internal medicine practice with an above average number of diabetic patients will be more likely realize more income from these patients (along with greater goodwill) than practices with generally healthy patients.
More Work Hours Means More Goodwill
Research has shown that there’s a direct connection between a physician’s income and the time he or she spends working at the practice. In light of the fact that medical care is typically reimbursed by the number of services provided, the more hours a doctor works and the more patients treated—the more services are provided. Of course, individual results may vary, but a practice group that establishes expected work schedules and practices more hours, usual sees more goodwill in their practice.
A practice with a strong payer mix will likely have more goodwill. Medical practices with a lot of Medicaid or self-pay patients typically has lower collections than practices that are able to attract patients with desirable insurance coverage. Thus, there could be a significant difference in goodwill for two practices providing the same services to the same number of patients.
Medical Practice Goodwill by Staffers and Patient Retention After a Sale
Non-physician employees in a medical practice have an impact on its goodwill, particularly those practices that employ physician assistants (PAs) and nurse practitioners (NPs). Practices that use PAs and NPs appropriately will realize an income benefit because these individuals will generate income above their pay and cover their associated overhead.
Primary care physicians in family practice, internal medicine, and pediatrics have shown to be extremely marketable, with estimates stating that a physician who purchases a practice from another primary care doctor will retain roughly 85% of the practice’s patients. However, referrals for specialty and subspecialty practices has some valuation issues: a physician who purchases a solo practice of a doctor dependent upon referrals will have a less certain patient transition. But the bigger the specialty or subspecialty practice being purchased, the greater the certainty the buyer will have that the referral relationships and patients will stay with the practice when the new owner takes over. In addition, those practices that provide ancillary services typically have more value than those that don’t.
Start to Sell Your Medical Practice Today
Start your preparations and get expert advice on determining your practice’s value and the optimal selling price—because the price depends to a great extent on how the business sale is handled. You want a well-conducted business marketing campaign for a successful sale at the best price, not fire sale.
Work with an experienced business broker who can help you with all of these issues. Andrew Rogerson is a business expert who has negotiated hundreds of medical practice sales in cities throughout the Sacramento Region. He’s helped numerous physicians sell in Elk Grove, Rocklin, Folsom, Davis, Citrus Heights, Rancho Cordova, Roseville, Cameron Park, and El Dorado Hills.
Spend some time talking with professional business broker Andrew Rogerson. He knows about medical practice sales and complex business transactions in the Sacramento area. Please visit our website Services. You can also get in contact with Andrew via email or call him at (916) 570-2674.