The problem with "Rules of Thumb" in the Valuation of a Healthcare Professional Practice

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Written by Chris Majdi

The business valuation of healthcare professional practices is a widely discussed and contentiously debated topic among business appraisers, healthcare business consultants, accountants, brokers, lenders, buyers, sellers, and various other parties. There are innumerable variables which exist in different practice settings that can render even the best approaches to valuation useless. This makes the accurate assessment of a healthcare practice difficult as-is. In this setting I cringe when I see the excessive use of "rules of thumb". Their excessive use comes from the desire to simplify and compartmentalize complex ideas into bite-sized pieces. Rules of thumb are generalized ratios of earnings, price, overhead, or other financial data. They can be highly inaccurate and are especially problematic when misapplied across different health fields, such as valuing an optometry practice with a ratio used for medical practices. I am unaware of any ratios that can encompass the intricacies of healthcare disciplines, specialties, market factors, geographic location, valuation purpose, buyer pool, economies of scale, or purchase price allocation. Even when looking at "concrete" sources on healthcare practice transactions (e.g The Goodwill Registry) one can see how skewed the actual data is. As valuation professionals we use this data as a sounding board rather than the gospel. Not relying on averages and ratios is especially relevant when a sample set of transaction information is too small or outdated. Condensing this skewed data into ratios, rules, and averages is even more problematic. With the difficulty in accurately and rapidly determining practice value it is understandable that buyers and sellers of practices can become frustrated and overwhelmed. This can be resolved by hiring a professional who is aware of current trends and can assess a practice for the owner's given purpose. This is the most crucial aspect to obtaining an accurate and relevant valuation that can be actually utilized to achieve a specific objective (business move, retirement, lifestyle change, divorce, etc....).

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