You want to know how much you can get for selling your practice? Appraisers say there's only one way to find out: get an offer to buy it.
The growing number of physician practice acquisitions is keeping appraisers so busy valuing practices on the verge of selling that they are telling physicians not to bother them if a deal isn't imminent.
Doctors are calling anyway, spooked by tales of markets such as Dallas and the Carolinas in which acquisition feeding frenzies spawned astronomical prices for practices acquired at the beginning of the curve and pittances paid for those left over.
However, experts say a valuation for valuation's sake is a waste of time and thousands of dollars because of the rapidly changing environments in which such deals are done.
Appraisers say physicians should hire them only after somebody has made an offer, because the continuing expansion of managed care and the spate of acquisitions by physician practice management companies have led to variations in practice values by region, specialty and the collective managed-care penetration of both.
"Part of the value (of a practice) is the joint plan that a practice and an acquirer can hopefully agree to, and how that's going to add value," says Keith Moore, managing director of Denver-based BBC Research and Consulting, which has appraised 40 practices over the past 10 years. "If there's no specific acquirer in mind, the (appraisal) process is a little bit pie-in-the-sky."
"I've had conversations with doctors and ask, 'Do you have a deal?' and they say, `Not really,"' says William Golz, vice president of Milwaukee-based American Appraisal Associates. "So I say, 'When you stop dancing and get serious, then we need to talk.' An appraisal in your back pocket isn't worth it, because once you get into a deal you'll have to re-evaluate (the practice) anyway."
PPM companies and hospitals usually have their own formulas for what they will pay for a practice. For example, most PPMs will pay four to seven times one year's net earnings for a practice.
Since their formulas are already set, acquirers will look at a practice's assets and its ability to generate cash. Managed-care contracts, capitation rates and even a physician's age and health are calculated as part of a formula that looks five years ahead to determine other terms like reimbursement rates to the PPM or hospital.
PPMs in 1996 paid an average of $500,300 per physician for a primary-care practice, according to a survey by New Canaan, Conn.-based consultant Irving Levin Associates. Meanwhile, hospitals in 1996 paid an average of $147,879 per physician for a primary-care practice, according to a survey by Columbus, Ohio-based Center for Healthcare Industry Performance Studies. The hospitals' total was up 3.3% from $143,151 in 1995. Irving Levin Associates said 1995 numbers for PPMs were not comparable because of a substantially smaller sample size than 1996.
For multispecialty practices, PPMs paid an average of $478,500 per physician, according to Irving Levin. Hospitals paid an average of $252,693 per physician, up 12.3% from 1995's average of $225,056, according to CHIPS.
Hospitals pay less partly because they can't pay more than "fair market value" because of federal rules against paying physicians for referrals. Also, Irving Levin's PPM survey focused on publicly announced deals, so it missed less lucrative transactions involving smaller numbers of physicians.
The surveys' numbers give a general view of the physician practice marketplace, but appraisers caution doctors not to compare their sale price to those averages.
"The fate and circumstances of each practice are different," Golz says.
Appraisers can afford to turn down the speculative business. They're busy enough putting values on the practices that are actively trying to sell.
For example, American Appraisal Associates' physician practice valuation business has grown by about 30% annually over the past four years, a growth rate that's "accelerating," Golz says. This year, the company expects physician practice valuation to account for as much as 40% of its $6 million healthcare valuation business.
Golz says his company also doesn't want to alienate potential clients by putting an appraisal on their practices once, then coming back for another when the practice is ready to be sold. American Appraisal's fees start at $4,000 and rise depending on the number of physicians and the practice's financial makeup.
Rather than get an appraisal, practices should get their financial information organized for the day an acquirer comes knocking, says Mark Dietrich, a partner of Framingham, Mass.-based healthcare accounting firm Dietrich & Wilson.
"It's like fixing the frayed carpet and painting the walls to get your house ready for sale," Dietrich says.
Financial data to have ready includes ancillary services income; equipment leases; premise leases; and payer mix, including Medicare, capitation and managed-care accounts, says George Marino, who leads the healthcare services group for New York accounting firm Friedman, Alpern & Green. Also, practices should have up-to-date information systems that can handle tasks such as billing, Marino says.
American Appraisal's Golz says some practices have given his firm "a shoebox full of receipts and a checkbook" to work with when it came time for an appraisal. Failing to get ready for a buyer can kill a deal, warns Thomas Brown, American Appraisal's vice president of healthcare valuation.
"I had a situation with a physician who said he would show us his financial statements, except for the $200,000 a year in income he never reported to the IRS," says Brown, who was working for the acquirer in this particular deal. "I went to the client and said future revenue would be inconsistent (because of the missing money), so they said, 'We're not interested."'
Also, having an appraisal done without reviewing agreements between a practice's physicians could muddy a deal. Marino cites the example of a hospital purchasing a five-physician internal medicine practice in which the senior physician decided he didn't want to sell.
Marino, who was representing the hospital in the deal, says the New York-based physicians had buyout agreements among themselves, so they decided to buy the senior physician's share. The problem for the remaining physicians, Marino says, was that the buyout agreement was based on an old appraisal that placed a greater value on the practice than the hospital was willing to pay. The valuation was lower in part because the senior physician accounted for most of the patient volume and productivity.
"The lesson is that physicians need to look at (buyout) agreements" before they sell out, Marino says.
The Vancouver (Wash.) Clinic, on the other hand, already had its internal finances ironed out by the time PhyCor said it wanted to buy the clinic's assets, the clinic's executive director Neill Fishman says.
Only when PhyCor called did the 66-physician multispecialty clinic hire an outside appraiser, BBC Research and Consulting. The clinic didn't turn over its internal valuation estimates to the consulting firm to ensure it got an independent review, says BBC's Moore.
It turned out BBC's numbers weren't too far apart from PhyCor's, and the Vancouver Clinic and PhyCor announced a deal in March. Terms were not disclosed.