Asset purchase: The sale of a practice's assets, but not the practice itself. Most physician practice management companies make asset purchases.
Direct income capitalization: One way of determining a practice valuation. Equal to income divided by historical rate of return.
Discounted cash flow analysis: Another way of determining practice valuation. More complicated than direct income capitalization, it attempts to use present cash flow to predict future income. The IRS prefers this method of valuation, as long as it is based on after-tax income.
Fair market value: The value of a practice assuming the buyer and seller are under no pressure to make a deal and have sufficient financial information regarding the transaction.
Fair market value/continued use: The value of assets in terms of how they are used in the practice and how they contribute to revenues.
Intangible assets: Items like patient files and good will that have no direct cash value.
Liquidation value: Value of the outright sale of tangible assets. The opposite of fair market value/continued use.
Net cash flow: Net income without factoring in noncash deductions like depreciation or amortization.
Net present value: The discounting of income into present-day dollars. Based on the assumption that a contract providing for $1 later is less valuable than $1 in hand.
Noncompete agreement: A clause that prevents physicians from competing against the acquirer if they leave the practice. Appraisers recommend that the practice be compensated for such clauses at the time of purchase.
Percentage of receipts: A way to compare how much revenue each practice physician generates.
Tangible assets: Accountable items like equipment, real estate and receivables.
Terminal value: The value of a practice at the end of a projection period, defined as five years by most acquirers.
Working capital: Current assets minus current liabilities.
Sources: American Appraisal Associates; Center for Healthcare Industry Performance Studies