The Practice Manager's Guide to Buying a Practice - McMasters ...

A perfect score of 300 would give a multiple of three, which is believed to be a maximum for amedical practice like this. So a score of 208 gives a multiple of 2.08. Again, it is stressed that this is asubjective value and each assessment may be different, and for good reasons.There is no reason why doctors should not create their own list of factors to be considered, and givethem an optimum score that reflects the relative importance of each factor to them personally. Thismakes the valuation their valuation. Guidance can be given through the formal thought processesunderpinning the valuation. There is every reason why different prospective purchasers wouldattach different relative importance on each factor, and then score them differently. This should beexpected to happen. This is the advantage of the approach: it is very flexible and can be adjusted tomeet different circumstances.Step 3 Determine valueThis multiple is then applied to the estimate of future maintainable earnings of $170,333 obtainedearlier to calculate goodwill of $354,292.Maintainable future earnings $170,333Multiple 2.08Goodwill value $354,292In other words, in the valuer's opinion a willing but not anxious buyer, and a willing but not anxiousseller, would agree to a price of about $354,292 to acquire the goodwill of a practice with the abovecharacteristics, and that has produced an average earnings for its owner on a four day week overeach of the previous three years of $170,333.This is a very high valuation, based on observed market results. In this situation, the purchaser wasprepared to pay because she had already invested five years of her life in this practice, andrealistically was not able to re-create the same practice elsewhere herself. The emotional andfinancial cost of starting again elsewhere was significant, and it was important to her sense of selfesteemthat she be seen as a member of a leading general practice.This value includes a share of the plant and equipment. Second hand plant and equipment valuesand furniture and fittings values are generally very low, and are rarely significant components of amedical practice sale.Alternative valuation methodsThere are alternative methods of valuation. For example, we understand some valuers suggest areasonable valuation of a medical practice can be obtained by multiplying a factor of between 15%and 35% of gross fees generated. A typical factor for these valuations appears to be about 30%. Thisapproach, as simple as it is, seems to be historically entrenched in the minds of doctors and is oftenused in valuing medical practices, without any real attempt to analyse the practice's profile in amore scientific way.The difficulty is that it is too mechanical, and does not deal with issues other than gross fees. Theseissues may well have an overwhelming influence on the valuation of the practice. For example:25