PART 3 OF 4: The Factors That Drive a Practice's Value

What raises or lowers the number, and the role of goodwill.

Two practices with similar revenue can be worth very different amounts. The difference lies in the factors that shape the quality and durability of a practice's earnings and the transferability of its value. This article examines what drives a healthcare practice's value up or down.

Normalized earnings

Before value can be assessed, earnings must be normalized — adjusted to reflect the practice's true economic performance. This means removing one-time items, adjusting owner compensation to a market rate, and accounting for personal or discretionary expenses run through the practice. Normalization frequently changes the picture substantially, and it is one of the most consequential steps in the entire process.

Revenue quality and payer mix

Not all revenue is valued equally. Appraisers look closely at the composition and durability of revenue:

• Payer mix, and the reliability and rates associated with each payer.

• Concentration risk, such as dependence on a single referral source or payer.

• The mix of recurring versus one-time revenue.

• Trends — whether revenue and patient volume are growing, flat, or declining.

Provider dependence and transferable goodwill

A central question in healthcare valuation is how much of the practice's value depends on the departing owner personally. Value tied to the owner's individual reputation and relationships — sometimes called personal goodwill — may not transfer to a buyer, while value tied to the practice itself — its location, systems, staff, and brand, or enterprise goodwill — is more readily transferable. The distinction is significant both in transactions and in contexts such as divorce, where the treatment of personal versus enterprise goodwill can be pivotal.

Operational and structural factors

A range of practice characteristics affect value, including the strength and stability of staff and providers, the condition and currency of equipment and technology, the terms and remaining length of the premises lease, the quality of systems and records, and the diversification of the patient base. Well-run practices with durable systems command more than practices that depend on the owner holding everything together.

Risk and the discount rate

Much of what drives value ultimately flows through risk. The less certain and less durable a practice's future earnings, the higher the rate an appraiser applies to those earnings, and the lower the resulting value. Reducing risk — through diversification, strong systems, and transferable goodwill — is often the most effective way to increase value.

How West Coast Health Law Can Help

We help practice owners understand the factors that drive value and identify, ahead of a transaction, the areas where addressing risk or strengthening operations can improve the outcome.

West Coast Health Law offers a FREE consultation which you may schedule by clicking the button on our website.

This article is provided for general informational purposes only and does not constitute legal advice or create an attorney-client relationship. Laws change and every situation is different; consult a qualified attorney about your specific circumstances.