Your Practice-What's it Worth?

Often value is not solely measured through the eyes of the owner, but instead dictated by the willingness of the buyer or the legal circumstance. Ever hear that a medical practice is only worth what someone is willing to pay for it? Sometimes the worth is pre-defined in a partnership agreement, interpreted by case law, or a judge’s decree, such as in divorce.

When valuing a medical practice the appraiser will identify the appropriate standard of “value” for that particular engagement. Using appraisal industry standards and terms, value can be defined as “fair”, “investment”, “intrinsic”, “going concern”, “forced liquidation”, “assemblage of assets”, “orderly disposition”, or more commonly “fair market”.  In many situations, the standard of value is legally mandated. However, in some circumstances it can also be a function of the wishes of the parties involved.

While virtually any business or professional practice may be appraised using any of these premises of value, the resulting value may be dramatically different.

Fair Market Value: This is the most widely recognized standard of value used in a business valuation. As defined by the American Society of Appraisers, it is “the amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts.”

Fair Value: Typically this value applies to specific business transactions.  In most states, it is applicable in cases of dissenting stockholders’ appraisal rights, if a corporation merges, sells out, or is involved in certain major actions and is challenged by a minority shareholder, often the consideration for the stock is at  a pre-transaction rate.

Investment Value: In the context of a dissenting shareholder suit, Investment Value is the expected return on the earnings.

Intrinsic Value: This value measures perceived characteristics inherent in an investment as interpreted by one analyst versus another. Intrinsic Value may eventually equal Market Value as the market of investors reach the same conclusion.

Going Concern Value: Measures income producing assets in an on-going business.

Assemblage of Assets Value: Measures the value of the assembled business assets even though they may or may not be currently in use for the production of income.

Orderly Disposition Value: Reflects the piecemeal value as assets are sold individually with normal exposure to a secondary market.

Forced Liquidation Value: Is the piecemeal sale of assets as they are forced into the secondary market, either individually or grouped, with less than normal exposure time.