Hard assets and accounts receivable make up two-thirds of ‘The Big 3’ when it comes to valuing a practice for a buy-in, buy-out, sale, or merger (goodwill is the other third). At AAO2015, Daniel Bernick, JD, MBA of The Health Care Group gave ophthalmologists a crash course in valuation basics:
Assessing Equipment Value
Heads up, doctors: If you use book value (the cost of the asset minus depreciation) to estimate the value of your ophthalmic equipment, you’re lowballing yourself, Bernick cautions. Most ophthalmic equipment doesn’t hit book value until you’ve owned it for five to seven years. And slit lamps have a much longer life than that, so book value underestimates them especially. Even if a piece of equipment is 12 years old, it may still have value if it saves someone from having to go out a buy a new piece of equipment.
Furthermore, you may well have taken advantage of IRS Section 179, which allows you to slash your equipment’s book value to zero during the first year of ownership for tax purposes, Bernick adds. For these reasons, he suggests a “modified book value” approach, which uses an 8-12-year life span instead of the IRS number, to better reflect the equipment’s fair market value.
Tip: Hire a used equipment dealer to appraise your practice’s ophthalmic equipment. Make sure the appraisal is based on the fair market value rather than the insurance value (which constitutes an item’s replacement cost, and is likely higher).
Assessing Supplies Value
Supplies include expensive drugs such as retina injectables, premium IOLs, frames, and contact lenses. Count the number of units on hand, and multiply by acquisition cost. Your practice may already be doing this to determine cost of goods sold for tax purposes (IRS Form 1125-A).
A less laborious approach is to estimate supplies value based on annual usage, Bernick says. As an example, your tax return might show a “medical supplies” deduction for $120,000. That means your monthly supplies cost is $10,000. If your typical inventory is, say, a two-month supply, multiply that $10,000 by 2 (months) to get an estimated supplies valuation of $20,000.
Assessing A/R Value.
Asset sales typically exclude accounts receivable, but buy-ins and buy-outs may factor in A/R, Bernick says.
A/R valuation must take into account that your practice does not collect every dollar it charges, explain attorneys Robert Wade and Robert Landau of Wade, Goldstein, Landau & Abruzzo, P.C.
One way to value A/R, according to the attorneys, is to take a practice’s existing accounts receivable on which there have been charges or payments within the last 6 months and multiply that total by the practice’s gross collection rate. (Gross collection rate = total cash receipts for 12 months or your most recent fiscal year divided by total billings for that same time period.) “While this is not an exact valuation of a practice’s accounts receivable, it should be relatively close,” the attorneys say.