Q&A: A practice's monetary value

April 9, 2010

Most physicians enter medicine as an ethical profession through which they can help people and earn a good income.

A: Most physicians enter medicine as an ethical profession through which they can help people and earn a good income. They don't enter practice to create business value that they can sell at some point, as might be the case with many businesspeople in other fields. The result is that many medical practices have little to no value for the purposes of a sale.

Creation of value in most medical practices is the result of understanding how value is created, followed by purposeful execution of business-oriented actions. Economic value is created primarily by the generation of "dividends" that are a return on investment (that is, equity or ownership) instead of a return on labor. In other words, if the practice doesn't earn the owner more than he or she could earn through simple employment (for example, by working for a super-group or hospital), then there is no economic value to ownership; a knowledgeable physician simply would take employment and invest elsewhere, somewhere that a return on investment would be more assured at less risk.

Answers to our readers' questions were provided by Medical Economics consultant Keith Borglum, CHBC, of Professional Management and Marketing. He has been a licensed practice broker, appraiser, author, and management consultant to physicians for more than 25 years; is based in Santa Rosa, California; and practices nationally. Send your practice management questions to medec@advanstar.com
.