Why do patient charts and goodwill not have any role in the valuation of a practice any more?
I know what the narrative is….
Because patients can go anywhere, they’re not tied to your practice.
Goodwill is difficult to measure at best and evanescent at worst.
The concept of “blue sky”
These fall under what is called “blue sky” in business… the part of the business valuation that is intangible, with no great way to measure.
That is true. But “blue sky” is not something we talk about just with regard to medical practices. It’s common among many kinds of businesses.
It is common in startups, new products or services, or markets that are expected to experience rapid growth. In these scenarios, it refers to the potential for earnings and profit that have not yet been realized but do stand to benefit investors and buyers down the line.
It also refers to intangibles related to a business, as well. Like reputation, customer loyalty and brand recognition. This is more in line with what “blue sky” means when referring to medical practices.
Yes, these upside potentials are harder to measure than the tangible assets- for which there are clearcut valuation metrics.
But there still are ways to do so. They do this all the time in other businesses. Of course, there’s going to be a discount for something unproven, that’s expected to be realized in the future. Or something that may or may not pan out.
The value of “blue sky” in medical practices
Yes, patients may leave. But they may stay too. At least a good portion of them. Afterall, patients are not keen to go hunting for another doctor or medical practice. It is a pain to establish with a new practice, appointments are hard to come by and most of all, if patients are happy with a practice, they’d love to stay- unless you do something to actively drive them away.
Yes, reputation is often tied to the physician in the practice and with her gone, so does the reputation. But again, patients are willing to give the new doctor a chance. Since they trust their doctor, they believe she is going to find a successor who matches her value systems and takes care of patients just as well.
So why do we not account for patient base and goodwill in private medical practices?
The advent of Private Equity and Corporate Healthcare
Because the “suits” designed it this way.
These factors were very much included in sale prices for medical practices a decade ago. So what changed??
Private equity and corporate hospital systems came into the market for small independent medical practices. that’s what happened.
And it was in their best interest to downplay and disregard the role of “blue sky” in the valuation of practices. Afterall, this would drive down sale practices and help them acquire these businesses for less.
It became widespread practice as more and more private equity firms and hospitals got into the business of acquiring medical practices.
And then there were more….
And then, physicians drank the Koolaid, too. Both practice owners and leaders as well as other physicians who stood to gain from driving down prices.
Afterall, when you say something loudly and often enough, people (at least some) are going to start believing it.
And that’s where we are at right now.
I feel we’ve done ourselves and our colleagues a great disservice.
I know that things are different from a decade back. Patients have more practices to choose. Their insurance often dictates who they can see.
So there should a sizeable discount to this part of the valuation. But it shouldn’t be zero.
I feel like our employed colleagues and those who’ve jumped on this bandwagon have no idea the blood, sweat and tears it takes to get a practice up and running. The practice founder will never be fully compensated for taking on all that risk and the time and energy commitment of starting a practice.
And they know that, too.
But they have set up a working system. With processes in place that keep things chugging along, sometimes far more efficiently and with patient satisfaction than large organizations.
There’s got to be value to that.
