Fair Market Value of Patient Files

Question

What is fair market value for a dispensing practices' patient files?

Answer

This seemingly straightforward question has a surprisingly complicated answer. It's important to understand the different valuation methodologies, and when it is appropriate to use one over another.

I discourage using file counts to value a practice in almost all cases, and only recommend this method if the practice is losing money (after adjustments) or will otherwise be shut down after the sale. Anytime the practice is profitable and is being sold as a going concern, income-based valuation methods such as Discounted Cash Flow and Income Capitalization are much more relevant because they predict the practice's ability to generate income for a new owner. The files, in and of themselves, do not generate income, and make it tougher to predict the future performance of the business. The income-based methods should then be compared to comparable transactions (i.e. what other practices of a similar size/type sold for). Calculate a weighted average of these different data points to create a well-rounded view of the practice value.

If you decide to attempt to value the files, there are conflicting schools of thought on which files to use and what values to apply. Some people differentiate between active and inactive files, while others look for hearing aid users, tested/not sold, and others. Even among the first category, there is significant debate as to what constitutes an active file;I find that a fairly universal definition is that an active file is a patient who has visited the office within the past 12 months (regardless of their purchase history). While I have never used this method in any of my valuations, I polled those who have and found a consensus average is approximately $25 per active file.

If you choose to pay for the files based on hearing aid purchasers and tested/not sold patients, the first step is to calculate these two amounts from among the active patients only (as opposed to over a time period without regard to activity). For the purpose of clarification, a hearing aid purchaser should be someone who bought the hearing aid(s) from the practice in question, not elsewhere, and made the purchase within the previous five years. Then, establish the values as $150 per hearing aid purchaser, and $75 per tested/not sold. This method places more value on the files because it does a better job of predicting future sales by analyzing the patients within the active files;however, it still does not tell you anything about the revenue or profitability of the practice, the latter of which is the key indicator of a new owner's ability to succeed.

Craig A. Castelli is the Managing Director of Bridge Ventures, LLC, and founder of its Chicago office. He has 8 years of audiology industry experience and has worked with hundreds of private practices. Bridge Ventures is a middle market merger and acquisition firm specializing in assisting privately held businesses with revenues ranging from $500 thousand to $50 million. They provide acquisition support, business valuations, and strategic advisory to healthcare practices throughout the United States. For more information, visit www.bridgeventuresllc.com. Craig can be contacted at ccastelli@bridgeventuresllc.com