Valuation Issues in Professional Practices
Professional practice valuation follows the same principles as the valuation of other businesses. Many of the concerns in valuing professional practices are similar to valuing small businesses, such as the likelihood that a practice is highly dependent on a single individual or a few individuals and that it often uses cash-basis accounting. Professional practices are service businesses and usually have few tangible assets. The success of professional practices is dependent on relationships with clients or patients and the reputation of the professionals in the community.
Many professional practices obtain most of their patients or clients through referrals, based on the reputation of specific professionals.
Professional practices, especially medical practices, may have contractual relationships with third-party payers. Professionals are required to meet specific educational requirements and most must obtain professional licenses. These characteristics of professional practices influence their valuations.
In some jurisdictions, an important issue in valuing professional practices is distinguishing between the goodwill that is solely attributable to the professional (and difficult to transfer) and the goodwill that is attributable ...