How much is your physician practice worth? Often, it depends on who wants to know and why. Valuation professionals follow different methodologies depending on whether the physician is selling a medical practice to another physician, valued for a divorce proceeding, or if practice partners just want to go their separate ways.

You can follow several pathways to put a value on a physician’s medical practice. The market value approach – for example what other practices in the area sold for recently – is dandy for houses but can be an exercise in uncertainty to compare medical practices in different parts of the country. Finding “comparability” is often quite difficult.

Another approach is to try and project future cash flow, the component most important to business investors and buyers. This is called the income approach and I consider it the most appropriate method for valuing physician practices and healthcare entities. But first you must normalize revenues, expenses, and more importantly, physician owner compensation.

Physician owners tend to take whatever’s left after expenses as their compensation. If physician compensation is set at a fair market level for the same area but there’s never any cash left at the end of the year, then what’s it worth to an investor? Unless a physician earns substantially more than the fair market rate for his or her specialty and the area, that money is physician compensation, not profit. That’s why figuring in goodwill – the ability to make profits – is such a major component in physician practice valuation.