Ophthalmology Business

SEPT 2013

Ophthalmology Business is focused on business topics relevant to the entrepreneurial ophthalmologist. It offers editorial, opinion, and practical tips for physicians running an ophthalmic practice. It is a companion publication of EyeWorld.

Issue link: http://digital.ophthalmologybusiness.org/i/174774

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Page 24 of 26

Argument for personal goodwill Argument for enterprise goodwill Advertising/ branding The doctor's name, reputation, and experience are promoted. Often a doctor's picture is used in advertising. The business' name and reputation are promoted. The practice may have a logo instead of a doctor's picture in its advertising. Patients Patients come to the practice because of their relationship with the doctor and want to be seen by a specific doctor. Patients come to the practice to be seen by any doctor. Convenient location and schedule availability play a role in patients choosing the practice. Patient referrals Patients come of their own choosing to see their preferred doctor. Patients come of their own choosing—or are referred to the practice by another provider—to be seen by any doctor on the staff. Providers One or two doctors, with their own specific patient following and referral base Multiple doctors who see their own patients as well as patients of other group providers when necessary Table 1 guide for goodwill, a valuator will usually rely on cash flow and earnings to identify goodwill value. Goodwill The biggest issue with goodwill in a subspecialty practice is: How much of the goodwill value is institutional (known as enterprise goodwill) and how much is individual (professional goodwill)? Enterprise goodwill is the intangible value of the business that can be transferred with a sale. Professional goodwill is the intangible value that leaves with the selling doctor. In a refractive surgery practice, if it has been marketed under an institutional name rather than a doctor's individual name—and it has a marketing plan, patient education/conversion plan in place—one could argue for some institutional value. However, most subspecialty practices don't rely on marketing and instead rely on a referral network. Typically, doctors refer to a practice because of their confidence in the medical and surgical skills of the subspecialist. Because of this, one cannot guarantee a referring doctor's continued patient referrals to a purchasing doctor. This lack of transferability with a referral base typically means a purchasing doctor will offer less up front for goodwill and may require the majority of goodwill be paid on a post-sale performance basis. One can better ensure continued referrals if the seller (a) continues to work in the practice after the sale, and (b) spends a fair amount of time introducing the new practice owner to the referral base. This can be done with lunch meetings, dinner meetings, casual get-togethers, or continuing education seminars. Table 1 isn't intended to be allinclusive, but merely to provide a guide as to the difference in building goodwill. • Bring an associate on and sell him/her shares of the practice over time (a partnership transition). The biggest concern in basing goodwill on post-sale performance is that despite all the due diligence possible, one can never know if the purchasing doctor can keep together the referral base of the practice as it goes beyond medical/surgical skills and can be dependent on the interpersonal relationship between the doctors, how the patients feel after being seen by the specialist, and the business skills of the new owner. The issues in a partnership transition are that (1) one must cannibalize his/her own practice to feed volume to the new associate until that person can build referrals on his/her own, and (2) while all precautions can be taken and the proper paperwork utilized, there are no guarantees an associate will go through with the transaction. The advantage of a partnership transition is that when the transaction occurs it will be a stock deal, which presently carries a substantially lower tax burden than an asset deal. Summary I hope the subspecialists reading this article are not discouraged by what I have written. The purpose of the article is to create realistic expectations of what to expect when contemplating the sale of a subspecialty practice. In most cases, a practice with a solid history of performance and profitability can find a buyer. However, the uniqueness of a subspecialty practice may require that a seller be open and flexible on the terms of a sale. OB Outright sale or partnership transition Because of the issues previously stated, a subspecialty practice has two options when it comes to a sale: • Sell the practice outright but base some (or a majority) of goodwill on the practice's postsale performance. Mr. Ruden is a certified valuation analyst, MedPro Consulting & Marketing Services, Scottsdale, Ariz. He can be contacted at 602274-1668 or bruden@medprocms.com. September 2013 • Ophthalmology Business eZine 25

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