The topic of paying goodwill and intangible value in hospital acquisitions of physician practices has become hotly debated. Questions continue to be raised whether goodwill or intangible assets should be considered in the purchase of a physician practice and whether they could be considered payment for referrals. Intangible assets and goodwill drive income in a physician practice and should be considered an important part of the acquisition because without the intangible assets, the practice has limited ability to generate income and limited value to a willing buyer.
If the physician practice didn’t have patients or didn’t have its workforce, value of the practice would be limited to its tangible assets. However, if a practice has patients and is an operating practice with experienced staff, value can be higher than the value of a practice’s tangible assets. When a hospital acquires a practice, the hospital is more interested in its intangible assets than tangible assets. I have never talked to a hospital that has said, “We want to acquire this physician practice because we really want their exam tables. That practice has the best exam tables of any other practice in the area!” Most buyers would agree the value lies in the trained work force, patient base, and established practice (going concern).
As appraisers, it is our job to put ourselves in the shoes of the buyer as well as the seller and arrive at a value the buyer and seller would agree to, without the compulsion to buy or sell and without consideration for value or volume of referrals. In my opinion as an experienced appraiser of health care practices, paying for goodwill and intangible assets in a physician practice acquisition is supportable as fair market value (FMV) and commercially reasonable.
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