A theoretical framework for shedding additional light on the determinants of medical practice value

James J. Hoffman, Bradley T. Ewing, Jayne G. Hoffman

Research output: Contribution to journalReview article

Abstract

BACKGROUND:: Over the years, business valuation techniques have been widely used to appraise the financial worth of medical practices. However, it has been argued that medical practices are one of the most complex and difficult types of business enterprises to value. PURPOSE:: The purpose of the current study is to develop a theoretical framework that sheds additional light on the determinants of a medical practice's value and to provide practitioners with a theory-based model on which to base valuations to avoid "wild west" scenarios where individual valuators use his or her own unique models that can lead to wild variations in the value amount of the same medical practice. APPROACH:: The article starts by discussing standard approaches to valuing any business including medical practices. We then develop a theoretical framework that sheds additional light on the determinants of a medical practice's value by showing how strategic choice and environmental determinism affect the value of a medical practice. Once the framework is developed, the practice implications related to the framework are discussed. FINDINGS:: In this article, determinants of a medical practice's potential for sustained profitability are identified. Specifically, a framework is presented that shows how the combination of strategic choice and environmental determinism can affect a medical practice's chances of sustained profitability. Developing such a framework is an important contribution to the literature given that one of the most problematic areas of medical practice valuation is determining the factors that a valuator must assess to arrive at an appropriate fair market value for a practice. PRACTICE IMPLICATIONS:: The development of a framework that sheds additional light on the determinants of a medical practice's value is important in light of the difficulty of obtaining reliable market data regarding sales of medical practices, which tend to be closely held private entities.

Original languageEnglish
Pages (from-to)355-363
Number of pages9
JournalHealth Care Management Review
Volume34
Issue number4
DOIs
StatePublished - Oct 2009

Keywords

  • Business valuation
  • Medical practice
  • Profitability

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