Determining the fair value of naturopathy patient files
Determining the market value of naturopath patient files
Recently, ND Business Solutions has assisted some naturopaths that were either buying or selling patient files (either on their own or as part of a practice). In the industry right now, some common rules of thumb are often used to determine the value of these files. The most common metric I’ve heard from naturopaths is that patient files are worth a certain dollar amount per file, or per file that has been active within a certain time frame. The CAND suggests between $125 to $200 per file active in the last 3 months and about half this for files active within the past year. While this method has the advantage of simplicity, it has some pretty serious (and potentially expensive) drawbacks.
If you take a moment and think about the billings you generate from your list of patients you will quickly realize that some patients provide a greater amount of revenue for your practice than others. Additionally, you also have probably realized from experience that someone who came in for an initial consult a few months ago and hasn’t returned isn’t as likely to continue being a patient as someone who has been in for a visit every couple weeks. Here’s a graph from a random sample of patient files showing the revenue breakdown distributed across the patient base. The area shaded in represents total revenue.
As we can see from the graph the top 20% of these patients generate roughly the same amount of revenue as the other 80%, making their files much more valuable for any potential buyer.
It’s possible to make the argument that this distribution is accounted for in the dollars per patient file rule that is commonly used, and this is true to an extent. An average billing per patient will occur across the profession and if the revenue distribution across a set of patient files is similar to the average, the rule of thumb can provide a fair value.
How do I know if my patient files will be accurately valued by a rule of thumb?
Currently there is no data available revenue distribution or average patient billings for the industry, although it is a project we are working on (help us here!). Since there is no way to accurately determine if the dollars per patient file works for a given situation, it is impossible to have any certainty that the valuation it produces is a fair value.
There are other issues with this method as well:
Different naturopathic practices will have higher or lower billings per patient for many reason (urban vs rural fee gaps, specialization in certain modalities, differences in the experience and reputation of naturopaths, etc.)
When a naturopath sells their patient files, they may decide to keep their best clients who are generally the most loyal and willing to travel to the naturopaths new location or even have consults over skype.
How else can I determine the value of a naturopath’s patient files?
ND Business Solutions values patient files using the adjusted discounted future cash flow method. The goal of this method is to predict the future cash flow the purchaser will generate from the files purchased, adjusted for an appropriate return on investment that reflects the level risk of the purchase (this is referred to as a discount rate).
This method places more emphasis on revenue and income that a set of patient files will generate, rather than the sheer number of files.
ND Business Solutions has also created a metric called the Retention Score that predicts how many patient files will actually turn into patients. This method differentiates between top patients that book visits frequently and other less than stellar patients.
By assigning different values to patients based on their predicted retention, we are able to solve many of the issues discussed with the single amount per file rule discussed above. Looking at the above graph, the top 20% of the patients would rank much higher as they are more loyal to the clinic and likely have been in for a more recent visit.
ND Business Solutions can professionally appraise your patient files, or patient files that you are looking to purchase. Please contact us to see how we can assist you.