Medical practice valuation can make or break a business sale because, for many physicians, attaching a dollar value to their practice is a touchy subject.
How to Value Your PRactice
The methodology for valuation of a medical practice has changed over the years. Today’s most common reference point is a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA).
Traditionally, a solo practitioner thought of earnings as the total remuneration from the business in a given year. However, the reality was that a portion of those earnings was compensation for the physician providing clinical care, and a portion represented profit generated from the business.
Historically, physician practice valuation primarily considered the total earnings of the owner. In contrast, investors focus on the profits of the business as a basis for a healthcare practice valuation. Further, investors believe the practice’s actual cash flow on a debt-free basis is the best predictor of their return on investment. Accordingly, this has led to the focus on EBITDA as a measure of a practice’s performance. Further, this is how most other businesses are valued.
What is the Right Multiple?
There are Many Factors
There is no easy answer to that question because the multiple is meant to assess the following:
- the opportunity of the investment,
- its relative riskiness,
- whether it provides a reasonable rate of return for investors,
- Many factors influence multiples, including location, trained staff, stable or growing revenue stream, payor mix, condition of the facility, mix of services, patient demographics, and profitability.
Understanding Different Buyers
A Key Factor
The other nuance in today’s marketplace is the different perspective on earnings from different types of buyers. A private equity firm is generally looking to invest in a business or partner with its founder. Therefore, they will want to keep as many members of the management teams in place as possible to operate the business and drive performance. However, they may make a downward EBITDA adjustment if they feel additional management team members are needed to continue to grow and support the business.
Conversely, strategic buyers (those who have existing group practices and experience in the industry) may make upward EBITDA adjustments for synergies, including:
- duplicative management team members or third-party vendors
- more favorable lab and supply contracts
- more favorable payor contracts
Generally speaking, a private equity firm will likely pay a higher multiple but on a lower EBITDA. In contrast, a strategic buyer will probably pay a lower multiple on a higher EBITDA.
No More Guessing
As healthcare specialists in the business brokerage industry, we know how to value a medical practice. We consider over 30 different factors when valuing your practice. No more need for guessing!
Do you need a medical practice valuation?
Arizona Medical Practice Brokers provides credible practice valuations for healthcare businesses and can provide a valuation for you whether you are considering selling or simply want to know the value of your business for planning purposes. We also take on valuation assignments from buyers that want to know that they are not overpaying for the business they have targeted to buy.