Medical Practice Valuation: How to Estimate your Selling Value

Trying to sell a medical practice is a much trickier task than it initially seems. It isn’t a simple real estate valuation (although that plays a part in it, too). When putting your medical practice up for sale, you also need to think about the equipment and facilities it contains. Then, there are also certain intangible values that need to be considered, such as the practice’s goodwill in the area.

Regardless of whether you are looking to sell or buy a medical practice, or are simply interested in their valuation process for the future, this article will have all the answers you’re looking for, and more! Then checkout out Weave’s Medical Software can help raise the revenue and value of your practice (click here to learn more about our medical software).

What Multiple Do Medical Practices Sell for?

Valuation multiples are one of the best ways of assessing the value of a business, and medical practices are no exception here. The basic rule of thumb for these kinds of businesses used to be that they sold for around 1.5-2x their gross annual revenue. However, times have changed, and on top of the skyrocketing real estate and medical service prices, the functioning of medical practices has changed as well.

As we already mentioned, plenty of externalities and intangible factors play a role in evaluating a practice’s worth. While this may increase its overall value, it also leads to elevated costs of running the business. Only after correctly weighing in the expenses related to running a private practice will you be able to get an accurate estimate of the multiple you can sell your business for.

Medical Practice Valuation Multiples Explained

Many business valuation methods are built around multiples. In the case of medical practice valuations, “multiples on earnings” are most typically used to determine the value of an establishment.

The most common multiples for general practitioners fall anywhere between 0.5 and 0.7x their annual revenue. Short supply practices specializing in fields such as oncology or neurology can count on higher multiples. You need to keep in mind that you’re not likely to sell your practice for a price that exceeds its gross annual income, mainly because of the high costs that come with running such an establishment.

Calculating an earnings multiple on the sale of a medical practice is simple if you are fully aware of the intangible and tangible assets and liabilities of your business. You will find a few examples of the easily omittable ones below.

Back office costs: rent, payroll, accounting, etc.,
Healthcare policy changes: they tend to affect all practices nationwide,
Goodwill: this may be a tricky one, but it includes things like the reputation of your practice and its recognizability within its specific medical field.

How Much Does a Medical Practice Cost?

Determining the cost of a medical practice is a lengthy and multilayered process. While it can get arduous sometimes, there is no need to overcomplicate it. We already established that the bulk of the valuation process revolves around the practice’s annual earnings. It simply makes sense for both the potential buyer, as well as the seller. The former will spend the cash they expect to make back within a year of the purchase, whereas the latter makes a year’s worth of profit by selling their business.

Buying a physician practice (and any other business, for that matter) gets more expensive when real estate gets thrown into the mix. While most business owners rent the space for their practice, it isn’t impossible to find a physician who actually owns the building his practice is located in. In these cases, adding the value of the building to the calculations is necessary, unless the selling physician agrees to sell the practice while continuing to own and rent out the building to the buyer.

Medical Practice Valuation Calculator

Now that you know everything that goes into the valuation of a medical practice, you can move on to carrying out the calculations. Most practice value calculators found online can be overly optimistic, with high multiples and no accounting for expenses. This one is divided into two parts: earnings and costs. Subtracting the former from the latter will give you a more accurate picture, which will likely amount to the 0.5-0.7x multiplier mentioned above. Keep in mind that this is merely a checklist of what to include, and you’ll have to do the calculations yourself.

Earnings:

• Number of patient visits per annum (average)Net collections per visit (average)
• Average yearly revenue
• Multiple (remember, medical practice valuation multiples can get high before subtracting the costs – if you run a short supply, highly specialized practice, make sure the multiple reflects that)

Costs:

• Medical billing
• Back office expenses
• Owner compensation
• Rent (if applicable)

Sample Medical Practice Valuation Report

Medical practice valuation reports can take up many different shapes and forms. You might want to include some graphs and projected earnings to boost the potential buyer’s confidence. While each report will vary from practice to practice, they all have at least one thing in common: the company profile page. Here’s what you should include there:

• Company name
• Entity type
• Industry
• State and country
• Business experience (i.e. years in business)
• No. of business owners
• No. of employees
• Summary of financial statements over a three-year period:
  • Revenues
  • Operating income
  • Depreciation
  • Owner compensation.

Outside of the company profile, it is considered a good practice to include an explanation of your valuation method, as well as a detailed layout of the calculations that went into assessing the value of your medical practice.

Medical Practice Valuation Guidebook

There is a lot to be said about the valuation of medical practices and how to carry out this process. This guide is a detailed explanation of the income approach to valuation, simply because it is the most generally applicable way of assessing any business’s value.

However, it is worth noting that there are also other valuation methods that might be factored into the report, depending on the specific characteristics of your practice. These include the asset approach and market-value approach.

An asset-based valuation can be useful if you own a lot of high-cost physical assets, such as advanced medical equipment or buildings that are part of the practice and are included in the sale.

The market approach is not really useful, unless you live in an area with a high condensation of medical establishments. It entails determining the value of your business by comparing it to other, similar ones in its vicinity.

Buying Medical Practice Valuation vs Selling

If you’re in the market to buy a medical practice, then you should pay extra attention to the goodwill of the establishment you’re considering buying. Many sellers don’t really mention goodwill in their valuation reports, either because they fear this information will bring the estimated value down, or simply because goodwill is difficult to measure accurately.

This is why, as a buyer, it is paramount that you carry out some independent research into the general reputation of the practice you’ve got your eye on, its patients’ opinions, as well as the overall popularity of the place. Looking into the goodwill can provide buyers with valuable insight into how much they can hope to profit off of the sale beyond the numbers-based valuation reports.

Final Thoughts

Depending on how long you’ve owned the business, selling a medical practice can be a difficult and emotional endeavor. You might want to get an external advisor when compiling the valuation report of your practice in order to avoid personal bias sneaking into the numeric assessment. With that said, you may want to head out and gather some data related to your patients’ experience with the practice to establish an estimate of your clinic’s goodwill within the community.

Hopefully, this guide helped you get a grasp of what it takes to carry out a medical practice valuation and the most important factors you need to take into account. Remember: a thorough evaluation and accurate assessment of value will increase your chances of landing a sale!