How to Calculate the Value of a Medical Practice

Valuing your medical practice correctly might just be the most important thing to get right in the process of selling it. But for many physicians, attaching a dollar value to their practice can be a touchy subject. Many have no idea what their medical practice is worth. 

When you’re preparing to sell or buy a medical practice, doing a thorough valuation of the business will give you confidence in your list price or your offer price and help you defend that price in negotiations.

If you’re selling a medical practice, you don’t want to get the valuation wrong. If you value the practice too high, you’ll lose interest from buyers, but if you value it too low, you could leave hard-earned money on the table. 

How do you value a medical practice?

Attaching a value to a medical practice is both an art and a science, and the valuation process must consider both tangible and intangible factors. The “science” of practice valuation is a complex equation that has changed over the years. Today’s most common reference point is a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA).

In the past, a practice owner might have thought of earnings as the total remuneration from the business each year. But in reality, a portion of those earnings was compensation for the physician, and another portion represented the actual profit the business generated. Physician buyers tend to put more weight on the compensation of the owner, while investors are more focused on the business profits. Investors also emphasize actual cash flow on a debt-free basis. All of this led to a focus on EBITDA as a measure of a practice’s performance. 

So then, what is the right multiple to use? Unfortunately, that’s a question without an easy answer. The multiple will depend on the investment opportunity, its level of risk, and the rate of return for investors. The multiple also has to assess many additional factors, including:

  • Trained staff
  • Stable or growing revenue stream
  • Payor mix
  • Facility condition
  • Services provided
  • Profitability

Understanding a practice’s true market value, tangible assets, cash flow, industry averages, and multiples don’t paint the entire practice. Also known as “practice goodwill,” a practice’s intangible value will help reveal its true market value – what a buyer may actually be ready and willing to pay in the marketplace. This is where some of that “art” of practice valuation comes into play. Intangible assets that must be considered during valuation can include things such as:

  • Reputation
  • Market share
  • Proprietary processes
  • Intellectual property
  • Patient lists
  • Location
  • Referral relationships

Who is the Buyer?

As mentioned earlier, different buyers will have different perspectives on a practice’s value and will prioritize different tangible and intangible factors. A private equity firm may prioritize investing in a business whose founder or primary physician plans to continue working, and it could be important for them to keep as much of the management team intact as possible. A strategic buyer, like one who has existing group practices, may make upward EBITDA adjustments if the potential practice has synergies like a duplicative management team or vendors, more favorable lab and supply contracts, or more favorable payor contracts. In general, a private equity firm will pay a higher multiple but on a lower EBITDA. In contrast, a strategic buyer will probably pay a lower multiple on a higher EBITDA.

Valuation is tricky, hire a professional

Clearly, medical practice valuation is a complex undertaking that is influenced by an abundance of factors. You may be tempted to try and value your medical practice by yourself, but we highly recommend enlisting professional guidance to ensure you value your practice properly. 

Getting a credible and professional practice valuation will help you best defend your asking price in the marketplace and will ensure every single influencing factor is considered. At Strategic Medical Brokers, we look at over 30 factors when we value your practice, leaving no more room for guessing. Submit a request today and we can start the practice valuation request for you.