The methodology for valuing 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. This is how most other businesses are valued.
There is no easy answer to that question because the multiple is meant to assess the following:
Many additional 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.
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:
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.
An individual buyer is commonly looking to purchase a job. They are focused on the Seller’s Discretionary Earnings (SDE) that they may earn by replacing the current owner-physician. Multiples paid for SDE are lower than those for EBITDA.
As healthcare specialists in the business brokerage industry, we know how to value a medical practice. Call us today if you need a medical practice appraisal valuation.
Strategic Medical Brokers provides credible medical clinic valuation 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. At Strategic Medical Brokers, we consider over 30 different factors when valuing a medical practice. No more need for guessing.
Strategic Medical 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.