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Medical Practice Valuation: How to Estimate Your Selling Value

Practice Management

Medical Practice Valuation: How to Estimate Your Selling Value

If you have built or led a medical practice for years, putting a price tag on it may seem daunting. But if you're transitioning and want to sell, calculating an accurate selling value is essential to ensure you attract serious buyers and get a fair deal. Even if you only intend to sell in a few years, valuing your practice now will help inform growth strategies for a more lucrative future exit.

 

Valuation is a complex process, but there is a reliable science to doing it well. This simple guide will help you estimate your medical practice's selling value.

 

Methods of Valuing a Medical Practice

 

The first step in medical practice valuation is choosing a method.

 

There are four main approaches, each highlighting different factors and has its own strengths:

 

  • Income Approach:  This is a versatile method that values a practice by calculating current and projected earnings and expenses. An income-based valuation consists of annual revenue multiplied in order to account for projected growth, minus annual costs. This is a common and effective way to value a medical practice.
  • Asset Approach:  This approach calculates selling value by deducting the value of liabilities from that of assets. Including asset valuation within a valuation report is helpful if expensive facilities and equipment are included in the sale. It's not the standard method for medical practices, though, as a practice's overall financial performance is not directly tied to the value of its underlying assets.
  • Market Approach:  The market approach derives a valuation by comparing those of similar practices in the area. This could be useful in an area with a high concentration of medical practices. But the market approach is not a standard method for valuing medical practices because these businesses vary widely in services, facilities, specializations, and patient relationships. Too many variables distinguish one practice's potential to perform financially from another's for this method to be informative in most cases.
  • Rule of Thumb Approach:  This approach values a practice at a multiple of annual revenue. Common multiples for general practitioners are 0.5-0.9 times gross annual revenue. Specialist practices in fields like oncology and neurology can justify higher multiples. While the method is simple and versatile, it leaves significant gaps in analysis. For example, it does not account for expenses.

 

Consulting with a valuation professional can help owners decide which method will produce the most relevant valuation for their practice. The best consultants are familiar with all four methods and are open to applying the one an owner feels is suitable for their practice. Owners can also present a valuation that accounts for the findings of more than one of these methods.

 

Determining a Multiple for a Medical Practice

 

Calculations of value apply a multiple to annual revenue. This multiple reflects the fact that annual revenue changes over time. It has the potential to grow, but the buyer also exposes themselves to the risk that revenue or profitability may decline.

 

Medical practices have sold for multiples of 0.5-2.5 times their annual revenue. Multiples of 0.5-0.9 times revenue are becoming more common than higher ones for general practices, but multiples vary substantially depending on factors.   

 

Determining factors include:

 

  • Whether the method factors in costs
  • How specialized the practice is
  • Current profitability
  • Cashflow consistency
  • Assets and liabilities
  • Market conditions
  • Regulatory environment
  • Risk analysis

 

Determining the most beneficial multiple is a key area where consulting a valuation professional helps. They have the experience, knowledge, and resources to determine a multiple that grants the seller a fair deal while attracting potential buyers.

 

Earnings and Costs in Medical Practice Valuation

 

The details of calculations of value vary depending on each practice's circumstances.

 

However, an income approach to calculating value includes at least the following steps:

 

  • Calculate the average annual revenue from patient visits.
  • Forecast future income over three to five years, accounting for risk and growth factors.
  • Apply a risk-adjusted multiple to the projected average annual revenue.
  • Subtract average annual costs, including medical billing, back office expenses, owner compensation, rent, insurance, and maintenance of the facilities.
  • The resulting figure is the valuation, though it may need adjusting for additional factors like high-value assets or liabilities.

 

This is a reliable way to value a medical practice, but the method is only as good as the data one feeds into it. This makes accurate, detailed financial reporting essential to sound valuations.

 

The most challenging aspects of this valuation process are forecasting and determining the right multiple. Consulting an experienced valuation professional lets owners leverage advanced insights in order to calculate value with precision.

 

Valuing Goodwill for Medical Practices

 

Goodwill is an often-neglected feature of a thorough valuation. Many businesses leave goodwill out of their valuations because it's challenging to quantify.

 

Goodwill translates the value of a practice's reputation into financial terms. Facets of goodwill include brand recognition and reputation, customer loyalty, and intellectual property. Overall, it captures how much more than the basic market price of a medical service they are willing to pay because the service comes from this brand.

 

Accounting for goodwill helps owners arrive at a fair selling price. If the practice has substantial goodwill in its area, this should elevate financial forecasts. On the other hand, if a recent event has impaired goodwill, valuations should factor in the risks this can pose to revenue.

 

Consulting a valuation expert with experience modeling goodwill in the medical industry will lead to a more reliable valuation.

 

Preparing a Medical Practice Valuation Report

 

After running the calculations and arriving at a selling price, a medical practice owner should present the information in a well-structured valuation report. The owner can show this document to potential buyers in order to justify the price.

 

A valuation report should include:

 

  • Company name
  • Entity type
  • Industry
  • Location
  • Years in business
  • Number of owners
  • Number of employees
  • Financial statements for the last three to five years
  • Revenues, expenses, depreciation, and owner compensation recorded in the statements
  • Explanation of the valuation method
  • Detailed calculations
  • Optional: Graphs, detailed reports, and modeling for projected revenues and risk assessments

 

An experienced valuation consultant will excel at crafting a persuasive report.

 

Contact DoctorsManagement, LLC, for a Practice Valuation

 

Whether you plan on selling a medical practice soon or want to discover your practice's value to guide its growth, DoctorsManagement, LLC, is the expert valuation partner you need. DoctorsManagement gets to know you and your practice as your partners in success. With DoctorsManagement's industry-specific valuation expertise, they model and analyze the data to provide you with an accurate, beneficial calculation of value (COV).

 

Contact DoctorsManagement, LLC, for a free initial consultation to learn more and discuss valuation solutions.

 

Source: DoctorsManagement

 

doctorsmanagement.com

 

 
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