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Practice Valuation

MPB offers a variety of valuation reports and services, including litigation support & expert witness testimony for divorce, oppressed shareholder, partnership dispute, and other legal matters.

practice valuation activities

Why are Practices Valued?

Practice valuations are performed for a variety of reasons, including the following:

  • purchase/sale
  • partner buy-in or buy-out
  • divorce
  • merger with another practice
  • partner/stockholder disputes
  • retirement planning
  • tax purposes
  • bankruptcy
  • eminent domain actions
  • etc.

What’s the Difference between a Valuation and an Appraisal?

The terms valuation and appraisal are used interchangeably.  Both refer to determining the value of a business or practice.  In recent years the term ”valuation ‘ has become more popular.  However, using ‘appraisal’ is equally acceptable.  The term ‘evaluation’ is however an incorrect use of the term, and is often confused with the correct terms (i.e., valuation or appraisal).  A trained valuation professional would never use the term ‘evaluation’, and is usually an indicator of lack of formal valuation education.

 

What do Practices Sell For?

There is no single magic formula to value any business.  And professional practices are generally more difficult to value than most businesses as they tend to have a wider range of values.  Though people frequently ask for a rule-of-thumb, even knowing they are imprecise and may not apply to your situation.  Here are a some rules-of-thumb:

  • Professional practices will sell for between 1x to 4x annual discretionary earnings to owner.
  • Professional practices will sell for between 20% to 80% of annual gross income depending on specialty and other factors.
  • Larger multi-provider practices with $1+ million EBITDA (i.e., think profit over and above owner doctor fair market compensation) often sell for 5X – 12X EBITDA.  
  • Physician Primary Care practices: average 30% to 35% of annual gross collections.
  • Physician Specialty practices: average 20% to 30% of annual gross collections.
  • Psychiatry (physician) practices: average 45% to 50% of annual gross collections.
  • non-physician mental health practices: average 25% to 30% of annual gross collections.
  • Physical Therapy/Rehab practices: average 60% to 75% of annual gross collections.
  • Medical Spas: average 50% of gross sales plus inventory.
  • Medical and Diagnostic Laboratories: average 100% to 125% of gross sales.
  • Dental practices: average 60% to 70% of annual gross collections.
  • Optometry practices: average 60% to 75% of annual gross collections.
  • Optical Stores: average average 50% to 60% of annual gross sales.
  • Chiropractic practices: average 60% to 70% of annual gross collections.
  • Smaller Veterinary practices: average 60% to 70% of annual gross income.
  • Larger Veterinary practices (3+ DVMs):  often sell for 100% to 120% of annual gross income.

The problem with rules-of-thumb is, “How do you know if your practice is the norm or if the rule-of-thumb applies to you.  Also, different practice types have significantly different average price ranges.  The average practice range/ratio is significantly different for a primary care medical practice when compared to a medical specialty practice, or a general dentistry practice, or an optometry practice.  Even within the same practice type, we often see practices sell for 2 standard deviations above or below the average sales price.  This means that a practice that might have an average sales price of 30% of annual gross income might have a price range of 5% to 60% of annual gross income.  Further, there can be outliers even outside this range.  Will your practice sell above or below the average? 

 

Why is the Price Range so Wide?

There are dozens of factors that influence practice value.  A key factor is practice type.  Average practice price ratios vary greatly between practice types: medical, dental, chiropractic, optometry, or even between a family practice and a cardiology practice.  Beyond practice type, numerous factors influence value.  Some sample factors are shown below:

  • Profitability.  A practice netting 35% of gross will sell for less than a practice netting 50% of gross.  How do you compare with your industry standard?
  • Location.  Practice in rural or particularly high cost of living areas may sell for less.
  • Facility.  Practices located in larger, modern facilities tend to sell for more than practices located in cramped, run down facilities, on the bad side of town.
  • Equipment.  Practices with lots of new, expensive, modern equipment tend to sell for more than practices with old equipment or very little equipment.  Have you implemented an EMR system yet?
  • Hours worked.  Are you working 20 hours per week or 50 hours per week to generate $XXX,000 of revenue.
  • Reimbursement projections.  How is fee reimbursement trending for your specialty?  What is your procedure mix?
  • Technology advances.  Have recent technological advances made your equipment or procedures performed obsolete?
  • Staff. Do you have well-trained staff with good tenure, or poorly trained staff with high turnover?
  • Payer Mix.  Is yours an all cash practice, or all Medicaid, or a blend of traditional insurance and PPO, or capitation?
  • Financial History. Is your practice income increasing or decreasing?  Is the current growth rate sustainable?
  • Projected Income.  Revenue history may not be relevant if projected income is expected to be higher or lower.
  • Referral Base.  Is your referral base broad and deep? How well will new patient referrals transfer to a new buyer?
  • Personal Goodwill.  How much of the practice revenue is tied to the doctor’s individual reputation or personality?  Will patients/referrals accept another doctor?
  • Sale Terms.  Will it be a stock sale or an asset sale? What is included or excluded from the sale?
  • Financing.  What type of financing is available? Commercial loan or seller carry? How much down payment? Interest rates?
  • Competition.  Did a competitor just open down the street? Are you the only game in town?  Is the hospital competing with you?
  • At Medical Practice Brokers, LLC we consider over 45 different factors when valuing your practice.

 The graphs below show the wide range of values for family medicine practices nationwide.   Other practice types can have even a wider spread.

Where would your practice fall on this spectrum?

Medical practice value ranges
family medicine price range

Who does Valuations?

There are several categories of people who perform valuations. Each category has it advantages and disadvantages. Although, the better appraisers tend have formal specific business valuation education and also have an understanding of the various issues involved in valuing a specific business industry for the stated purpose (e.g., buy/sell, divorce).

          • business appraisers
          • accountants (CPAs)
          • business brokers
          • college professors
          • commercial real estate appraisers
          • investment bankers

Why not just have my CPA do it?

Accountants often do not have significant experience or training in performing valuations.  The vast majority of CPA’s nationwide have little or no training or expertise in business valuation.  While they are very familiar with financial statements, many are uncomfortable making the forecasts that crucial to valuation.  Further, their experience tends to be in the tax value and tax law/regulation, which is usually quite different than Fair Market Value or Fair Value is in divorce.  They usually do not have real world sales experience to understand how terms of sale, or loan requirements, or current buyer trends will alter practice value.

 

How about a general business broker?

General business brokers most often use generic rules-of-thumb to list and sell businesses.  However, rules-of-thumb can be dangerous as they do not take into consideration the specifics of a particular situation.  Also, many business brokers lack the formal valuation education and have limited understanding of business financials.  Finally, most general business brokers are not familiar with professional healthcare practices and have difficulty assessing the variations unique to professional practices.  Most business brokers will just tell you that a practice will sell for X times net or gross–this usually will give you a dramatically wrong answer to practice value.  We find many general business brokers drastically overvalue professional practices.

 

How about those Valuation Software Programs?

Software-driven products should be approached with caution.  In general, valuation programs are designed to give quick, and not necessarily accurate answers.  Further, by design, they deny the user the expertise of a qualified appraiser’s many years of valuation wisdom.  While valuation software tools can be an effective time saver in the hands of a trained professional, their use is problematic when used by individuals or untrained part-time appraisers who do not understand the appraisal process or the tool itself.  The old axiom of ‘Garbage In – Garbage Out’ often describes the result.  You may find it interesting to know that most certified business appraisers rarely use purchased valuation software as the crucial element in valuation is the experienced interpretation of information.

Valuation Organizations

There are several organizations in the United States that certify business appraisers:

  1. International Society of Business Appraisers (ISBA)
  2. Institute of Business Appraisers, Inc. (IBA)
  3. American Society of Appraisers (ASA)
  4. National Association of Certified Valuation Analysts (NACVA)
  5. American Institute of Certified Public Accountants (AICPA)

Our People

Our valuators are members of, and/or are accredited by professional valuation organizations listed above.  Additionally, our experience in practice sales/brokerage gives us a rare perspective as to true practice fair market values.  All of our brokers have access to our internal network of sales and valuation expertise.

What is YOUR Practice Worth?

Of course, the question has crossed your mind, “If you were to sell your practice today how much would it bring?”  Or “Am I paying too much for this practice?”  Understandably, that’s not a simple question in today’s dynamic market. Every practice is unique. For sellers, pricing your practice is a tricky matter. If you ask too much, buyers will look elsewhere. Yet, if your price is too low, you’ll cheat yourself out of thousands of dollars.  For buyers, how do you know if you are paying a fair price?

Don’t be burned by outdated pricing rules!

Using any one formula or rule to determine practice value is a setting you up for a potentially costly mistake. There are numerous factors that influence practice value: equipment, goodwill, profitability, financial history, staffing, buyer debt service, etc. The old rule of thumb “a practice is worth one year’s gross” simply isn’t true any more. Where does your practice stand? If real estate is involved then you have to determine if the practice income can support the fair market value of the real estate.  Will you have to delay retirement another 5-10 years?

Sadly, some doctors think their practice is worth much more than the practice will actually sell for in today’s market. Unfortunately, some have based their retirement plans on an over inflated value only to discover they cannot retire as they had planned. This is particularly sad when health reasons or “burn out” don’t allow the doctor the extra years needed to attain their retirement goal. Even CPAs sometimes miscalculate medical practice values by as much as 100% by using IRS formulas that have no basis in what buyers and lenders will pay for a practice. One might say, “It probably makes as much sense to hire a general-purpose CPA to appraise your house as it does a medical practice, since he/she probably has never marketed or sold either.” Is your CPA is a specialist in medical practice sales? You need to know!

Can you see the forest for the trees?

Sometimes a person is so close to something it is difficult to form an objective opinion. Medical practices are no exception. Unless you have had exposure to numerous practice financials, sales data, and industry financing trends, it is unlikely a person will be able to determine a fair market value in today’s practice marketplace. You might have to spend hundreds of hours doing research just to figure out what factors will make a significance difference to buyers and their lenders. Did you adjust the sales price to compensate for the doctor’s spouse working part-time for free? Did you adjust to normalize for the amount of vacation and hours worked? Are the practice financials sufficiently documented to attract a buyer? Do you know if the practice income after debt service will support the value of the real estate? Do you know what “add backs” can be used in your situation to maximize the sales price? How much will a buyer pay for “potential”? Does this practice warrant a top dollar price, or only a middle of the road price, or something less? Can a buyer get financing to buy your practice?

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(719) 487-9973

david@practicebrokers.com

15847 Woodmeadow Ct. Colo Springs, CO 80921

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