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Medical Practice Valuation Multiples Explained

Rizal
July 10, 2024

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 specialising 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 specialised practice, make sure the multiple reflects that)

Costs:

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

Sample Medical Practice Valuation Report

  • 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.

Are you in the process of selling your clinic practice? Vanda is here to help! We offer free services to assist you in finding investors or buyers, evaluating your clinic’s valuation, and more. Additionally, we provide a free subscription to Vanda services for clinics, including seamless migration from your existing clinic systems. If you would like to learn more, please contact us at seg@magicsoft-asia.com.

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