How to Value a Medical Practice
Medical practices are businesses that provide assessments and care for individuals with health concerns. These services are provided by medical professionals who have a Doctor of Medicine or Doctor of Osteopathy degree. IBIS World notes that there are over 140,000 medical practices throughout the United States. These businesses generate over $61 billion dollars in revenue each year. Moving forward, we can expect healthy growth in this industry. As such, buying, growing, or selling a medical practice can be lucrative. Whether you are buying, expanding, or selling a medical practice, it is important to understand how to value a medical practice.
Valuing a medical practice is a complex process. The best way to learn how to value a medical practice is to receive a business appraisal. During a business appraisal, a valuation analyst examines the strengths and weaknesses of your medical practice. In addition, they will determine the value of a medical practice. This information is beneficial if you are looking to increase the value of a medical practice.
Peak Business Valuation is a professional business appraiser. We work with many medical practices throughout the country. Peak is happy to provide you with a business appraisal for a medical practice. In addition, we can discuss any questions you have about how to value a medical practice. Schedule a free consultation below to get started!
How to Value a Medical Practice
There are various valuation approaches a business appraiser may consider when deciding how to value a medical practice. Peak Business Valuation often uses the market approach and/or the income approach. Each valuation method provides different insights into the value of a medical practice. As part of the valuation process, a business appraiser determines the best valuation approach for your medical practice. This can include using a combination of valuation approaches.
Valuing a Medical Practice Using the Market Approach
Business appraisers often use the market approach when valuing a medical practice. The market approach resembles the real estate appraisal process. When valuing a home, real estate appraisers assess similar homes that recently sold in the area. This helps them understand the fair value of a home. With the market approach, a business appraiser looks at similar medical practices that were recently sold on the market. If the medical practice is a private company, the expert refers to private transaction databases to gather information.
Multiples for a Medical Practice
The market approach relies on valuation multiples to determine the value of a company. Valuation multiples are financial ratios that compare the value of a medical practice to metrics such as sales, cash flow, or earnings. To find the valuation multiples for a medical practice, valuation experts use the appropriate NAICS or SIC code. Below, we highlight basic valuation multiples for a medical practice.
SDE (Seller’s Discretionary Earnings) Multiple for a Medical Practice
- SDE multiples assess a medical practice’s cash flow by multiplying its seller’s discretionary earnings by the multiple. This is a common multiple when valuing a medical practice.
EBITDA Multiples for a Medical Practice
- The EBITDA multiple measures the return on investment a medical practice owner can expect to make.
REVENUE or SALES Multiples for a Medical Practice
- The revenue multiple measures the total amount of revenue a medical practice generates. Valuation analysts apply a REVENUE multiple to the store’s revenue to determine the fair market value of a medical practice.
To learn more about how to value a medical practice using valuation multiples, see Valuation Multiples for a Medical Practice.
Valuing a Medical Practice Using the Income Approach
Another common valuation approach for valuing a medical practice is the income approach. The income approach analyzes the future earning potential of a medical practice. This approach determines the value of a medical practice based on its ability to generate profits and cash flow. In addition, the income approach assesses the risks associated with a medical practice. We discuss a few of these risks below.
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- Competition: The medical practice industry is competitive. To succeed, it is important to differentiate your medical practice from competitors.
- Key Personnel: To operate, medical practices need professionals with sufficient education and experience. In addition, medical practices should have strong management teams to keep the business organized.
- Reputation: The reputation of a medical practice plays a crucial role in its success. Medical practices with good reputations can expect steady cash flow and patient acquisition.
- Regulatory Compliance: There are many regulations in this industry designed to protect patients. It is vital for medical practices to be aware of and comply with these regulations to operate.
Methods to Value a Medical Practice Using the Income Approach
Under the income approach, there are two popular methods for valuing a medical practice. They are the capitalization of cash flow method and the discounted cash flow method (DCF). Below, we discuss how to value a medical practice using the capitalization of cash flow method and the discounted cash flow method.
Capitalization of Cash Flow Method
- Business appraisers generally use the capitalization of cash flow method for medical practices with long and stable histories. When using the capitalization of cash flow method, the valuation expert determines an appropriate measure of economic income for a specific period. The income is then divided by an appropriate capitalization rate. The capitalization rate indicates a reasonable rate of return an investor can expect. It also assesses the risks an investor may encounter when buying or selling a medical practice.
Discounted Cash Flow Method
- The discounted cash flow method is best for medical practices that have strong financial histories. It is also beneficial for businesses that have built reliable forecasts in the past. When using the discounted cash flow method, valuation analysts use 3-5 years of cash flow projections. Then, the expert discounts the future cash flows using a discount rate rather than a capitalization rate. This helps them accurately determine the value of a medical practice. Keep in mind, the discounted cash flow method is less popular since it is limited to future cash flow estimates which are often arbitrary.
Summary
There are various valuation approaches to consider when valuing a medical practice. Often, business appraisers rely on the market approach and/or the income approach. Using these valuation approaches gives you multiple perspectives on the value of a medical practice. To learn which method is best for your medical practice, receive a business appraisal. As part of a business appraisal, a business appraiser can help you identify the fair market value of a medical practice. This is important whether you are looking to buy, grow, or sell a medical practice.
Peak Business Valuation, business appraiser, works with medical practices on a regular basis. We are passionate about helping businesses succeed. As such, Peak can provide you with a business appraisal for a medical practice. We can also answer any questions about how to value a medical practice. Start by scheduling a free consultation with Peak Business Valuation below!
See also Valuing a Medical Practice, Valuation Multiples for a Medical Practice, and Value Drivers for a Medical Practice.
