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Valuation Multiples for a Physical Therapy Practice

Valuation Multiples for a Physical Therapy Practice

The U.S. physical therapy industry is made up of more than 132,000 practicing physical therapists. This industry comprises professionals administering medically prescribed rehab through outpatient services for patients suffering from pain and injuries. Overall, this industry has a combined annual revenue of between $34-37 billion. Here is a quick summary of what multiples look like for a physical therapy practice.

Be sure to also check out our post on Valuing a Physical Therapy Practice. To better understand how to value your physical therapy practice, schedule your free consultation with Peak Business Valuation, business appraiser Utah.

Physical Therapy Valuation Multiples

* The following data is a result of several different private market databases. As such, observing one data set vs. another may result in different multiples. In addition, PT practices transact on a number of data points. As such, the multiples discussed are based on an array of PT practices across the United States.

Revenue Multiple

According to our data, over the last five years, physical therapy practices sold for an average 0.54x revenue multiple. The term multiple is a valuation metric that refers to the implied value of a business. It is calculated by multiplying the amount of revenue or sales a business makes by the valuation multiple.

Revenue X Multiple = Value of the Business

For instance, if a physical therapy practice generates $950,000 in revenue and transacts at a 0.54x multiple, then the business value is worth approximately $513,000.

$950,000 X 0.54x = $513,000

 

A revenue multiple is not typically used for valuing a physical therapy practice(s). Physical therapy practices vary depending on collections. As such, collections are particularly important i.e. how clients pay via insurance, Medicare, cash, etc. Other factors that may impact a revenue multiple include government regulation, skill of workforce, market, and pricing. For more information on value drivers, schedule your free consultation today! And read Value Drivers for a Physical Therapy Practice.

Seller’s Discretionary Earnings (SDE) Multiple

Over the last five years, the average SDE multiple for physical therapy practices was 2.65x for. This multiple is applied to SDE to derive an implied value of the business. The calculation is as follows:

SDE X Multiple = Value of the Business

For example, if a physical therapy practice has seller’s discretionary earnings of $700,000 and is estimated to sell at a 2.54x multiple, then the business is worth approximately $1,778,000.

$700,000 X 2.54x = $1,778,000

Seller’s discretionary is a common cash flow multiple used in small business transactions. SDE is computed by starting with your company’s EBITDA and adding back potential expenses that would not otherwise be incurred by a new owner. These expenses may include owner’s compensation, manager’s salary, other expenses such as auto, and nonrecurring items or events such as legal fees, consulting. For more information see, Seller’s Discretionary Earnings.

This approach is most frequently used as a valuation method for small businesses with sales less than $3M.

EBITDA Multiple

The average EBITDA multiple for physical therapy practices over the last five years was 3.6x. The following is the EBITDA multiple calculation.

EBITDA X Multiple = Value of the Business

*EBITDA = Earnings Before Tax + Interest + Depreciation + Amortization

For example, a physical therapy practice has an EBITDA of $1,500,000 and an EBITDA multiple of 3.4x. Using the above metrics, the company is worth approximately $5,100,000.

$500,000 X 3.4 = $5,100,000

The EBITDA multiple is a valuation ratio that measures a company’s return on investment (ROI). This multiple is preferred as it is normalized for differences in capital structure, taxation, and fixed assets. Normalized ratios allow for comparisons to similar businesses. Normalization is the process of removing non-recurring expenses or revenue from a financial metric like EBITDA, EBIT or earnings. Once earnings have been normalized, the resulting number represents the future earnings capacity that a buyer would expect from the business.

 

The Trend of Average EBITDA Multiples

The following graphic shows how EBITDA multiples have trended in the physical therapy industry based on total revenue.

Physical Therapy EBITDA Multiples By Revenue

Impact of Size on the EBITDA Valuation Multiple

The following graphic shows how business size impacted EBITDA multiples for physical therapy practices over the last few years.

Physical Therapy EBITDA Multiples By Size

The Trend of Average SDE Multiples

The following graphic shows how SDE multiples have trended over the last few years in the physical therapy industry.

Physical Therapy SDE Multiples By Year

Impact of Size on the SDE Valuation Multiple

The following graphic shows how business size impacted SDE multiples for physical therapy practices over the last few years.

Physical Therapy SDE Multiples By Size

When looking at multiples, keep in mind there are many unique factors that impact a business and the multiple used to value that business. We would love to talk with you more about the factors that may impact the value of your physical therapy practice.

Peak Business Valuation enjoys working with small business owners to help maximize the value of their physical therapy practice. We focus on providing valuable information to help you grow, sell, or buy a physical therapy practice. We have provided business valuations for dozens of physical therapy practices. Questions are always welcome. Please reach out via email or schedule your free consultation today!

Schedule Your Free Consultation Today!