Would you like to know what impacts the value of your physical therapy practice? Previously, we wrote an article that answers several questions about how to value a physical therapy (PT) practice. However, there is much more that can be addressed.
Through understanding the basic economics of your physical therapy practice you can increase the value of your company. Beyond just client visits, we will also present several ideas to add value to your practice.
Understanding the Basic Economics
As a physical therapist, you understand the following equation:
(average reimbursement/visit) x (# patients seen) = total amount of revenue
For instance, a PT practice in Florida sees about 32 patients a day with an average price per session of $100 to $120. As such, the clinic generates around $16,000 to $19,200 a week when running at full capacity. As a result, at the high-end, this clinic produces around $86,400 a month.
The owner of this PT practice mentioned during a call that the value of the business is directly correlated to the value of his patients. As such, keep track of this information on a monthly basis. An appraiser will want to know this information if hired.
Looking Past Revenue
Now that you have spent time understanding revenue per visit, you need to look deeper into the largest operating expenses? The largest operating expense for a physical therapy company is salary and compensation. On average, according to industry research by IBISWorld, salaries account for 53.2% of revenue. Wages vary as one clinic can have very specialized individuals while another clinic may have several assistants.
One of the ways in which to understand how salaries impact a practice is by looking at how an owner views salaries and compensation. Regardless of how the practice is structured, it is important to understand that an owner expects to make a significant return on an employee’s salary. This compensates the owner and covers other operating expenses.
For instance, one of the employees at the clinic in Florida made around $85,000. A typical owner most-likely is looking for a 3-4x annual salary. The range of revenue impact is around $255,000 and $340,000. At the high-end, this comes out to be $28,333 a month. Divide the monthly revenue by $120 a session and that particular employee needs to have 236 sessions a month or roughly 10 a day.
Overall, understanding the cost of an employee will greatly impact a PT practice. This type of exercise will enable an owner to see whether or not an employee is working at full capacity and the average hourly rate for that employee.
Impacting a Physical Therapy’s Value
Our appraisers at Peak Business Valuation assess the above information to better understand how one PT practice relates to another. I will be the first to tell you that it is difficult to compare one practice to another. There are numerous other factors that impact the value of a practice. Some of these include:
- Services Rendered
- Owner’s Involvement
Many of these factors are not considered when initially speaking with a prospective clinic receiving a business valuation. Analysts simply look at revenue per visit to understand the practice. This allows them to get a good grasp of where the business is at.
Although it is important to have the numerical figures in place to support the company financially, it is important to understand the value generated from the other above factors. By digging deeper and speaking directly to business owners, Peak gets better insight into these value drivers. For example, we ask about the specialized skill of the employees. This helps us more fully understand the profitability of the practice. Having the right team of specialized PTs who provide high-quality care generates strong relationships with patients and referral sources.
In conclusion, the value of your business is directly correlated to the number of clinic visits, the quality of the care, and the expense of the team. By discussing these factors on a call with a potential client, we discuss in greater detail how they impact a PT practice. Again, the best way to fully understand the impact of a PT’s operations is to have an appraiser or valuation expert analyze the practice.
Bringing Value in Other Forms
I have touched on just a few factors that directly impact the value of PT practice. Yet, there are dozens of owners we have worked with who have created value in many different ways.
Many practices are implementing alternative methods to bring in cash flow via wellness programs, massages, spa treatments, fitness, etc. Such services have attributed to the value of a practice since the revenue is generated separately from the day-to-day operations of the business.
For instance, we worked with a practice in New York that had built a mobile application for customers to subscribe to. This allowed patients to more easily connect with physicians. The clinic charged customers a monthly fee and had add on services like preparing meal plans, etc. This was a great solution that the clinic has not only benefited from, but also sold to other clinics to use and offer to patients.
One of the more underrated value sources has been the power of asking for referrals. One clinic we worked with saw a higher number of new patients than any other clinic we had previously seen. After several care visits with a patient, the PT would ask “Who do you know that could you use our services?” This led to a great pool of new patients. As a result of this implementation, the clinic hired another physician to keep up with demand.
If you are interested in learning more about our industry experience with physical therapy practices and how we can help you understand the value of your business, please reach out via a phone call or email.
We also help individuals who are looking to purchase a practice to assess whether or not they should purchase the practice. Additionally, we help owners of practices looking to sell their business to know where they should be pricing their business at.