Valuing a Health Care Practice

In many past blogs we’ve discussed different concepts on the valuation of a practice for the purpose of a sale. Many doctors, including Silkin Management Group clients, are reaching retirement age in the next decade and many of them plan on the sale of their practice for a significant part of their retirement income. Thus it behooves anyone who fits this mold to have some understanding of how the value of their practice might be determined.

The evaluation of a professional practice is both an art and a science. The evaluator must take into account the investment of the selling doctor, both in terms of time and financial resources, usually over a long period of time. Additionally, the evaluator must consider the practice as any financial asset, specifically the ability of the practice to pay a fair return to the potential buyer. The total return must provide a reasonable income stream to the buyer while servicing the debt incurred in the purchase of the practice.

Sales price, down payment, interest rate, payment period and terms are all variables that can all be adjusted in the negotiation process to structure an agreement that is beneficial to both parties.

In recent years we have seen many practices sold for between 50% and 60% of the most recent year’s gross income. Information from colleagues involved in the sale and financing of practices confirm this trend.

Sales value can be determined by evaluating tangible assets of the practice, at their current fair market value, and using the average of the last three year’s net value as the goodwill factor. For example, a practice grossing $800,000 with a net income value of $250,000 and tangible assets evaluated at a current fair market value of $100,000 might be marketable at about $400,000. This could vary depending on location.

After establishing a target value for the practice by applying the general rules, other factors are considered that can affect the sales value, positively or negatively. Is the practice growing or declining in terms of total patients seen, gross income and net income? Is the practice attracting new patients? Is the community in which the practice is located growing and improving, static or declining economically? If these factors are all positive, the sales value would approach 60% or more of the practice’s gross income figure. If these factors are static or negative it would affect the value of the practice to the same degree that the earnings potential of the practice is affected.

At Silkin Management Group, we have found that if the net income of the practice is unusually high (more than 40% of gross) or low (less than 25% of gross) a careful analysis of the reasons for the differential from the norm is required. We think that net income is a key factor in determining the value of any practice. After all, wouldn’t you rather buy a practice doing $600,000 a year and netting $250,000 than a practice producing $800,000 a year and netting $175,000?

There are many things that go into creating a good net including a well trained staff, efficient management systems, practice management knowledge, effective marketing, well run financial systems, etc.


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