How to Value a Medical Practice

November 9, 2023

Adam Hoeksema

Figuring out the value of a medical practice, whether it's a large healthcare center or a small clinic, means looking at finances and healthcare trends. If you're thinking of buying or selling, understanding its true value is essential. In this guide, we’ll determine the value of a medical practice by outlining the key steps to take and answering questions such as: 

What Are the Most Common Valuation Methods for Medical Practices

Business appraisal involves closely examining both financial and operational elements. For a thorough insight, you might want to refer to our guide, 'How to Determine the Value of a Business’.

Various techniques exist for gauging a business's value, with the most suitable one often tied to the business's specific nature and industry segment:

1. Asset-Based Valuation

Rationale: This method evaluates a medical practice by calculating the value of all its assets minus any liabilities.

Usage: Tangible Assets: Includes medical and office equipment, technology systems, and the physical clinic space.

Intangible Assets: Considers elements like patient records, practice brand, and goodwill.

Net Asset Value: Found by subtracting the medical practice's liabilities from its total assets.

2. Income-Based Valuation

Rationale: This method evaluates a medical practice by calculating the value of all its assets minus any liabilities.

Usage: Tangible Assets: Includes medical and office equipment, technology systems, and the physical clinic space.

Intangible Assets: Considers elements like patient records, practice brand, and goodwill.

Net Asset Value: Found by subtracting the medical practice's liabilities from its total assets.

3. Market-Based Valuation

Rationale: Compares the medical practice to similar practices that have been sold, using market data to inform the valuation.

Usage: Comparative Ratios: Employs financial ratios, such as price-to-earnings or price-to-sales, common among sold practices to estimate value.

Recent Transactions: Analyzes the sale prices of comparable medical practices to derive insights into current market valuations.

How to Calculate the Value of a Medical Practice

For practical valuation insight, let's assess a fictional medical practice, ApexMed Health Associates, using three methods:

1. Asset-Based Valuation 

Identify and Value Tangible Assets:

  • Medical Equipment: $500,000
  • Office Furniture and Fixtures: $50,000
  • Medical Inventory: $20,000
  • Real Estate (if owned): $1,000,000

Identify and Value Intangible Assets:

  • Patient Records: $300,000
  • Brand Value: $200,000
  • Goodwill: $400,000

Calculate Liabilities:

  • Outstanding Loans: $600,000
  • Other Liabilities: $100,000

Calculate Net Asset Value:

  • Total Assets (Tangible + Intangible): $500,000 + $50,000 + $20,000 + $1,000,000 + $300,000 + $200,000 + $400,000 = $2,470,000
  • Total Liabilities: $600,000 + $100,000 = $700,000
  • Net Asset Value: $2,470,000 - $700,000 = $1,770,000

Using the Asset-Based Valuation, ApexMed Health Associates is valued at approximately $1,770,000.

2. Income-Based Valuation 

Forecast Future Cash Flows:

  • Year 1: $600,000
  • Year 2: $650,000
  • Year 3: $700,000
  • Year 4: $750,000
  • Year 5: $800,000

Identify the Discount Rate:

  • Assuming a discount rate of 10%.

Calculate Discounted Cash Flows:

  • Year 1 DCF = $600,000 / (1 + 0.10)^1 = $545,455
  • ... and so on for each year.

Estimate Terminal Value and Discount to Present Value:

  • Assuming a perpetual growth rate of 4%:
  • Terminal Value = [$800,000 x (1 + 0.04)] / (0.10 - 0.04) = $14,000,000
  • Discounted Terminal Value = $14,000,000 / (1 + 0.10)^5 = $8,657,938

Sum Up All Values for Total Value:

  • Total DCF for 5 Years: $2,500,000 (hypothetical sum of DCFs for 5 years)
  • Total Value of ApexMed Health Associates = $2,500,000 + $8,657,938 = $11,157,938

According to the Income-Based Valuation, ApexMed Health Associates would be valued at approximately $11,157,938.

3. Market-Based Valuation for ApexMed Health Associates:

Use Comparative Ratios:

  • Suppose medical practices like ApexMed typically have a P/E ratio of 7.

Calculate Based on Earnings:

  • With net earnings of $500,000, P/E valuation: $500,000 x 7 = $3,500,000

Consider Recent Transactions:

  • If similar medical practices sell for 5x their annual profit, then: $500,000 x 5 = $2,500,000

Calculate Market-Based Value:

  • Combine the values from P/E and recent transactions: $3,500,000 (P/E) + $2,500,000 (Transactions) = $6,000,000
  • Average the combined value: $6,000,000 / 2 = $3,000,000

ApexMed Health Associates' market-based estimated value would be approximately $3,000,000.

How to Buy a Medical Practice

Medical practices are at the heart of healthcare, serving as critical access points for patient care. Are you contemplating purchasing a medical practice? Here's a structured overview to guide you. For a detailed roadmap, check our comprehensive guide on How to Buy a Medical Practice.

Medical Practice Industry Overview

The medical practice sector is a major player in the US healthcare system, with primary care alone accounting for a significant portion of healthcare expenditures. The industry is buoyed by an aging population, technological advancements, and an emphasis on preventive care. With steady demand and potential for long-term patient relationships, medical practices present viable investment opportunities.

Medical Practice Acquisition Costs

The cost to acquire a medical practice depends greatly on its size, location, specialty, and patient base. Initial investments can range from $100,000 to several million dollars. Typically, the purchase price is a multiplier of the practice's annual profits, which can vary from two to six times, depending on the practice's profitability and market conditions.

Choosing the Ideal Medical Practice

Your search should start with healthcare business brokers, online medical practice listings, or through networking within the healthcare industry. Important considerations include the practice's reputation, patient demographics, existing staff competencies, and the state of medical equipment. Identifying practices with growth potential in services or patient base is also key.

Find Funding

Funding options are diverse, including traditional loans, medical practice loans, or private investors. A compelling medical practice business plan with realistic financial projections is crucial when seeking financing, as it demonstrates the sustainability and growth potential of the practice.

Conducting Due Diligence

In-depth analysis of the practice's financials, patient retention rates, insurance processes, and regulatory compliance is essential. It's also important to review any existing contracts, such as property leases or equipment loans. The findings will inform your negotiations and the final purchase terms.

Closing the Deal

Following your due diligence, negotiate the terms of purchase. It is vital to have full clarity on the practice's financial standing, legal obligations, and operational mechanics before you finalize the acquisition. With informed planning and strategic acquisition, stepping into medical practice ownership can be a rewarding enterprise.

Acquiring a medical practice soon? A QoE Report can offer the financial health check you need before sealing the deal.

How to Fund the Acquisition of a Medical Practice

If you're looking to step into the healthcare industry by acquiring a medical practice, an SBA loan might be one of the most accessible financing options. Medical practices often meet the eligibility requirements for SBA loans due to their critical role in providing health services. For specific guidance, you can refer to resources on SBA Funding for Medical Practice Acquisition. When applying, it's important to emphasize your experience in healthcare management or your role as a medical practitioner. Demonstrating your capability to lead and grow a medical practice can significantly strengthen your loan application.

Creditworthiness is also a crucial aspect of the approval process for financing. Ensure you have a solid credit background and prepare a detailed business plan that outlines how you plan to operate and expand the practice. Include your approach to patient care, staff management, and business profitability. Getting advice from financial advisors who specialize in healthcare acquisitions or connecting with colleagues who have undergone the acquisition process can provide you with insights and strategies for a successful purchase and operation of your own medical practice.

Creating Financial Projections for a Medical Practice Acquisition

Every medical practice presents its own set of operational specifics, from patient demographics to the mix of medical services offered. When creating financial projections for the acquisition of a medical practice, concentrate on:

  • Gather Historical Data: Examine past patient service revenues, insurance claim data, expenses, and net profit.
  • Analyze Physical Assets: Evaluate the state and value of medical equipment, office furniture, technology systems, and the facility itself.
  • Forecast Revenue: Take into account the stable patient base, referral patterns, service demand, and potential for service expansion or integration of new technologies.
  • Project Expenses: Calculate costs for medical supplies, pharmaceuticals, staffing, facility operations, insurance, and compliance with healthcare regulations.
  • Determine Valuation: Integrate all financial data, using valuation methods such as discounted cash flow (DCF) or asset-based valuations, adjusted for medical practice specifics.

Using a specialized medical practice or an acquisition financial template can streamline this complex process. This template would typically integrate income statements, balance sheets, and cash flow statements. Equipped with this comprehensive financial analysis, you're ready to negotiate the value of the medical practice effectively with potential buyers or sellers.

I hope this information has been useful. If you have any questions about valuing your medical practice, please feel free to reach out to us.

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 50,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

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