Healthcare practice valuation is tricky and consists of multiple components. Here we provide a general overview of the valuation process, with a specific example, to help guide you.

Remember, when in doubt, always seek guidance from an experienced accountant or valuation expert.

The underlying value of any business (including healthcare) consist of the sum of your assets minus any debts (liabilities). Total Value = Assets – Debts (Liabilities). 
Here’s an example on how to value a dental practice. Remember, the same principles apply when trying to value a chiropractic, medical, optometry or podiatry practice.

“I am a dentist who has been practicing for 20+ years. I want to sell my dental practice and need to set a price. I own my own building, which also includes a large parking lot. My office is completely furnished. I have state of the art dental equipment that I recently financed. My practice is mostly cash-based. However, I do have a substantial amount in accounts receivables, typically 60-day turnover. I do have some bad patient debt outstanding on my books and accounts payable. By contract, I am obligated to pay 6 months of healthcare insurance premium to my staff (x3) when I sell my dental practice.  My properties taxes will be due in 3 months. After all expenses, my take home is about $325,000. The average salary of a dentists in my area is about $275,000.”

Step 1. List out all your assets and debts on a spreadsheet separately.

Step 2. Assign a CURRENT value to each asset and debt.

Remember, if you bought a computer last year for $3K and the current value is $1K, on your spreadsheet, you can only assign $1k. If you took on debt for $5K last year and currently owe $2K, the current value of your debt would be $2K

Asset Current Value ($)
Office Building $450,000
Dental Equipment/Operatories $30,000
Laboratory Equipment $10,000
Patient Supplies $2,500
Office Furniture $7,000
Computers/Telephone/Fax/Printers $4,000
EMR $4,000
Account Receivables $3,000
Cash $1,000
Total $511,500
Debt (Liabilities) Current Value ($)
Accounts Payable $7,500
Debt from Financing Dental Equipment $10,000
Bad Debt (Patient) $3,000
Property Taxes $8,000
Additional Obligations (Healthcare Insurance for Employees) $8,000
Total $32,500

In the above example, the total assets are $511,500.00 and total debt (liabilities) is $32,500. Therefore, the minimal value of your practice and associated property is $479,000.00. The minimal value is theoretical floor value which your healthcare practice is worth. In a perfect world, you should theoretical be able to sell your practice for at least $479,000. Remember, though, there are a variety of other factors that may impact your minimal value such as local reputation (brand), growth potential, location, and overall desire to practice in your specific area. These factors can impact your minimal value in a positive or negative manner.

After expenses, my net income is substantial higher than most practices in the area. How do I factor this into selling my practice?

Let’s go back to our above example: After all expenses, my take home is about $325,000. The average salary of a dentists in my area is about $275,000.

In this example, the dentist is making about $50,000 extra per year relative to his peers in his local market ($325,000-$275,000). This extra $50,000 is an income premium.

Incorporating income premium into any valuation exercise adds a huge layer of complexity. Buyers are hesitant to assign additional value to any income premium above and beyond minimal value. Here’s why – income premium is arbitrary.

Let us explain this further.  The income premium for any healthcare practice can be based on a whole set of factors which may not come into play once a practice has been sold. For instance, how exactly are you generating the income premium? Are you working more hours than your peers? Are you doing a specific procedure that reimburses well? Or are you simply the best dentist in that area? 

As you can see, unlike your tangible assets (building, office furniture, laboratory equipment), net income and any resulting income premium might not necessarily persist once the ownership of a healthcare practice has changed hands. For this reason, buyers of healthcare practices are hesitant to pay a significant amount of moneys above and beyond the minimal value.

Having said that, certain financially successful practices have been able to capture additional value and in cooperate an income premium into the selling price. The easiest and cleanest way to do so is based on the concept of multiplier (income multiplier).  Based upon comparable salaries in your area, take your income premium and multiple it by 2-3 to find your income multiplier.

In our example, the income premium is $50,000 and thus the income multiplier would be between $100,000 and $150,000 (average $125,000).

Once you’ve found your income multiplier, add this to your minimal floor value to give you a range of values for your practice.

Total Minimal Value Income Multiplier Total Value
$479,000 $100,000 ($50,000 x 2) $579,000
$479,000 $125,000 ($50,000 x 2.5) $604,000
$479,000 $150,000 ($50,000 x 3) $629,000

Based upon the above scenario, this dental practice would be valued between $479,000 (min, minimal floor value) – $629,000 (max, minimal floor value + 3x income multiplier).

Couple of key ending points:

1. A significant value of any healthcare practice rest in your tangible assets, more specifically the office building itself. In the above example, 90% of the minimal floor value ($479,000) was derived from the office building ($450,000).

2. Income multipliers can range between .5 – 5x depending on a variety of factors. Location of practice is by far the most important. In Manhattan and San Francisco, expect huge income multipliers, while practices located in small towns sell at or below the minimal floor value.

3. In most transactions, a 2.5x multiplier is considered generous, while .5-1x is the average.

4. Unlike selling a home, you’ll need to come up with a range of values for your healthcare practice. Use the above reference to help you find that range.

5. When in doubt, ALWAYS SEEK ADDITIONAL HELP!

Questions? Comments? Need additional help? Contact us at [email protected]

Clineeds is an online platform designed to help healthcare professionals buy, sell or lease commercial office space or sell entire practices.
Published on July 9, 2017