Common Valuation Methods to Value Your Medical Practice

Owning and running your own medical practice is no child’s play. While working tirelessly for hours on end and being conscientious of patients’ dependence on you is rewarding in its own way, it is all taxing and stressful. No wonder many medical practice owners decide to embark on a new journey by either selling or merging their practice. Those who don’t want to give it up completely sometimes bring in a new partner to share the responsibility. And some take the retirement path and bequeath their practice to capable successors.

However, selling a medical practice requires careful attention to determine its true economic value. When it comes to medical practice valuations, there’s much more than just income and assets to be considered. It needs a comprehensive analysis of all the factors that make your practice special, including your tangible assets, patient loyalty, reputation, and the practice’s future potential.

So how do you determine your medical practice’s financial worth?

Various Methods to Value Medical Practice

There are multiple methods to value a medical practice, each focusing on a different factor or feature of the practice. Let’s understand each one in a little more detail.

Multiple Revenue Method

This method is common for valuing small and medium-sized medical practices with a steady patient flow and, consequently, consistent revenue. The Multiple of Revenue Method calculates the practice’s annual revenue and adds a multiple to it. For instance, a general practice doing fairly well can be valued at up to 0.5x to 0.7x of its annual revenue. More specialized practices can go higher, up to even 1.0x their annual revenue. 

The reason for a relatively low valuation is that such small to medium-sized practices are often heavily dependent on the owner to retain patients. After the sale of the practice, the possibility of a patient returning reduces, leading to a lower valuation. 

Earnings Multiple Method 

Established medical practices that earn higher profits can use the Earnings Multiple Method. This method applies a multiple to a practice’s earnings before interest, taxes, depreciation, and amortization (EBITDA). This can range from 3x to 6x, especially based on the practice’s reputation, specialty, locality, and future growth potential. 

Income-Based Valuation Method

A reasonably straightforward method, the Income-based Valuation Method determines a medical practice’s potential to earn future income. The income method is more commonly used to value large or specialty medical practices with more consistent cash flow, higher growth potential, and long-term patient loyalty, such as pediatrics and long-term care facilities. Within the income approach, you can calculate the valuation in two ways: 

Using Capitalization of Earnings: Wherein a capitalization rate is applied to the normalized historical earnings of your practice to forecast its future earnings to arrive at a present-day value. This capitalization rate also takes into consideration any risks associated with your particular practice. Thus, the lower the risk associated with your practice, the lower the capitalization rate and the higher the valuation. 

Using Discounted Cash Flow (DCF): Similar to capitalization of earnings, the DCF method focuses on your practice’s future cash flow for the next several years and discounts it back to a present-day value. This approach is more detailed because it requires forecasting future performance and accounting for variables such as growth rates and market changes.

Patient-Based Valuation Method

While the above three methods arrive at valuations based on the medical practice’s income statement, this method relies on the doctor-patient relationship. Patients are any medical practice’s biggest asset. In primary care practices such as pediatrics or elderly care, revenues are often driven by the loyalty and longevity of patient relationships, their high retention rates, and referrals. This method estimates the annual revenue per patient, forecasts future cash flows, and discounts them to a present-day value. 

Asset-Based Valuation Method

All medical practices use specific tools and equipment for treating patients. Specialized practices use many high-value medical equipment and surgical tools. Then there are the furniture, computer systems, and the value of the real estate on which the practice stands – all tangible assets that can be easily valued. Apart from their inherent value, these assets can also be valued by their future income-generating potential. 

Intangible assets such as goodwill, patient base, and brand image can also be assessed and assigned a value. You can determine the value of your medical practice using the value of both tangible and intangible assets.

Market-Based Valuation 

If there is one flaw or loophole in the methods given above, it is that all of them determine the value of your practice based solely on the assets, income, or growth potential of the practice itself. However, economic value does not happen in isolation. 

How much are other similar practices being sold for? How geographically accessible is your practice? To what age groups or population does it cater to? All these factors also influence the valuation of your medical practice. The Market-Based valuation method collects data on all these factors before calculating the economic worth of your medical practice. 

Which Valuation Method to Use for Your Medical Practice 

The above methods take into consideration different factors. While one focuses on income, another places greater importance on patient relationships, and a third calculates value based on assets. The question arises, which one is most suitable for your medical practice?

The answer to this is complicated. Depending on what kind of medical practice you own, how well-established it is, and how centrally-located it is, you might have to use more than one of these methods to arrive at a correct valuation. For instance, under the earnings multiple and asset-based valuation methods, a specialty or surgical practice would be valued higher than a general practice. However, if the general practice is located in a bustling city with easy access to public transportation, it will attract a higher valuation under the market-based method. 

This is where consulting with an experienced accountant can help you. Equipped with the necessary resources and sources, and by identifying your growth drivers, an expert accountant can analyze different sets of data to determine which method or combination of methods would best suit your needs. For example, if your medical practice’s main value driver is its revenue, the accountant will give more weightage – let’s say 75% – to the revenue-based valuation method and combine it with the patient-based valuation method (5%) and market-based valuation method (20%).

The accountant will also factor in your technology integration, reimbursement rates, physician reputation, compliance, and, most importantly, growth potential, to arrive at the best possible price for your medical practice.

Contact DNTW Toronto LLP in North York to Help You Value your Medical Practice

A professional accountant can help you value your medical practice that incorporates its economic and financial worth. To learn more about how DNTW Toronto LLP can provide you with the best accounting and business valuation services, reach out to us here.