Medical practice transactions — including sales, mergers and acquisitions — require a clear understanding of value. If you're considering any of these scenarios, you'll first need to estimate the practice's value. Keep in mind that a business valuation is typically performed by a qualified professional appraiser who's accredited through any of several reputable associations, such as the American Institute of Certified Public Accountants, the American Society of Appraisers, and the National Association of Certified Valuators and Analysts.
What Does the Practice Need to Provide?
As the practice's owner, what's your role in the valuation process? You'll typically need to provide various types of financial information, including (but not limited to) the practice's:
- Tax returns for the previous three years,
- Profit/loss (P/L) statements for the previous three years,
- End-of-year balance sheets for the previous three years,
- Depreciation report for anything that has been depreciated over time,
- Last year's payroll report, and
- Production report (by provider if there's more than one, and it should be organized by the provider).
You'll also need to provide a list of equipment purchased in the past three years (and expenses), and a list of "discretionary items" (such as owners' compensation or personal expenses) that may need to be adjusted to reflect the practice's earnings capacity to a new owner.
In addition, a description of the practice is key. This should go beyond basic background information and address factors that may affect value. Ask questions like: What does the practice focus on? What are its mission statement and vision statement? The description should include the practice's infrastructure. For example, the number of treatment rooms, square footage, and whether the seller owns the building or is a tenant (and if a tenant, a copy of the lease agreement and a determination of whether it's transferable).
When gathering data, many valuation professionals ask a "catch-all" question to ensure a comprehensive understanding of the practice's operations and key value drivers. Other relevant details might include how many new patients per month the practice has seen over the past 12 months, the total number of patient visits, the top 10 Current Procedural Terminology (CPT) codes used and the top five referral sources. Providing complete and accurate information upfront can help streamline the valuation process and improve reliability.
What Are the Possible Valuation Methods?
There are three generally accepted approaches to valuing medical practices: the asset-based approach, the income approach and the market approach. Depending on the situation, an appraiser may consider all three and give different weights to each.
Within those approaches, the appraiser may use methods based on normalized earnings or cash flow, capitalization or discounted cash flow analyses, and pricing multiples, based on revenue or earnings before interest, taxes, depreciation and amortization (EBITDA), as appropriate for the specialty, size and risk profile of the practice.
In health care transactions, valuation often must consider not only transaction economics but also fair market value and, in some cases, commercial reasonableness and referral-related compliance considerations under applicable fraud-and-abuse laws.
Is the Value Reliable?
The decision to buy, merge with, or sell a medical practice shouldn't be taken lightly. Engaging with external professionals who have proven experience in medical practice valuation can help you better understand how the practice is being valued — and provide confidence that the final numbers are reliable. Wherever you're at in the process, we're here to help. Contact your financial advisor to discuss your options and help determine the best path forward.