Whether you are looking to jumpstart your career or expand through a strategic acquisition, purchasing a practice might be something you’ve considered. There’s more thought that goes into a practice purchase than just the expected revenue. In fact, non-monetary items, like staff and patient demographics, compliance and legal issues, and future plans, can all influence the practice’s value.
Evaluate Seller’s Financials
The financial data of a practice can have a significant impact on the valuation. Take the time to evaluate the seller’s financials, including the income statement, the balance sheet, and past tax returns. You want to determine how efficient the practice is at generating revenue and profit, the value of assets in the business, and the details on cash flow. The stronger the practice’s financial position, the greater the fair value. Working with an experienced accountant for doctors and dentists to decipher the seller’s financials can be a great way to get the full picture and assign a fair value.
Calculate Valuation Metrics
Practice valuation can also be assigned using different metrics. EBITDA (earnings before interest, taxes, depreciation, and amortization), normalized earnings, and other valuation metrics give you insight into how well the practice is at generating profit from primary operations, operational performance, and cash management. These metrics can be calculated from the seller’s financial statements. Evaluating valuation metrics over the course of a few years gives you crucial insights about financial trends. For example, if EBITDA decreased over the past three years, it can indicate financial troubles, which lowers the fair value. The stronger the metrics, the higher the potential fair market value.
Analyze Patient Demographics
Patients are the lifeline of any practice. If a practice is consistently gaining new patients, increasing their lifetime value, and diversifying revenue sources, the practice is more valuable. For example, data might show you that the practice gains an average of fifty new patients per month. What is the impact on revenue from consistent patient gains in five years? Revenue might be on track to double with little to no work on your end, which is very valuable. Analyzing your patient demographics can be vital in assigning a fair market value to a practice.
Review Insurance Participation and Reimbursement Rates
For most practices, reimbursement is the main source of cash flow. In our experience it’s common for a practice not to have copies of their insurance contracts or fee schedules. Insurance carriers do not make it easy to get either, but reviewing both, for each contracted carrier, is essential to assessing the practice’s value. Are the opportunities to negotiate better rates when the contract is up? Do you want to stay in network with the same carriers the practice is in now? Do you want to add new carriers? Answers to these questions might change how you value a practice.
Consider Staff Data
Just like patient data is important, so is staff information. Identify any red flags in the existing team, such as staff turnover, poor online reviews, and low productivity. When you purchase a practice, you are walking into an existing workplace culture. Transparency in current operations is vital. For example, if the practice has a strong team that excels in productivity and efficiency, the value of the practice might be higher compared to a practice plagued with turnover and poor reviews. It can be difficult to assign a financial value to staff data, which is why working with a professional who helps you analyze the deal is important.
Review Compliance and Legal Issues
Buying a practice can come with a handful of compliance and legal issues. From drafting legal agreements to transferring licenses and employment agreements, reviewing legal issues and compliance complications can impact the practice valuation. For example, if a practice has a pending lawsuit that will be paid post-closing, that can influence the final price you pay. Going through applicable legal and compliance issues should not be done on your own. Working with a lawyer, accountant, and other professionals is crucial.
Forecast the Future
Your future plans for the practice can play a role in the final practice valuation. For example, are there services that the seller refers out that you can bring in-house to lower costs and increase revenue? Can you expand your insurance participation and reimbursement rates to take on more patients? If the practice has room for optimization, you may decide to pay a higher price. This is why looking ahead can be critical when assigning a fair market value to your practice.
Summary
One of the most difficult parts of purchasing a practice is determining its fair market value, from evaluating financial statements and metrics to considering non-financial data. If you have questions about whether the practice you want to buy is a fair value, please contact us.