Practice Valuation: Know What Your Practice is Worth
Maximize Your Lifes Work
Understand how medical practices are valued, factors that increase and decrease value, and strategies to maximize your practice sale price.
- Practice value = tangible assets + intangible goodwill - goodwill typically represents 60-80% of total value
- Valuation multiples vary widely: 2-4x for primary care, 3-6x for specialty, 5-8x+ for PE-attractive practices
- Start exit planning 3-5 years before sale to maximize value through operational improvements and documentation
- Different buyers (PE, hospitals, individual physicians) offer different multiples and terms - shop strategically
- Proper sale structuring (asset vs stock, goodwill allocation, installment terms) can save $100K+ in taxes
The Opportunity
Why This Matters for Physicians
Understanding Practice Value Components
Practice value consists of tangible assets (equipment, receivables, real estate) and intangible assets (goodwill, patient relationships, brand reputation). For most physician practices, goodwill represents 60-80% of total value. Understanding these components is essential for sale planning.
Common Valuation Methods
Three primary approaches: Income approach (multiple of earnings/EBITDA, typically 3-6x), Market approach (comparable sales data), and Asset approach (tangible asset value). Most practice sales use income approach with goodwill allocation. The "right" multiple depends on specialty, payer mix, location, and growth trajectory.
Factors That Increase Value
Higher valuations come from: diversified payer mix (not dependent on single payer), strong referral network, modern equipment and technology, trained staff willing to stay, documented systems and protocols, clean financial records, growth trajectory, and favorable lease terms.
Factors That Decrease Value
Lower valuations result from: heavy Medicare/Medicaid dependence, aging patient base, single-provider dependency, outdated equipment, staff turnover, messy financials, declining revenue, unfavorable lease terms, and pending legal or regulatory issues.
Implementation
Proven Strategies
Value Enhancement Strategy (3-5 Years Before Sale)
Begin preparing your practice for sale 3-5 years before your target exit. Focus on: cleaning up financials, diversifying payer mix, documenting all systems and protocols, upgrading equipment, securing favorable lease terms, and building a strong management team that can operate without you.
Dr. Smith plans to sell in 5 years. Current valuation: $1.5M (4x EBITDA of $375K). Over 5 years: adds associate ($150K additional EBITDA), cleans financials, documents systems, secures 10-year lease. New valuation: $2.6M (5x EBITDA of $525K). Value increase: $1.1M.
Strategic Buyer Identification
Different buyers pay different multiples. Private equity-backed groups often pay premium multiples (6-8x+ EBITDA) for practices that fit their acquisition criteria. Hospital systems may pay premium for strategic locations. Individual physician buyers typically pay lower multiples but may offer better terms.
Ophthalmology practice: Individual buyer offers 4x EBITDA ($2M). PE-backed group offers 6x EBITDA ($3M) but requires 3-year employment commitment. Hospital system offers 5x EBITDA ($2.5M) with employment transition. Different buyers = different values.
Tax-Efficient Sale Structuring
How you structure the sale affects after-tax proceeds significantly. Asset sales allow goodwill allocation (capital gains treatment) but create tax burden for seller. Stock sales may be more tax-efficient for seller but create liability concerns for buyer. Installment sales spread tax liability over time.
$3M practice sale. Asset sale with $2M goodwill: 20% capital gains = $400K tax. Versus all ordinary income: 37% = $740K tax. Proper allocation saves $340K. Installment sale over 5 years: additional tax deferral and potential bracket management.
Avoid These Pitfalls
Common Mistakes
Waiting Too Long to Plan Exit
Most physicians start thinking about sale 1-2 years before retirement. Value optimization takes 3-5 years. Rushed sales result in lower prices, less favorable terms, and suboptimal tax treatment. Start planning early even if timeline is uncertain.
Overestimating Practice Value
Many physicians believe their practice is worth more than market reality. Emotional attachment, years of hard work, and revenue do not equal value. Get a professional valuation from someone who knows your specialty and market. Unrealistic expectations kill deals.
Neglecting Personal Goodwill Planning
Personal goodwill (value tied to YOUR reputation and relationships) may not transfer to a buyer. Practice goodwill (value in systems, brand, staff) is more transferable. Failing to distinguish between these can lead to valuation disputes and failed negotiations.
Questions
Common Questions
Here are the most common questions we receive about this topic.
Ask Your QuestionReady to Understand Your Practice Value?
Every practice is unique. Let us help you understand your current value, identify enhancement opportunities, and develop an exit strategy that maximizes your lifes work.