If you are considering the sale of your practice the first burning question to arise in your mind is: How much is your practice worth?
After all, you cannot place your practice on the market before you’ve established on asking price!
When you take your practice to the market and begin to negotiate with buyers, you need to have a clear understanding of how you determined your asking price and the underlying factors that contribute to and underpin your decision.
The value you place on your practice must be consistent with market sales data and buyer expectations if you are to achieve a sale within a reasonable amount of time. Too high an asking price will put potential buyers off and too low an asking price will disadvantage you in achieving your expectations. So how do you arrive at an accurate market value for your practice?
Your first objective is to determine your practice EBIT (Earnings before Interest and Tax) or EBITDA (Earnings before Interest, Tax, Depreciation & Amortisation) as this figure will be used in calculating your practice market value. This figure is derived from your Profit and Loss statement so your accountant should be able to give you some assistance in this regard. Your practice value is then calculated as a “multiple” of your EBIT. The actual “multiple” figure used can change over time according to the prevailing economic conditions and is dictated by the latest market sales data.An +/- adjustment to your asking price will then be applied to reflect your practice’s relative position in the marketplace on a wide range of factors. The most important factors can be summarised as follows:
- Practice History
- Locations & Position
- Size of set up i.e. no of rooms
- Security of Tenure i.e. Lease terms and conditions
- Number of FTE GPs
- Annual Gross Billings
- Practice Expenses
- Estimated Profits i.e. EBIT or EBITDA calculation
Smaller practices, normally single or 2 GPs, with annual gross billings under $1,000,000, require specific consideration, as these practices don’t achieve an annual EBIT or EBITDA. Their pricing is generally worked out on the basis of a percentage of annual gross fees. This applicable percentage range is influenced by many of the same considerations, outlined in this article.
Your final asking price will be a reflection of all of your practice characteristics, as perceived by a constantly evolving marketplace. Price is also a reflection of business risk so any inherent problems in your practice that are detected by the buyer will reduce your final price. Some examples of this is an unstable doctor base or lack of security of tenure.
I’ve outlined below a broader summary of the issues which need to be taken into consideration when determining an asking price for your practice:
How many years have you been established in your current location?What is the reason for your sale?
How many doctors do you have? (male and female mix – on service agreements?)
How long have your principal doctors and other contract GPs worked with you?
Is your practice fully accredited?
Practice management structure. Is it transferrable to new owner?
Level and number of services being provided by your doctors, RNs and staff?
How loyal is your patient base? (Private, mixed or BB fee structure; appointment based or walk – ins)
What is your gross annual revenue and how consistent has it been? (ie. any regular annual growth?)
What is the mix and nature of your expenses?
What is your net pre-tax profit/loss? How has this been over the last few financial years?
Practice Size & Setup
What type of premises do you occupy? (ie. residential, commercial, shopfront, Council Approval)
What is the overall condition of your premises?
Number of consulting rooms, treatment rooms etc?
Is there scope for expansion / growth?
What mix of medical services do you provide?
Do you sub rent to pathology, allied health, dietitian, hearing etc?
Location and Position
Are you in a rural, regional or metropolitan location?
What are the demographics of your local area?
How is your practice positioned in terms of convenience, visibility and passing traffic?
How accessible is your practice in terms of parking and transport?
What is the number and make up of your competition?
What other ancillary medical services are available in your area?
Security of Tenure
Are your premises owned or leased?
What is your rent per square meter and is this consistent with other similar properties in your area?
What lease terms and conditions are in place, inclusive of annual increases and further options to extend?
Do you or your superfund own the freehold and is it for sale with the practice?
Impacts of Covid 19
The impacts of Covid 19 would fall under “future profit expectations” and “business risk” when assessing your practice value. As we have mentioned previously, practices with strong fundamentals should not be disadvantaged in terms of price or sales potential. In the short to medium term, buyers may use the perceived Covid risks to negotiate prices down, however, we recommend that all efforts should be made to resist any attempts at price gouging on this basis. Covid 19 should not be a continuing influence on the viability or profitability of medical practices.
As you can see from the above, establishing an accurate market value can be a complex exercise involving a lot of intangibles which only an industry professional with recent experience would be able to calculate. While your accountant may be excellent at giving you tax and financial advice and even an initial price estimate, they are not necessarily aware of current market sales data and the supply & demand characteristics affecting the true value of your practice. This kind of specialised market knowledge can only be found in an experienced practice broker who is actively engaged in medical practice sales.
At the end of the day a good understanding of the factors making up your asking price will put you in a strong position when it comes down to the final negotiation with an interested buyer.
I wish you all the best with your sales deliberations and stand ready to assist you if you require.