How to Value a Medical Practice
This article focuses on how medical practices are valued by private equity-backed groups, and to an extent, health systems and other strategic acquirers. Only some specialties are candidates for this type of transaction, while others may rely on more traditional physician-to-physician deals (often buying and selling for asset value plus “goodwill”).
Specialties that are currently candidates for private equity acquisition include ophthalmology, dermatology, ENT, pain management, urology, women’s health, orthopedics, oncology, cardiology, neurology, nephrology, rheumatology, gastroenterology, and both general and specialty dentists. Emergency medicine, radiology, and anesthesiology groups may also be candidates for acquisition by longer-established acquirers.
Physician practices are almost always valued on a multiple of EBITDA basis in transactions with private equity groups or similar buyers. That is:
EBITDA x EBITDA Multiple = Valuation
The key inputs are 1) the practice’s EBITDA, and 2) the EBITDA multiple. We explore each in turn below.
Determining EBITDA
The term “EBITDA” stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. However, most transactions are technically valued with a multiple of “Adjusted EBITDA”, which means the simple EBITDA calculation above plus adjustments for key items – most often non-recurring expenses, excess owner compensation and benefits, and sometimes proforma adjustments for new providers and other near-term growth opportunities.
In using the term EBITDA here, we are referring to Transaction EBITDA, which means whatever calculation of EBITDA is used in the relevant transaction.
EBITDA is typically calculated using the steps below:
Now, we have a calculation for EBITDA:
Net Income
plus
Interest, Taxes, Depreciation, and Amortization
plus
Owners’ Historic Compensation and Benefits
plus
Non-Recurring and Other Appropriate Expense Adjustments
plus/minus
Any Adjustments to Revenue
minus
Owners’ Post-Transaction Compensation
plus
Any Pro-Forma Adjustments
equals
EBITDA
Determining the EBITDA Multiple
Once EBTIDA is calculated, a multiple is applied to arrive at transaction value. For example, a practice with $4,000,000 in EBITDA selling at a 10x multiple yields $40,000,000 in transaction value. The math is simple here, but determining the multiple is multifaceted.
EBITDA multiples are generally determined by various factors, which blend in a non-formulaic way. It is perhaps more an art than a science and dictated by the human element; multiples are influenced by outlook, capital markets, comparable transactions, and general sentiment in the community. Key items include:
Pursuing a Deal
Physician sellers can maximize their transaction value by working with a team of experienced advisors. At FOCUS, we offer a preparation, marketing, and closing process that is tailored to physician groups and designed to attack the factors listed above. It allows us to maximize EBITDA, maximize the multiple, and maximize value.
Learn more about the FOCUS Healthcare Practice and read our recent healthcare insights.