In the present scenario, we usually do not think much about the worth of medical practices. However, when situations arise in your career or personal life, the worth of your practice may become the foremost important business term you would wish to understand.
Through this blog, we will attempt to cover all the details and share the insights.
- 54% of medical practices have 10 or fewer physicians, down from 61% in 2012.
- 15% of physicians are practicing with 50 or more doctors, up from 12% in 2012
- 54% of physicians are baby boomers
Two reasons why more and more physicians are selling their practices and working with a hospital or a large medical group.
- Physician practices are seeing a requirement for significant capital investment due to government mandates around medical keeping.
- Since 54% of physician’s practice owners are baby boomers, they are looking to sell their practice and take on an employee role or retire altogether.
Let us see what medical practice is worth…
This assumes that all the physicians are compensated at a market-driven rate and the owner is not taking out any payouts or dividends. The most important variable when evaluating a medical practice is physician compensation.
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If you can isolate the cash flow that is paid to you as the owner of the practice versus an employee of the practice that is the Achilles heel of this valuation.
Medical practices sell for 3-5x multiple on earnings. 3x when the practice is specialized, and more towards 5x when the practice is internal or family practice.
Let us take an average of 4x. So 4x times $200,000
The practice is worth about $800,000.
Lower multiples within that range might be seen in a medical practice consisting of older physicians in a specialty affected by managed care, for instance, whereas a valuation of a practice consisting of younger, primary care practitioners might use a somewhat higher multiple.
Medical practice owners are not seeing the traditional financial returns they had seen in the past. That leaves an opening for private equity that can acquire say, 100 practices and in theory, achieve the economies of scale inherent in a larger organization. Things like bulk purchasing, insurance, centralized billing, and IT services, all make physicians practice ideal targets for the right acquirer.
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An exit multiple at the high end of the range might be seen in an appraisal of an established outpatient specialty center – an ambulatory surgery center, for instance – which is positively affected by favorable reimbursement policies and managed care.
A good physician treats the disease; an excellent physician treats the patient who has the disease. Think of your practice as the patient and you as the owner of the disease. If you can separate yourself from the practice, and the practice still operates well, you have done your job as an owner or a medical practitioner.