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Selling Your Practice? You Need to Understand Valuation | The Doctor Weighs In
By: Nick Hernandez, MBA, FACHE
Practice valuation can make or break a business sale because for many physicians, attaching a dollar value to their practice is a touchy subject.
Practice valuation nomenclature has changed over the years. Practice values used to be referred to as a percentage of collections. But today’s most common reference point is a multiple of earnings before interest, taxes, depreciation, and amortization ( EBITDA).
Traditionally, a solo practitioner thought of earnings as the total remuneration from the business in a given year. The reality, however, was that a portion of those earnings was compensation for the physician providing clinical care and a portion represented profit generated from the business.
Historically, valuations were largely considered the total earnings of the owner. Whereas investors focus on the profits of the business as a basis for valuation. Further, investors consider the actual cash flow of the practice on a debt-free basis as the best predictor of their return on investment. This has led to the focus on EBITDA as a measure of a practice’s performance. Further, this is how most other businesses are valued.
