After reading all the articles on valuations of a
practice, I would like to try to summarize the
topic to ensure we are all comparing apples to
apples. The reality is that everyone has given
good input but I would like to offer a simple and
concise summary of valuation methodologies that
will be easy to understand based on real life
experience.

There really are no rules of thumb anymore and
selling a practice is like selling any other
service business, so it’s important to understand
who is buying your practice and then you can come
up with a logical formula and rationale for
valuing your practice. I think the easiest way to
start this process is to put your practice in one
of three buyer buckets.

1. Buyer: Current associate or new podiatrist
wanting to buy your practice. This will probably
be your best chance of getting the best price with
the most flexible terms. The reason is that the
seller can slowly exit the practice while the new
physician integrates into the practice and the
revenue stays fairly stable. Let’s say a practice
collects 500K and the owner takes home 150K plus
benefits, then in theory the new associate or
podiatrist should be able to replicate these
numbers or even grow the practice revenue.

I would say that the lowest value for this type of
practice would be 150K or 30% of annual
collections. There are a lot of factors going into
the purchase price, but the more flexible the
terms, the higher price you could possibly get in
this scenario. The buyer here is going to step
into the shoes of the existing doctor and should
be able to continue as a viable practice entity.

2. Buyer: Another podiatry group or basically a
strategic buyer. This one usually will vary
depending on whether you are retiring or staying
on and practicing for the next 5-10 years. Here
you are dealing with a buyer who is going to buy
you for strategic reasons and wants to access your
patient base to further grow their current
practice model. Here a knowledgeable buyer will
probably use a more sophisticated methodology and
really focus on what value your practice will
bring to the group practice. Group practices with
ancillaries are not allowed by law to factor into
their price, the value or volume of ancillary
referrals your practice would contribute to their
growth when coming up with a valuation price. Here
you might be able to negotiate a higher price
depending on how much the buyer really wants your
location and your practice.

In both these scenarios the buyer might also buy
your real estate which could be a big advantage to
you as a seller. In this model, usually the group
will have to replace you or pay you to stay on
with the practice. In either event, the purchaser
needs to justify the purchase price and be able to
get a return on their capital or investment.
Depending on the aggressiveness of the buyer, you
might should be able to negotiate a higher price.

3. Buyer: Private Equity Backed Platform Practice.
In this scenario, the game changes completely. The
buyer will usually pay you off some multiple of
EBITDA as Dr. Ribotsky discussed, but in order to
do that you will need to have net income in your
business. To keep things simple I am going to use
the term net income and EBITDA interchangeably
even though they have different means whether you
are on cash or accrual based accounting. Since
most physicians are on cash accounting, net income
would be more appropriate to use, which is your
bottom line after all your expenses are paid and
this is the amount of cash generated by your
practice by the end of the year. Since physicians
are service businesses most practices don’t have
any profits and distribute out all net income to
the owners.

This is a problem when valuing a practice. Would
you invest in a company where the owners took all
the profits out of the business every year?
Obviously not and that is why you will need to
recast your financials to show how much profit you
are willing to leave in the practice. For example,
let’s say you collect 500K per year but you have
zero net income then your practice is truly worth
zero. Why?

As a financial investor, if I gave you 150K for
your practice and you didn’t have any profit I
would never make any money on my investment. So,
what PE firms do proforma out your financials and
figure out how much profit or EBITDA or Net Income
they can get out of the company. Once they can
realistically get comfortable with that number,
they will pay you a multiple on that number. If
you have 50K of EBITDA and I pay you a 5X
multiple, if nothing changes I will get my money
back in 5 years.

Now, as a savvy investor, I am going to change
your practice to make you more efficient and
improve your profitability. So if I can get your
net income to 100K per year then I would
theoretically get my money back in 2.5 years. I am
really simplifying this example but I am trying to
review the concepts and give you an understanding
of how investors will look at your practice.

I hope I haven’t confused anyone, but to me it’s
simplicity before complexity. You can Google
“practice valuations” and find hundreds of
articles on practice valuation methods. The key is
to understand your buyer, and your strategy before
even starting the process. I hope this helps and
gives some clarity on this topic.

David Helfman, DPM, CEO, Extremity Healthcare,
Inc. VPG, LLC.