Successful medical practice owners maximise their investment returns by continuing to evolve the way they do business. They continue to set new goals to counter existing weaknesses/ threats, take advantage of opportunities as they arise and measure success against these goals.
Take charge of your business to ensure it’s well positioned for the road ahead. Value your practice now and select and focus on 5 key initiatives for the next 12 months, reflect and measure the benefits achieved by assessing the value achieved after setting these initiatives and prepare for your next strategic planning cycle.
How to value your practice?
Valuing a medical practice involves assessing its financial worth based on various factors such as revenue, profitability, assets, patient base, location, and goodwill. Here are some common valuation methods used to value a medical practice:
- Asset Valuation Method – calculates the value of tangible and intangible assets available to be transferred on the sale of the business
- Discounted Cash Flow Analysis – determines the present value of future opportunities or cash flow
- Capitalisation of Profit – multiplies a business’s adjusted net profit before tax by a capitalisation rate
Capitalisation of Profits method
The most common method is the Capitalisation of Profits method which values the business as a going concern. This valuation Assessment establishes a valuation for the business in its current form, based on current (adjusted) earnings and then multiplied by a multiple based the medical practice’s risks and value drivers. The methodology would include considerations such as:
- Profitability and servicing – the practice generating sufficient available cashflows’
- Profit adjusted for tax to provide a return on business investment
- An assessment of risks and value drivers
- The cost of capital
Financial performance
Generally, the net profit for the past 3 years is assessed and adjusted for owner market wages, interest expense ignored, depreciation adjusted based on useful life of assets rather than tax depreciation, related party rent is adjusted at market, owner specific expenses such as motor vehicles and other related deductions are also adjusted including abnormal income or expenses. A weighted average is then calculated to determine the future maintainable earning for the medical practice.
Business capitalisation rate or otherwise known as business multiple
The calculation of the Capitalisation Rate requires an assessment of the business’s risks and value drivers of the practice, conducted to identify the maximum period an owner/investor would deem appropriate to receive a total return of investment of funds. This rate is otherwise known as the business multiple and used to determine the value of the practice.
Successful business owners can maximise this multiple and generally attract a multiple of 5 to 9 times or higher when they are able to demonstrate a strong business model with a stable trading history and overall low levels of business and industry risk.
Successful medical practices focus on the achievement of regular business growth, are competitive and strong patient loyalty and value added pricing in place, they continue to monitor and enhance their employee value proposition to retain good experienced and knowledgeable staff, they continue monitor changes in legislation and industry risk and make change to reduce the risk, they have strong policies and procedures in place, have strong operating systems to maximise efficiency and reduce costs without impacting quality, the practice is not reliant on any key persons or owners and they have a documented succession plan in place.
Valuing a medical practice is a complex process, and it is advisable to consult with experts such as professional accountants, appraisers, or practice management consultants who have experience in medical practice valuation. They can provide a more accurate assessment based on your specific circumstances and the current market conditions.
Business Success
Successful medical practice owners start early and assess the current value of their practice, they determine where they want the value to be in 5-10 years and form a plan for getting there.
If you would like more information, contact Prosperity Health Director Ashley Quinton on 07 3839 1755 or aquinton@prosperity.com.au. Alternatively we have Specialist Health Sector Advisers in each of our offices. If you would like to speak to one in your location, call 1300 795 515.
