Medical practice valuation

The worked example

The six doctor practice from our bulk billing worked example bills $2,316,450 a year across its doctors, and its 35 per cent service fee brings in $810,758. The owner is one of the six. Their billings of $386,075 run through the practice's accounts in full, and they draw a salary of $150,000 in place of a doctor's share. After the other doctors' 65 per cent and $585,000 of running costs, including a one off $15,000 for a new records system, the accounts show profit before interest, tax, depreciation and amortisation of $326,706.

A buyer would pay a doctor 65 per cent of the owner's billings, $250,949, to do that clinical work, so maintainable earnings are $240,758: the practice's service fee income less its recurring running costs. With six doctors and the principal billing about a sixth of the practice, it sits in the group practice band, 3.0x to 5.0x, or $722,000 to $1,204,000. Written service agreements and a low reliance on the principal work for it, and a lease with two years left and no option works against it, so the answers point to the middle third: $891,000 to $1,035,000.

At four times, the middle of the band, the accounts' profit plus the owner's salary, $476,706, would suggest about $1.9 million, roughly double what the practice supports once a doctor is paid for the owner's work.

Illustrative example, built from typical figures for a practice of this size, not a client engagement. The salary, running costs and lease are assumptions.

How to read the result

The range

The headline is the third of the band your answers point to. The band range shows the full span for practices of your size and structure, and What moves it names the answers behind the third.

Solo or principal led, 2.0x to 3.0x

One or two GPs, or a principal who bills more than 40 per cent of the practice. Much of the value follows the principal, so buyers pay less for it.

Group practice, 3.0x to 5.0x

Three or more GPs and a principal who bills 40 per cent or less. Written agreements at a market service fee, doctors who stay and a loyal patient base move a practice up the band.

If a corporate group buys, 5.0x to 7.0x

Shown only for a group practice where three or more doctors would sign agreements to stay 12 to 24 months after a sale. Part of the price is usually deferred and the doctors are tied in, so compare offers on what you receive at settlement and what you must do to earn the rest.

No earnings based value

When the market wage and the adjustments take maintainable earnings to zero or below, a buyer pays little for goodwill, and the value rests on equipment, fit out and the patient list.

Larger practices

Above about $2 million of maintainable earnings, practices sold through a formal process can sit above these bands, and a comprehensive valuation is the right next step.

Questions owners ask

Why is the value lower than my profit suggests?

Your profit includes your own clinical work. A buyer has to pay a doctor to do it, so the multiple applies to what is left after a market wage. For a working owner that is usually the largest adjustment in the valuation.

My billings already sit outside the practice. What do I enter?

If you pay the practice a service fee like every other doctor and keep your share outside its accounts, the profit already reflects a market arrangement for your work. Enter 0 for your billings through the practice and 0 for owner pay.

Does bulk billing change the value?

Fully bulk billed practices run on thinner margins and depend more on Medicare settings, which buyers take into account. Our bulk billing switch shows what a change of billing model does to practice revenue and doctor income.

What about the premises?

Freehold premises are valued separately from the practice. If a related entity owns them, the practice should pay market rent, which is why the rent adjustment brings rent to market.

What about payroll tax?

How state revenue offices treat payments to contracted doctors differs by state and changes often, and buyers ask about it. Talk to your tax adviser about your own arrangements.

When do I need a formal valuation?

For a sale, a partner joining or leaving, finance or a family law matter, the other side will want a valuation it can rely on. Our indicative valuation starts from $4,500 and a comprehensive valuation from $13,500.

Typical results

For a practice with $300,000 of maintainable earnings, the bands give $600,000 to $900,000 when it is solo or principal led and $900,000 to $1,500,000 as a group practice, and $1,500,000 to $2,100,000 if a corporate group buys with three or more doctors signed on. In the group practice band every $10,000 of maintainable earnings moves the value by $30,000 to $50,000, which is why the market wage and the adjustments deserve the most care.