As a physician, you may be in a position where you are looking to buy or sell a medical practice. For young doctors, you may be seeking opportunities to grow and become a partner or full-owner of a practice to further your career, while others are on the cusp of retirement and may be balancing the act of retiring and ensuring their patients are protected and taken care of in the future.
Regardless of your position as a buyer or seller, the most common disruption in business transactions with the sale of a medical practice is the lack of alignment in values, culture, and trust between the incoming buyer and the seller. Aligned values will ensure that the medical practice continues to be run in a fashion that both parties see fit. Aligning a buyer and a seller with similar views develops trust and ensures that the practice passes smoothly.
Over the past two years, industry trends in the medical field have had a significant impact on the economic opportunities out there for younger doctors. Currently, 43% of all physicians are 55 or older.1 Many of these doctors are seeking to forge the path of partial or full retirement and begin stepping away from the office more and more. For the younger doctor, this is a sign of immense opportunity on the horizon as more medical practices go up for sale in the next few years.
For doctors approaching retirement, it may be an important time to begin taking action to find the right business successor and to begin valuing a practice and planning an exit strategy. An important note for doctors in these positions is to understand that medical practice sales to large medical offices have been on the rise in recent years. There was a 2.5% increase in the share of physician practices with at least 50 physicians, growing from 14.7% in 2018 to 17.2% in 2020.2 This option can provide a quick and easy path to step away from the practice, and to sell a medical practice elsewhere may require more planning and preparation.
Rule of Thumb
Essentially speaking, your business is worth what someone else will pay for it. If a potential buyer is looking into a practice that is for sale, the asking price gives the buyer an idea of the balance they will make between the expected future income of the practice and the anticipated risks of purchasing the practice.
An assessment of a medical practice’s fair market value is the first step toward selling. The existing rule of thumb is that valuations in the sale of medical practices are right around three to five times operating profit. When a physician is very specialized or is an older physician, medical practices tend to sell closer to three times the operating profit. For a younger physician, or for a privately owned family practice, prices for these offices tend to be closer to the five times operating profit range.
Let’s consider some examples. For a specialized practice, such as a cardiothoracic surgeon’s office, we’ll assume an operating profit of $200,000. Industry trends would value this practice from around $600,000 to $700,000. If this was a family practice for sale, the price tag would likely be closer to $1,000,000.
Hopefully, this rule of thumb provides insight into where your practice may stand. Once again, these numbers are not exact figures, but they are intended to provide a ballpark direction of where your numbers should be. This method of valuing a practice is typically referred to as the capitalization rate or a multiple. For medical practices specifically, this multiple is usually net operating income.
There are additional considerations for those involved in the sale of a medical practice that go beyond the practice of medicine and get into the structure of the business. Some questions to consider are:
- Are assets involved, such as buildings or property?
- If you are not purchasing the building, then who owns the building?
In addition, it would be wise to understand expectations around any current leases and if you would be taking over that lease, and the current rate of that lease. Typically, the purchase of a medical practice will involve a mixture of both tangible and intangible assets. In the medical industry, intangible assets can carry the bulk of the true value of the business, though each situation can vary.
Often intangible assets aren’t necessarily things that you can see or touch, but they have a large impact on the success of the practice. Some of these intangible assets that weigh into the value of a practice are:
- Does the practice have a consistent pattern of revenues and profits that are likely to continue?
- Are they reliable?
- Are the premises professionally presentable, clean, and well maintained?
- Is there ample and convenient parking for patients?
- Will patients feel comfortable in our office? Is there a strong practice manager in position with good support staff?
- Does the practice look good in terms of its branding and marketing?
- Is there a stable customer base loyal to the practice already?
All of these factors may seem like small details, but they play a large part in determining the true success of a medical practice.
IMAFS Is Here to Help
Rules of thumb can be a good indicator of where you should be when valuing your medical practice. However, they are not exact. That’s why we recommend getting assistance and seeking out financial services for physicians when valuing your practice and making legal agreements during a buyout transaction. Here at IMAFS, we provide guidance in this process, as well as retirement planning beyond the sale of your practice. Contact us to speak with a fee-only financial advisor today!