You are thinking of selling your practice and retiring. Or maybe you want to move to your dream location and start a practice from the ground up. Whatever the reason for the sale (or purchase), the big question always comes up is HOW MUCH are you asking and more importantly, HOW did you come to that number? If your answer is “I am not sure”, then this article will help.
Generally we are unsure of how much to ask, or we have a pie in the sky number that no one will ever pay. Even if you found a buyer willing to pay a huge sum for your business, the hard part is getting them financed. When bankers join the party, they want to see real numbers and a real valuation for the purchase. I have seen many deals die at the end because of financing (or ability to get financed), which leaves the seller financing the deal, or the deal simply ends in frustration. If you are serious about selling, then it is time to get your hands dirty and put together a serious asking price based on real information and real numbers from your tax returns and books.
To develop a real world asking price you will need to gather some information such as last 3 years total revenue and profit after all expenses. Also get the number of active and inactive patients. Active patients are those who have had services rendered in the last 6-12 months and inactive are those who have had services in last 12-24 months.
Once you put together value on patients, equipment, hardware/software, virtual items and show how great it works out on a return on investment worksheet for the buyer, you will have a nice package to provide a potential buyer and their banker!
So now let’s break down how we get our fair value.
There are many ways to put a value on a single patient. My best advice is not to make it complicated – for best results with a potential buyer – keep it simple. I don’t think anyone would argue that selling a practice and asking for one year’s patient value as part of the overall asking price would be unfair. In some cases you could even ask for 2 year’s patient value – as long as you can prove it pays for itself in the Return on Investment worksheet.
Active patients are the real meat of your practice’s value. The best way to come up with patient value is total revenue divided by number of active patients for last 12 months. To give an example, if we did $300,000 in total revenue and have 300 active patients, our active patient value is $1,000 each for one year.
HINT: This is also a great way to evaluate how well your practice is doing year by year. Form a baseline and then each year compare your ‘per patient’ amount to see how well you did that year. Larger companies commonly do a ‘per employee’ value, which is just another way to evaluate a company’s growth.
For inactive patients (those you haven’t seen in 12-24 months), there is some value. They could be considered a glorified lead list and perhaps one step above buying a mailing list. You can argue this one either way. For our valuation purpose we will argue that inactive patients have a greater chance of coming back because they may have been feeling very well and didn’t think of coming back.
Using our above example, let’s estimate your inactive patients have a 10% chance of returning in the next given year, so we would give them 10% of the value of an active patient, so $100 each. If we have 100 inactive patients they are worth $10,000 for a single year valuation.
HINT: Estimate the inactive patient value and perhaps use a bargaining tool during negotiations.
For equipment you can ask replacement value for the items included with the sale. This would be your tables, desks, reception furniture, etc. The best approach is to research similar aged equipment and not ask new price on older items. Imagine what you would pay for the same item in the same shape from another practice and try to be fair.
Hardware/Software & Virtual Items:
For hardware value you should take only half the cost to replace all of it including your networking equipment (if professionally installed). If the hardware is just a few months old, you could consider asking more; however most of the time hardware is outdated as soon as you open the box.
For software value you can take full replacement value as long as you have current active maintenance contracts AND the software vendor allows you to transfer your license to a new doctor in the case of selling your practice. Some vendors will charge a fee for this and others will do this for free if you have an active maintenance contract. Software is typically billing/scheduling and EHR software if you have it.
A well designed website including patient interaction and search engine optimization shouldn’t go unnoticed or undervalued. You can ask the full replacement value based on creating the site today. You could ask for a quote from the website designer to have a realistic dollar amount.
If at all possible you will want to leave property left out of the business deal. It is best to treat it as a completely separate transaction and not related to the valuation of the business. If you own property outright then get an estimate of what you can sell it for in today’s market. If you still owe quite a bit on the building it might be best to wait a few years to consider selling the business and the building. Property values will never be where the once were, however they will improve over the next five to ten years.
Complete Practice Valuation Summary
Patient Value: $310,000 ($300,000 active patients, $10,000 inactive).
Equipment Value: $45,000 (A rough estimate for x-ray, tables and office furniture).
Hardware/Software Items: $25,000 (A rough estimate for a few computers/ server, up to date software packages and a great professional website).
Buyers Return on Investment:
Keep in mind that most buyers will look to see their investment back in 5 years. It would be helpful if you put together a return on investment document to show exactly how much their loan payment would be each month and what the total over the long term. If you can show how the cash flow (or projected cash flow) will pay off their investment, you are well on your way to a completed deal.
For a ROI sample you should use 10% annual interest for the loan. I have included a basic sample of this below to demonstrate how simple it should be. There is no need to make things complicated during this early process. Once you come to an agreement you can then involve your attorney to create a simple purchase of assets agreement. This will save you a lot of money in the long run.
Keep in mind the if the buyer can make their monthly loan payment and still make a reasonable profit; they are making a good investment – and you have created a fair value. If you cannot show a nice ROI, then the asking price should be reduced.
ROI Sample 1 – $250,000 Purchase Price:
• Monthly payment (60 months): $5,311.76
• Estimated Business Revenue (monthly): $20,000
• Estimated Business Expenses (monthly): $8,000
• Estimated Profit (monthly): $6,688.24
ROI Sample 2 – $500,000 Purchase Price:
• Monthly payment (60 months): $10,623.52.
• Estimated Business Revenue (monthly): $35,000
• Estimated Business Expenses (monthly): $16,000
• Estimated Profit (monthly): $8374.00
With our sample numbers above we would ask $380,000 for the practice (not including property) and we could easily justify and explain our numbers to the buyer and their lender. Often times we have a tendency to greatly over price the business in order to leave room for a buyer negotiating downward. A better approach is to price it fair and firm and be up front about that early on in the process to eliminate any negotiating.
A word of advice: When making business deals such as the sale of a practice, if you work to create a fair deal for both parties you will create a win-win situation and almost always come away with a done deal. If you are the seller, try creating a deal that you would do if you were the buyer and vice versa. When you take the time to consider creating a fair deal, you will save yourself a lot of time in the long run.
Author, Alex Niswander, is a soap notes expert with over 10 years focusing on clinical charting and proper noting procedures. He has reviewed charts in hundreds of clinics throughout the country and continually reviews new requirements by Medicare and major insurance carriers. He is also the owner of Chiro QuickCharts EHR system.
To learn more about Alex’s products, please visit the company website:
Chiro QuickCharts – billing/scheduling/ehr/emr