Know your worth: how to value a healthcare practice

February 27, 2020

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Healthcare practices have become hot commodities.

The aging population is increasing market demand for healthcare services, the innovation in health tech is presenting people with more reasons to see a doctor, and the trend of larger consolidators or platform companies buying or buying into multiple practices has finally become mainstream in Canada. These companies are hungry to grow through acquisitions, and they have a lot to offer because they can almost immediately help both sides realize deal synergies.

These are all reasons to sell. They’re also all reasons to wait to sell. Getting a valuation can help you make an informed decision based on where your practice is today and where it could be in the future. In this article, we examine the factors that go into a valuation for a medical practice.

What should a practice owner expect from a valuation?

First and foremost, a valuation should be valuing or pricing the practice today, and assessing its future worth based on market trends, past successes, and the potential of what the clinic offers now and could offer later.

Knowing where the business is heading and what it’s going to take to get there will inform an owner’s decision to move or not move forward with a plan to sell. It will also help a practice owner evaluate unsolicited offers from consolidators who come knocking one day, if they haven’t already.

What factors drive the worth of a practice?

Almost all the factors that go into pricing a practice ladder up to seamless transition: how easy is it to change ownership of a clinic without disrupting service quality, revenue generation, day-to-day operations, and growth?

Considerations include:

Location — A potential buyer will probably already know a target clinic’s address and enough about the neighbourhood to make it worth finding out more. Your lease situation will be one of the first things they will look at; a longer term is always worth more because the risk of a rent hike or the need to relocate is less.

Team — In a service business, the people come with the company. A potential buyer will look at factors like experience, service time in their current job and in previous jobs, any disciplinary actions initiated and/or received, and patient reviews. An experienced, loyal and well-regarded team is worth more.

Offering — This is fundamentally a review of supply/demand factors facing the practice. How many other clinics do what the target clinic does? How many products or services does the target clinic offer compared to other clinics? What is the market size for both? A specific reason to visit the target clinic will increase its value, and it doesn’t have to be clinical. It could be because foot massages are offered in the waiting room. If it adds value to patients, it will add value to the sale price.

Technology — A clinic with the latest technology will typically be worth more than a clinic that needs to invest in new machinery, because it’s almost always a sizeable investment. Failing to upgrade almost always results in customer attrition.

Referral network — This is the lifeblood of any clinic, and even more so if it’s a specialist clinic that relies exclusively on referrals from primary care physicians. A potential buyer will value a robust referral tree as well as anything the practitioner is doing to nurture that, like a well-read blog, newsletter, or social media channel.

Practitioner goodwill — This is where a number of deals drop off, mostly because the practitioner(s) are quite literally irreplaceable: either no one can do what they can do or (more commonly) the patients have affinity to the person over the business. If too much of the business is dependent on the practitioner/owner, a precipitous revenue drop will occur if they leave. This will require an immediate investment in marketing to correct, not to mention a position to fill. Both will lower the value or kill the deal.

The investor perspective

To understand and communicate the value of your healthcare practice, it’s important to know the mindset of an investor or private equity firm. They will consider a number of questions, including:

  • How easy will it be to seamlessly transition ownership?
  • How critical is the person exiting to the health of the business?
  • Do I like the team and can I work with them?
  • How much do I really know about running a healthcare clinic?
  • What makes this clinic different?
  • Can I count on very-low-to-zero customer attrition post-sale?

What should practice owners do next?

Think of a valuation or pricing as a pre-emptive or preventative checkup on the health of your practice.

Develop a comprehensive understanding of your value today, what it could be tomorrow, what it’s going to take to get there, and how long until the business is worth enough to take a deal.

Consider taking the following steps:

1. Be proactive — Regardless of how much longer you think you want to work, getting a proper valuation now will give you time to correct aspects of the business potential buyers would devalue, help you create a divesting timeline, and keep you from accepting a premature or unfavourable deal.

2. Picture your clinic being owned by someone else — Who is working there? What do patients and other practitioners say about it? What are you doing with your time? How you want things to be will inform your plans.

3. Upgrade your technology — Even it’s something small, it all helps. Pay particular attention to technologies that can do what you do, so the business relies on you less.

4. Pay attention to policy changes — As changes to government policies impact what’s covered and what isn’t, you may be able to find service gaps to fill. Filling them correctly could raise your value substantially.

5. Engage a professional valuations advisor — An experienced advisor can provide a realistic roadmap for your clinic’s value. Like you were trained to evaluate human health, they’re trained to evaluate business health.

How BDO can help

BDO’s team of M&A professionals and Chartered Business Valuators (CBVs) is experienced in working with healthcare practices across Canada. We understand the landscape, the realities of operating in the healthcare system, and the demands of patients today. We can provide an accurate, credible business valuation/pricing that can help you achieve your goals.

To learn more, contact your local BDO office or BDO’s Transaction Advisory team.

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