You’ve likely heard the term practice valuation, perhaps from a fellow doctor, or slung around online but do you know how Transitions Brokers arrive at the listing price for dental practice or medical practice? In this article, you’ll discover
- What a practice valuation is
- Factors that influence the valuation
- What a multiple is
- How a multiple is used to calculate valuation
- Factors that influence the multiple
What is a Practice Valuation?
A practice valuation is a price that says how much a practice is “worth” in the market. More specifically, there’s no MLS for dental practices or medical practices; it is up to the transitions broker to create the market. Therefore, the practice valuation is how much the transitions broker believes the market they create will pay for their client’s practice.
The valuation is based on EBITDA. You can read more here, but it’s essentially a measure of a practice’s profitability. In general, the higher the EBITDA, the higher a practice owner can price the practice.
What is a Multiple?
Based on the EBITDA, a transitions broker will assign the practice a multiple. A practice multiple is how many times the EBITDA can be multiplied to get a practice price. Usually a multiple is between 2 and 7, 2x EBITDA, for example, or 7x EBITDA). Using simple math, if a practice’s EBITDA was $100,000 and the Transitions Broker assigned the practice a multiple of 2.5, the practice would be listed for $250,000.
What determines the size of the multiple?
While EBITDA is the biggest factor in determining a multiple, there are other factors. Using the examples above, there may be 3 practices with an EBITDA of $100,000 but they may all be priced differently. Here’s why:
- Size of the practice
- How long the doctor is willing to stay on
- The desirability of the physical location
- Location within a state – small town vs. metro area
- Associate driven
While every brokerage may calculate valuation a little differently, we pride ourselves on the process above. We’ve done an immense amount of work here at Practice Transitions Group to perform underwriting in a way that produces an accurate valuation that buyers can trust. Here’s a recap of our proven process:
- The practice goes through rigorous underwriting and the team and the lead broker, determine a practice’s EBITDA.
- Then, we look at the nuances of the practice like the location, the steadiness of the staff, etc.
- Next, we assign a multiple based on the EBITDA, the nuances of the practice itself, and the market to assign a multiple.
- Finally, along with our client, we determine an asking price or practice valuation.