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Cover Focus | Mar 2017

Key Characteristics that Drive Practice Valuation

A practice with strong fundamentals will attract a larger pool of buyers, which increases the value of the practice and the options available to the practice owner.

Whether a practice owner will eventually sell his or her practice to an external party or work out an internal transfer / sale to other physicians, it is advantageous for an owner to take steps to improve the value of a practice.  A practice with strong fundamentals will attract a larger pool of buyers, which increases the value of the practice and the options available to the practice owner.

The pillars of a strong, valuable practice are stability, profitability and growth.  To support those pillars, there are a number of areas that a practice owner can focus on:

  • Talent – To bolster the services of a firm, practice owners should focus on hiring and retaining physicians, physician assistants and other medical talent.  The practice’s “talent bench” would ideally be deeper than just the owner. Additional producers will help increase the strength of the overall practice.
  • Financials – Sound, transparent books and records can be proven through reviewed or audited financial statements, which are provided by a practice owner’s accounting firm.  In addition, adjusted EBITDA margin 1 percentages of 20% or greater will demonstrate practice profitability and performance.
  • Diversification – Dermatology practices that offer a range of services, such as Mohs surgery, medical dermatology, cosmetic dermatology, and dermapathology, tend to attract more demand from the buyer’s market.  In terms of services offered, the “less eggs in one basket” for a dermatology practice, the more value that a practice can demand.
  • Attractive Geographic Market – The size and location of the market served can be a major determinant in the ability of a practice to generate attractive performance, growth and a healthy backlog of patients.
  • Strategic Plan – A written strategic plan, which highlights practice financial goals, steps to more efficiently operate the practice and means with which to grow, provide a buyer with a roadmap for successful practice management.

Other considerations for practice owners include adding new locations, avoiding legal or regulatory issues, and maintaining an efficient administrative support team.  It is the goal of most practice owners to plan and work towards maximizing their fullest potential and value.  When that happens, the buyer’s market certainly recognizes and rewards those practice owners who have solidified the fundamentals of success.

EBITDA = Earnings before Interest Expense, Taxes, Depreciation Expense and Amortization Expense. Adjusted = adding back owner-specific expenses (example – above market compensation to owner, country club dues) and non-recurring expenses.

Bill and Clint Bundy are Managing Directors with Bundy Group, a boutique investment bank specializing in practice sales, capital raises and acquisitions for the dermatology and healthcare markets.

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