How Much is Your Physiotherapy Clinic Worth?

By Wendy Coombs

Have you gone into business thinking one day you’d like to sell? I hope the answer is yes because it’s a good plan to have. Down the track, after years of hard work, you want to end up with some money in the bank rather than dead broke. Who wouldn’t!

Business acquisition and merger specialists say it takes two years to prepare a business for a sale. Quite a hefty time period. The point being, if you plan on retiring and getting ‘top dollar’ for your years of sweat equity then do not leave your planning to the last minute.

Even if you don’t plan on selling your company in the immediate future, you should run your business in a way that makes it “attractive” financially. This not only ensures sustainability and fiscal responsibility, but means that at the end of it all, it puts you in a position where you’re already prepared for a sale.

Let’s cover what it takes to position your business for a sale.

Values

There are three ways of valuing a business:

1. Book Value: Value based on financial statements.
2. Market Value: What a buyer will pay to take over the clinic as is.
3. Strategic Value: What a motivated buyer will pay. This buyer will likely have a plan and a means to significantly increase profit beyond its current profits.

Positioning your business for sale means that you are trying to maximize the strategic value for a buyer.

Valuation Formulas

There are many formulas that can be used to value a clinic. But the reality is that a clinic is only worth what a buyer will pay for it!

It is standard to expect to pay off a business purchase with business profit in three to five years. But for many it’s not always achievable unless you’re thinking (and planning) ahead to build value in the assets you have for sale.

Physiotherapy practices do have assets such as equipment, accounts receivable, and leaseholds. But most of the value is in the form of goodwill or intangible assets. The goodwill and intangible assets can be viewed as the value placed on the likelihood of the business continuing on as it has in the past.

For example, if the prediction is that the caseload will drop following a sale then the goodwill value decreases. Whereas, if systems and processes are deeply embedded and the prediction is the business will continue on as it has been with the same or a growing caseload, well, you can see how the value dramatically increases on this basis.

Sometimes however, it can be very difficult to put a value on goodwill, which is why having a formula as a starting point is helpful.

Here are just three formula suggestions:

1. Multiple of EBITDA: 3-5 times earnings before interest, tax, depreciation, and amortization.
2. 6 months gross billing, plus assets, minus liabilities.
3. 12 month net take home for the owner (includes professional income, management income, and profit), plus assets, minus liabilities.

6 Factors that increase the value of the business and the goodwill

These are some of the things potential buyers may look for and find enticing.

1. Good lease terms – Many years left on the lease with no pending price increase looks very appealing to buyers.
2. Many revenue streams – A practice with a primary income from Physiotherapy services with additional income from products, orthotics, massage therapy and other health disciplines increases value.
3. Many referral sources – Clinics with many physician referrals are at lower risk than those who have just one doctor who may decide to move, retire, or change referral patterns.
4. Multiple locations – Businesses that have multiple locations tend to have more stability due to increased revenue, economies of scale, flexibility with HR, and so forth.
5. Experienced management – The longer the seller stays on to provide management services past the sale transition, the higher the likelihood that the business will maintain its current targets.
6. New equipment – Physiotherapy equipment is expensive to purchase and repair. Therefore, practices with new equipment are more appealing to buyers because they don’t need to anticipate this additional expense.

Normalizing Financial Statements

It is important to keep an eye on the important metrics and manage through measurement too. No business is going to look appealing if you ‘make up’ the numbers!

Get a good grasp on your financial statements, keep them up to date and well ordered. Then, when it comes to a sale, normalize your financial statements in order to be very transparent to the buyer. After all, you want them to see the true value of the company.

This means that there are no hidden shareholder expenses put through the company and that the financials can be taken at face value with little interpretation.

Normalizing financial statements could include:

1. Notes about any expense that were high or low for the daily operations of a clinic. For example, legal expenses for lease review or acquisitions, or a one-time expense such as an equipment purchase.
2. Profit is typically kept low by ensuring that management provided by the shareholders/directors is paid out to the reasonable maximum. Therefore, when assessing the profit of the business for valuation purposes, management salary should be separated out as an expense, as it may be considered income for the new owner. Engaging in a discussion about how management is paid and what responsibilities are included is also important to determine the cost of delegating this job to an employee.
3. A consideration must be made toward the replacement value of the leasehold improvements and the equipment, as these fixed assets are amortized quickly off of the financial statements and their book value does not reflect their replacement value.

The above information is only from my personal experience of buying and selling several Physiotherapy practices in Alberta.

In addition, the Private Practice Section of the American Physical Therapy Association at www.ppsapta.org sells a book called “The Valuation of Physical Therapy Practice.”

Additional areas worth understanding are, “positioning your practice for sale” and “the acquisition process.” Both of the above resources contain information on these topics.