How to make the most of your clinic or practice valuation

A valuation is much more than a financial exercise. It’s a crucial strategic tool for any professional looking to sell, purchase, or optimize the management of their clinic or practice. A valuation is used to determine the fair market value of the whole enterprise or specific shares, taking into account not only financial and operational realities but also the context of the valuation.

This article will help medical professionals understand a valuation report. Whether you’re thinking about a future transaction or want to understand the value of your clinic or practice, this guide will provide the basics you need to read a valuation report.

What is a valuation and why is it important?

A valuation prepared in compliance with the practice standards of the Chartered Business Valuators Institute is a fulsome report that provides significant information to the reader. Unlike a summary analysis based on rules of thumb, a valuation report employs robust analysis, relevant data, and unique characteristics of the clinic. It not only takes into account a clinic’s profitability, assets, and liabilities, but also future growth prospects and specifics of the market in which it operates.

Before reading a valuation report, it’s important to distinguish between two concepts:

1. Business value, which represents the operating value of the clinic or practice.
2. Share value, providing net shareholders^[1] value once debt and surplus assets have been considered.

A transactional and strategic tool

The valuation of a clinic or practice is not just a transactional exercise, it can serve a wide variety of strategic, legal, or financial purposes. Some reasons a clinic or practice owner should consider working with a Chartered Business Valuator (CBV) include:

• Setting expectations of the selling price
• Validate an offer received
• Secure financing from a financial institution
• Plan for succession or a family transfer
• Resolve a shareholder dispute
• Assist in resolving a matrimonial dispute
• Support tax planning or business restructuring
• Assess a clinic or practice’s performance and value to plan for a future sale

How to determine the value of a clinic or practice

A valuation employs a structured processes to determine a fair market value. The approach selected depends on the entity’s profile, financial history, stage of development, and valuation context.

Asset-based approach

The asset-based approach has several methods. The general principle is to review each asset and liability and determine market value. An net assets method involves revising a clinic or practice’s net assets — i.e., the market value of its equipment, furnishings, cash, and other assets, less debt and other liabilities at market value — to determine the resulting net equity.^[2] This method is mainly used in two situations:

• For start-up clinics or practices that have yet to generate significant revenue or profits.
• For established low-profit clinics that are unable to generate a satisfactory return on their physical assets but are expected to continue to operate.

Earnings or cashflow approach

This is a widely used approach when valuing health clinics or practices, and is based on the ability to generate future cashflows, i.e. profitability.

The most common variants are:

• Capitalized cashflow method: Used when past financial results are representative of expectations for the future. Historical financial statements are analyzed (often over five years) and normalized for future expectations. A valuation multiple is then applied to determine value.
• Discounted cashflow method: Used when the financial results are not representative of the future, which can be due to a recent expansion, move, or change of the team. In this case, financial projections are used to reflect the clinic’s new reality.

A cashflow approach takes into account a wide range of qualitative and quantitative factors, including team stability, future investments, growth prospects, legal contracts, and practice reproducibility when transferring ownership.

The market-based approach

This approach involves comparing the clinic or practice with similar transactions in the market. A market approach is often used as a corroborative method to validate results obtained from another approach. Valuators use their market knowledge, professional experience, and various databases to identify comparable transactions, while taking into account differences observed (size, location, profitability, etc.).

The choice of method is an important step in the valuation process. The method must be justified in the report and adapted to the reality of the clinic or practice. A poorly chosen method may distort value, hinder negotiations, or lead to undesirable tax consequences.

Key valuation terms you should know

Before you read a valuation report, there are a number of technical terms to become acquainted with. Some of the more common include:

The components of a valuation report

A valuation report is structured to guide the reader through the reasoning and analysis that led to the value conclusion. The main components of a report that meets the standards of the Charter Business Valuators Institute includes:

1. Introduction (terms of reference)

Indicates who was contracted to conduct the valuation, for what purpose, and on what date. This section establishes the terms of reference for the analysis.

2. Summary of fair market value

A summary of the determined value presented at the beginning of the report.

3. Valuator’s expertise and independence

The report must demonstrate that the individual or firm conducting the valuation has the required qualifications, including recognized expertise in business valuation. The business valuator’s fees are not based on the result obtained. Their independence ensures the analysis is objective and strengthens the credibility of the report.

4. Definitions and standards used

This section includes key definitions such as fair market value and the professional standards followed.

5. Restrictions and limitations

This section mentions limitations of the analysis (e.g., if certain documents were not provided or if assumptions had to be made in the absence of information).

6. Market and economic overview

Provides an overview of the economic and sectoral context, including industry trends, growth prospects, policies, unemployment rates, inflation rates, etc. This helps situate the clinic or practice in relation to the market in which it operates.

7. Overview of the clinic or practice

This section describes the clinic or practice, including history, structure, shareholders, team, lease, clientele, services provided, etc.

8. Financial performance history

Analysis of financial statements from the past several years, including adjustments, to determine normalized earnings before interest, taxes, depreciation, and amortization (EBITDA) or cash flow.

9. Valuation method used

Presentation of, and justification for, the valuation method used. This section is key to understanding the reasoning used to determine the value obtained.

10. Calculating value

Details of the calculation performed, including:

• Normalized cashflow or EBITDA
• The multiple factors applied on the basis of a SWOT analysis (strengths, weaknesses, opportunities, and threats)
• Future investment assumptions

11. Corroborative method

Comparison with similar market transactions to validate the consistency of the value obtained. This helps situate the clinic or practice in relation to comparable cases.

12. Conclusions

Summary of results, key assumptions, and limitations.

13. Appendices

Appendices may include:

• Schedules with all the details of the financial analysis
• Historical financial statements, budget and forecasts, if applicable
• List of documents analyzed
• Assumptions used
• Photos of the clinic
• A glossary of technical terms

Each section of the valuation report plays a key role in helping understand not only the concluded value, but also the factors affecting it. A careful read-through allows the owner to validate the assumptions, ask the right questions, and, if necessary, correct certain information before finalizing the report.

It is important to note that the schedules form a key component of the valuation and must be discussed as well before the document is sent out.

How to read and interpret a valuation report

A valuation report can be intimidating at first glance. Yet it’s a strategic document that will enable you to understand the true value of your clinic or practice, validate the assumptions used, and make informed decisions. Here are the key steps to reading it effectively

1. Read the summary of findings

Start with the summary: this is where you will find the fair market value that has been determined. Check to make sure this value is consistent with your expectations or understanding of the situation. Also, be sure to distinguish between business value and share value.

2. Understand the valuation method used

The report must justify the valuation method chosen, including the reasons for this choice. Make sure the selected method is in keeping with your clinic or practice.

3. Analyze key assumptions

Pay attention to factors that can influence future profitability, such as:

• Normalized EBITDA or cashflow
• Future investments
• Rate of growth
• Level of operational risk

Are the assumptions described in the report realistic and representative of your situation?

4. Consider the valuation multiple that was used

The multiple plays a key role in calculating the value. It is influenced by internal factors (team stability, contracts, clientele) and external factors (competition, market trends). The report should clearly explain the factors justifying the choice of multiple.

5. Validate the data used

Ensure that the information provided (lease, financial statements, contracts, etc.) is accurate. If you find an error or omission, report it to the valuator when the report is presented at the draft stage and before it is finalized. This is the stage at which revisions can often be made.

6. Review the corroborative method

This section compares your clinic to other similar transactions. It is used to validate the consistency of the value obtained and contextualizes your clinic or practice in relation to the market.

7. Ask questions

Don’t hesitate to schedule a meeting with the valuator to go over the key sections. This is often a good time to clarify anything that has been left out or misunderstood. The CBV will guide you through the sections of the report that can affect the valuation and explain the assumptions used.

Reading a valuation report also means checking to make sure its conclusions are solidly grounded. Having a good understanding of the report not only helps you negotiate better — but also allows you to plan more effectively for the future of your clinic.

How to improve your clinic or practice valuation

The valuation of a clinic or practice is not determined solely on the basis of current income. The valuation process takes into account a series of financial and operational factors that can be optimized with some advance planning.

Here are some things to consider:

1. Contracts

Make sure that any professional contracts (e.g., associate dentists or physicians) are properly drafted, signed, and up to date. Well-drafted agreements protect goodwill and reassure potential buyers.

2. Goodwill

Goodwill is a major intangible asset. It includes:

• Number of active charts
• Volume of new patients
• Patient profile
• Patient retention and recurrence

Good monitoring of these indicators, supported by hard data, enhances the perceived value of the clinic or practice.

3. Types of practice

Providing a diverse, well-structured range of services increases value. Could the services you refer patients to externally be provided in-house?

4. Growth potential

Clinics with strong growth potential are more attractive. Indicators of potential include:

• Space for a diverse team
• Services that are in demand but not yet offered
• A sizeable patient pool with untapped potential

5. Condition of premises and equipment

Well-maintained premises and up-to-date equipment reduce the buyer’s need for future investment. Conversely, a clinic or practice that is worn with old equipment will likely be worth less.

6. Transfer of goodwill

The transfer of goodwill (e.g., mentoring, coaching by the seller) is an important factor. A well-planned transition can reassure the buyer and increases value. The optimal duration period varies depending on the type of practice.

7. Transferability of the practice

It’s important to find someone who is capable of taking over the clinic or practice. If the practice is difficult to replicate, you will need to allow for a longer transition with more mentoring and a clear roadmap.

8. Workforce

Team stability is a major asset. Low turnover, competitive working conditions, and a fully staffed team are reassuring elements for buyers and lenders.