02/09/2018    David Helfman, DPM

Formula for Value of a Practice

After reading all the articles on valuations of a
practice, I would like to try to summarize the
topic to ensure we are all comparing apples to
apples. The reality is that everyone has given
good input but I would like to offer a simple and
concise summary of valuation methodologies that
will be easy to understand based on real life
experience.

There really are no rules of thumb anymore and
selling a practice is like selling any other
service business, so it’s important to understand
who is buying your practice and then you can come
up with a logical formula and rationale for
valuing your practice. I think the easiest way to
start this process is to put your practice in one
of three buyer buckets.

1. Buyer: Current associate or new podiatrist
wanting to buy your practice. This will probably
be your best chance of getting the best price with
the most flexible terms. The reason is that the
seller can slowly exit the practice while the new
physician integrates into the practice and the
revenue stays fairly stable. Let’s say a practice
collects 500K and the owner takes home 150K plus
benefits, then in theory the new associate or
podiatrist should be able to replicate these
numbers or even grow the practice revenue.

I would say that the lowest value for this type of
practice would be 150K or 30% of annual
collections. There are a lot of factors going into
the purchase price, but the more flexible the
terms, the higher price you could possibly get in
this scenario. The buyer here is going to step
into the shoes of the existing doctor and should
be able to continue as a viable practice entity.

2. Buyer: Another podiatry group or basically a
strategic buyer. This one usually will vary
depending on whether you are retiring or staying
on and practicing for the next 5-10 years. Here
you are dealing with a buyer who is going to buy
you for strategic reasons and wants to access your
patient base to further grow their current
practice model. Here a knowledgeable buyer will
probably use a more sophisticated methodology and
really focus on what value your practice will
bring to the group practice. Group practices with
ancillaries are not allowed by law to factor into
their price, the value or volume of ancillary
referrals your practice would contribute to their
growth when coming up with a valuation price. Here
you might be able to negotiate a higher price
depending on how much the buyer really wants your
location and your practice.

In both these scenarios the buyer might also buy
your real estate which could be a big advantage to
you as a seller. In this model, usually the group
will have to replace you or pay you to stay on
with the practice. In either event, the purchaser
needs to justify the purchase price and be able to
get a return on their capital or investment.
Depending on the aggressiveness of the buyer, you
might should be able to negotiate a higher price.

3. Buyer: Private Equity Backed Platform Practice.
In this scenario, the game changes completely. The
buyer will usually pay you off some multiple of
EBITDA as Dr. Ribotsky discussed, but in order to
do that you will need to have net income in your
business. To keep things simple I am going to use
the term net income and EBITDA interchangeably
even though they have different means whether you
are on cash or accrual based accounting. Since
most physicians are on cash accounting, net income
would be more appropriate to use, which is your
bottom line after all your expenses are paid and
this is the amount of cash generated by your
practice by the end of the year. Since physicians
are service businesses most practices don’t have
any profits and distribute out all net income to
the owners.

This is a problem when valuing a practice. Would
you invest in a company where the owners took all
the profits out of the business every year?
Obviously not and that is why you will need to
recast your financials to show how much profit you
are willing to leave in the practice. For example,
let’s say you collect 500K per year but you have
zero net income then your practice is truly worth
zero. Why?

As a financial investor, if I gave you 150K for
your practice and you didn’t have any profit I
would never make any money on my investment. So,
what PE firms do proforma out your financials and
figure out how much profit or EBITDA or Net Income
they can get out of the company. Once they can
realistically get comfortable with that number,
they will pay you a multiple on that number. If
you have 50K of EBITDA and I pay you a 5X
multiple, if nothing changes I will get my money
back in 5 years.

Now, as a savvy investor, I am going to change
your practice to make you more efficient and
improve your profitability. So if I can get your
net income to 100K per year then I would
theoretically get my money back in 2.5 years. I am
really simplifying this example but I am trying to
review the concepts and give you an understanding
of how investors will look at your practice.

I hope I haven’t confused anyone, but to me it’s
simplicity before complexity. You can Google
“practice valuations” and find hundreds of
articles on practice valuation methods. The key is
to understand your buyer, and your strategy before
even starting the process. I hope this helps and
gives some clarity on this topic.

David Helfman, DPM, CEO, Extremity Healthcare,
Inc. VPG, LLC.

Other messages in this thread:

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02/06/2018    Robert T Morris III, DPM

Formula for Value of a Practice (Jack Ressler, DPM)

In light of the recent debate on practice
valuations, I thought I might add my thoughts to
the mix. I debated purchasing an established
practice vs. opening outright for a long while
before electing to open up on my own. Call me
naive, but in today's world I do not see the
value in what many of those selling established
practices are offering. I get it, you worked
your whole life to develop your nest egg into
something worth selling upon retirement, but is
the price you seek really worth it?

Let's start with facilities. Does your older
office desperately in need of modern furnishing
really command top dollar? We've all seen the
surveys on PM News. Many older doctors are still
using paper charts. Is that valuable to a new
practitioner in the modern world? What about
staff? Are they going to be committed to a young
physician coming onboard eager and ready to work
at a pace much faster than what they're
accustomed to? What about equipment? Thirty year
old instruments and fifteen year old desktop
computers? What about your patients? Do you
really think the few established patients that
return regularly will continue to come when the
new guy or gal arrives?

To me the answer was simple. Practices outlined
as above are more of a liability than an asset.
Facilities will need to be improved, EMRs and
digital XR will need to be installed, staff and
equipment will likely need to be replaced, and
patients? They can't be bought. They'll do
whatever they feel. Contrary to what many say,
bankers will loan you money. Landlords will
lease you spaces. Vendors will sell you
supplies. Job boards will help you onboard
staff. Quality attorneys and accountants and
consultants will keep you pointed in the right
direction. Lastly, marketing, when done
aggressively and in a calculated manner, will
fill your clinic with patients, and in time,
after you perform quality work, will lead to
increased business via word of mouth referrals.

To be fair, the availability of immediate cash
flow inherent to an established practice could
help to alleviate the pain early on in a
startup, and mentorship from the outgoing
physician is also something that could prove
valuable. All things considered, I remain
unconvinced that purchasing an established
practice is any less difficult than building one
from the ground up. I encourage those of you out
there reading this to consider all of your
options before electing which route to go.

Robert T Morris III, DPM, Salt Lake City, UT

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02/05/2018    Bret M. Ribotsky, DPM

Formula for Value of a Practice (Jack Ressler, DPM)

I have been consulting and advising for the past
18 months in the buying and acquisition market
for medical dermatology practices. While I have
not specifically worked with the DPM market, the
foundations and principals from the hedge funds,
private equity people are similar. It’s all a
function of EBITA (Earnings before interest,
taxes, and amortization (EBITA) refers to a
company's earnings before the deduction of
interest, taxes and amortization expenses).

In simple terms, it’s the PROFIT left over after
you have removed your ownership from the
practice and paid someone (or you) to do the
work you have done. For example, if you're a
single practitioner and your practice gross is
1.4 million dollars in a year/TTM (trailing twelve months), and you spend 800K on expenses, staff, etc. that leaves you 600K. If you would need to pay another
qualified doctor 350K to do all the work you
were doing, you would have 250K of EBITA
(profit).

Armed with this number, the next question is the
multiple you would get paid on this number. A
single doctor or small group would only be able
to get 3-5.5 times EBITA in a sale. This often
comes with an agreement to work for 3-5 years.
In reality they are loaning you your money in
advance for these years. Of course, they are
taking the risk, and you are salaried now and
they get the profits. Often you take part of
the payment (up to 25%) and roll it into the new
company (newCo).

For example, in this scenario you sell for 5x of
the EBITA = $250,000 x 5 = 1,250,00 and choose
to roll over 25 % you get $937,500 in cash and
$312,500 worth of stock in newCo. As newCo grows
and collectively purchased new groups and
increases systems to increase efficiency, they
sell (re-capitalize) a portion of the business
at a higher multiple (ie 10x).

So your investment of $312,500 could double to a
value of $625,000 allowing you to remove 75% in
cash $468,750 and rolling over 25% $ 156,250
into newCo2. This would leave you with $
1,406,250in cash for your business and an
investment in newCo2 of $156.250. You also need
to keep in mind that once you get the $937,500,
you can start earning interest on this money, so
the ' $50k a year should be added to your
salary.

Bret M. Ribotsky, DPM, Boca Raton, FL

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02/02/2018    Brian Kashan, DPM

Formula for Value of a Practice (Name Withheld)

I just read the posting by Name Withheld, about
how he would choose to open an office next to an
older practice instead of purchasing an existing
practice. Although the circumstances. He
describes, with the sudden passing of a doctor
is different than the more common scenario of a
retirement, there are several similarities. If
the practice has been a successful practice and
is valued correctly, it should be an attractive
opportunity for someone to acquire.

There are several factors that I feel are being
overlooked in the mindset of Name Withheld. Firstly,
it is much easier to get a bank loan when
purchasing an existing practice for a fair
price. The practice has a track record with
trackable income over many years. Banks want to
see security and opening a new practice is the
least secure method for them to base a loan
upon. A steadyor increasing practice revenue is
a much better risk for the bank.

In addition, purchasing an existing practice
provides immediate income. Mutually beneficial
terms can be agreed upon to allow the purchaser
time to acquire revenue and begin payments. In
addition, patients are scheduled from day one.
It is one of the most difficult tasks imaginable
to open an office cold and rely upon advertising
to sustain the practice. While marketing is
essential in today's times, experienced and
successful practitioners will tell you that
their best source of new patients comes from
existing patient referrals.

I have been in practice for many years and have
tried almost every form of marketing and
advertising imaginable. Many were successful.
Some were not. Regardless, marketing and
advertising never came close to the amount of
new patients I get from patient referrals. In my
opinion, the old records of an existing practice
are the best source of new patient revenue. As a
bonus, a new practitioner can charge new
patient visits on every patient that they see
for the first time. In addition, the new
technology and skills of the purchasing
physician will add another source of revenue for
the existing practice.

Lastly, don't forget the established patient
referral patterns of the existing practice.
Doctors who have been referring to the practice
will continue to refer to the practice, if the
transition is handled correctly. It is extremely
difficult to get a referring physician to break
his referring patterns and just start referring
to someone new.

In conclusion, I could not disagree more with
Name Withheld aboutthe best way to start a
practice.

Brian Kashan, DPM, Baltimore, MD