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  • Pediatrics practice purchase

    Hi everyone,

    My wife is a pediatrician and is currently an employee in a small private practice with one other employed physician. The owner is looking to sell and me and my wife are interested.

    We've never looked into practice valuation before but it doesn't seem like there is one agreed upon method. Our accountant has reviewed the numbers and provided us with the EBIDTA. Some methods suggest a multiple ( I think I saw 4x) as the value of a practice. Other methods, which seem to be older, are based off of a percentage of revenue collection.

    The practice real estate is also open to purchase.

    Do you suggest a formal practice evaluation (accountant doesn't feel it is necessary) to at least be able to present them with a counteroffer? Right now the price they are asking is 16x EBIDTA, which is WAY outside of reasonable from what I have read.

    Thank you for your help.

  • #2
    Do you know if others are interested in buying the practice and willing to pay 16x? Is the other employee looking to buy or partner with you?

    Comment


    • #3
      Hi

      other employee has no interest in buying the practice.

      the current owner has not looked outside the group to sell, so unclear if any other buyer willing to pay 16x. 5-10x, closer to the lower range since is a pediatrics office sounds more reasonable.

      Comment


      • #4
        4-6x EBIDTA is reasonable. 16x is stupid high and totally unrealistic.

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        • #5
          What you are buying is the future revenue stream (EBITDA).
          What you get is the net assets and liabilities and then it’s up to you to provide the E earnings. You will have to A(amortize) the goodwill. What are you buying and what is the goodwill?
          You need proformas. The building separate is another question. How fair is the rent and what if you had to move? What if you rented and started a practice on your own? Yes, there is a startup cost of building a patient base. But how much?
          Hank has said, 4x-6x is reasonable. That multiple applies to most any private business.

          The deal is an asset purchase or are you buy the LLC (the ar and liabilities) ? Due diligence on valuation of a deal is more than a multiple.
          If your CPA has proformas and some type of FMV assessment of exactly what you are buying and how much premium it takes to close the deal, then it’s up to you to see if it’s worth it compared to starting on your own. Whether you CPA or a valuation consultant runs numbers doesn’t matter. Don’t take EBITDA multiplier as a rule, it is the result of what you pay. The future earnings are the key. A highly profitable practice with no interest, no depreciation (fully depreciated) no amortization) can not look so good when you have interest, new equipment and the seller jacks the rent up and you move.
          Of course, the continuing patient base and revenue stream has value, but you do the work.
          ​​​​​​​You need to understand the practice you are buying and value. I hope you and your CPA have that covered. Good luck.

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          • #6
            Thank you for the thorough response. I’m not going to lie, that last post was way above my head.

            we don’t have any proformas data( I don’t even know what that is). What we do have is the EBITDA but that doesn’t seem like it is enough to come to a purchase price.

            renting or buying the property and starting a new practice isn’t likely an option as the current owner would just sell to a hospital.

            we only have the purchase price for the property and don’t know what monthly rent would be. The building is on a main road in a good town so the Real estate purchase may be the most worthwhile of all of this.

            Comment


            • #7
              It sounds like the seller either is trying to take advantage of a naive buyer or failed to save for retirement and now is setting a sales price to fund retirement. Maybe both.

              Hopefully the physician practice finance department at the bank won’t give a would be buyer a loan for a crazy multiple like 16 time EBIDTA.

              Comment


              • #8
                I wouldn't do anything unless the real estate is part of the deal, and obviously the combined purchase is a reasonable price. Red flag if they won't talk about real estate sale until after the practice sale.

                Agree, sounds like the retiring doctor is trying to win the lottery.

                Comment


                • #9
                  The value of the practice is basically whatever you can profit off the employees (midlevels and the other doc), accounts receivable, any hard assets that are included, plus goodwill. You will also presumably make more money from your own work, but that depends on how you’re paid now as an employee. Oversimplified, sure, but that’s the gist.

                  The goodwill, ie the patient census and their loyalty to the practice, probably isn’t worth as much as the selling owner thinks it is. So you will have to negotiate.

                  Comment


                  • #10
                    Originally posted by NephronDoc View Post
                    Thank you for the thorough response. I’m not going to lie, that last post was way above my head.

                    we don’t have any proformas data( I don’t even know what that is). What we do have is the EBITDA but that doesn’t seem like it is enough to come to a purchase price.

                    renting or buying the property and starting a new practice isn’t likely an option as the current owner would just sell to a hospital.

                    we only have the purchase price for the property and don’t know what monthly rent would be. The building is on a main road in a good town so the Real estate purchase may be the most worthwhile of all of this.
                    The income under the current owner and the income under your ownership will be different. You will have ITDA that are different than the old owner.
                    You have a loan, he does not. A proforma is a projection of your financial results. That is how much cash you will have left to pay the loan and interest. That is what you and your CPA need to understand. Selling to the hospital is better for you than putting yourself in a negative cash flow and a losing business. As an owner, you and whatever advisors need to know this.Learn it before you buy the practice. If you need new equipment and the rent doubles you might be bankrupt. Don't assume that the results will be the same. One piece, the owner won't be working there, right? How do you replace that revenue? Your advisors need to educate you.

                    Comment


                    • #11
                      Originally posted by NephronDoc View Post
                      We've never looked into practice valuation before but it doesn't seem like there is one agreed upon method. Our accountant has reviewed the numbers and provided us with the EBIDTA.
                      Probably region and specialty specific. Do local hospitals have interest in buying local peds practices? How much competition is there?

                      Unless there are a bunch of mid levels or she's currently underpaid she might just be buying her job.

                      Hopefully you can find an attorney or accountant who knows what the going rate is. It sounds like your current accountant does not know.

                      EBIDTA is nonsense for valuing peds practices. Convince me I'm wrong.

                      Comment


                      • #12
                        Another option re: the owner - s//he may simply be ignorant about reasonable valuation and is simply listening to colleagues and/or unqualified advisors. EBITDA is only a starting point, not a destination. If you/your wife have been employees only and not in a management position and had to make payroll and manage cash flow + your own income, it is easy to allow the potential to own a successful practice to cloud your judgment in the rush to be the winning buyer. You don’t appear to have this attitude, just saying to be aware.
                        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                        • #13
                          16x EBIDTA!! What is this guy reading/smoking. A hospital will usually offer 8-10x, a PE will offer around 10-12x, if very successful. I can’t imagine any pediatric practice getting anything close to that

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                          • #14
                            16X is insanity. And there's no way they'll get close to that w private equity or hospital acquisition. Makes me wonder if doc is playing hard ball, slightly mad, or just crazy unrealistic. Either way I'm not sure I'd be interested in negotiating in any of those scenarios, with only 1 other doc would be much easier to just start your own practice.

                            Anywho, I practice a completely different type of medicine but I'm buying into a private practice as a partner from day 1 and I'm paying about 1X EBIDTA perhaps slightly less. Granted there's no real estate ownership involved. I 'paid' an accountant who's very familiar with medical practice sales/acquisitions and he calculated the value of practice 3 different ways for me and we started negotiations from there.

                            Comment


                            • #15
                              Originally posted by Tuxedo View Post
                              EBIDTA is nonsense for valuing peds practices. Convince me I'm wrong.
                              You’re buying a profitable business (or perhaps buying assets with a turnaround opportunity). You’re buying a stream of revenue less expenses and taxes.

                              Please make the case for why profitability uniquely doesn’t matter for a pediatric practice. “Because kids?” Really, your answer should be something better thought out than “because kids”.

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