How to Value an Internal Medicine Practice Before Buying It
Determining the value of an internal medicine practice is an important step for physicians considering an acquisition. The asking price of a practice does not necessarily represent its true financial value, so buyers should carefully evaluate the practice’s revenue, profitability, assets, patient base, expenses, and future opportunities before completing a transaction.
A proper valuation can also help a physician determine how much financing may be required and whether the proposed purchase price is reasonable.
For physicians considering internal medicine practice financing, understanding the factors that influence practice value can be an important part of preparing for an acquisition.
Here are seven factors physicians should consider when evaluating an internal medicine practice.
1. Annual Revenue
Revenue is one of the first financial metrics buyers typically examine when evaluating a medical practice.
Physicians should review multiple years of revenue when possible rather than relying on a single year’s results.
Important questions may include:
- Has revenue increased or decreased over time?
- Is revenue relatively consistent?
- What percentage comes from different payers?
- How many patients does the practice see?
- Are there significant changes in recent revenue?
Revenue provides useful information, but it should not be considered by itself when determining the value of a practice.
2. Practice Profitability
Two practices with similar revenue can have very different values if their expenses and profitability are significantly different.
Buyers should examine expenses such as:
- Payroll
- Rent
- Medical supplies
- Insurance
- Technology
- Billing expenses
- Administrative costs
- Other operating expenses
Understanding how much income the practice generates after operating expenses can provide a better picture of its financial performance.
3. Patient Volume and Patient Base
The patient base can be another important component of an internal medicine practice.
Physicians may want to evaluate:
- Number of active patients
- New patients
- Patient retention
- Visit volume
- Referral sources
- Patient demographics
A practice with a stable patient base may provide a different acquisition opportunity than one experiencing declining patient volume.
Buyers should also consider whether the existing patient base is likely to continue supporting the practice after the ownership transition.
4. Accounts Receivable
Accounts receivable can provide insight into the practice’s revenue collection and cash flow.
Physicians should consider:
- Total accounts receivable
- Age of outstanding balances
- Collection history
- Insurance receivables
- Patient receivables
Not all accounts receivable necessarily have the same value. Older outstanding balances may be more difficult to collect than recent receivables.
Understanding the quality of the practice’s receivables can therefore be important during due diligence.
5. Equipment and Other Practice Assets
The physical assets included in an acquisition can also contribute to the overall value of the practice.
These may include:
- Medical equipment
- Computers
- Office furniture
- Technology systems
- Office fixtures
- Other business equipment
Physicians should consider the age, condition, ownership status, and remaining useful life of major equipment.
Older equipment may need to be replaced soon after the acquisition, which can create additional capital requirements.
6. Real Estate Can Affect the Overall Transaction
Some internal medicine practices are sold together with commercial real estate.
If real estate is included in the transaction, the value of the property should generally be evaluated separately from the value of the medical practice itself.
The physician may need to consider:
- Property location
- Size
- Condition
- Comparable property values
- Existing financing
- Potential future use
Separating the value of the operating business from the value of the real estate can help provide a clearer picture of the overall transaction.
7. Future Growth Opportunities
A practice’s current financial performance is important, but buyers should also consider its future potential.
Potential growth opportunities may include:
- Adding another physician
- Expanding office hours
- Adding services
- Increasing patient capacity
- Improving marketing
- Adding another location
- Upgrading technology
A physician may identify opportunities to increase revenue or improve efficiency after taking ownership.
However, projected growth should be based on realistic assumptions rather than overly optimistic expectations.
Common Methods Used to Value Medical Practices
Medical practices can be evaluated using different valuation approaches.
Depending on the circumstances, a valuation may consider:
- Revenue
- Profitability
- Cash flow
- Comparable transactions
- Practice assets
- Future earning potential
The appropriate approach can depend on the practice, specialty, financial performance, location, and structure of the transaction.
Physicians should consider working with qualified professionals when determining the appropriate value of a practice.
Why the Purchase Price Matters for Financing
The value assigned to a practice can directly affect the amount a physician may need to finance.
A physician purchasing a practice for a significant amount may also need additional capital for:
- Working capital
- Equipment
- Renovations
- Technology
- Real estate
- Other acquisition expenses
Understanding the total capital requirement before entering the transaction can help the physician develop a more complete financing plan.
What Should Physicians Review Before Agreeing to a Purchase Price?
Before agreeing to purchase an internal medicine practice, physicians should conduct thorough due diligence.
This may include reviewing:
- Financial statements
- Tax returns
- Patient volume
- Accounts receivable
- Existing debt
- Equipment
- Employee expenses
- Contracts and leases
- Real estate information
The buyer should also work with appropriate legal, accounting, and other professional advisors during the acquisition process.
Final Thought
Valuing an internal medicine practice involves much more than looking at annual revenue or the seller’s asking price. Physicians should evaluate profitability, cash flow, patient volume, accounts receivable, equipment, real estate, expenses, and potential future growth.
A thorough evaluation can help a physician determine whether the proposed purchase price is reasonable and how much capital may be required to complete the transaction.
Whether you’re evaluating your first practice acquisition or considering another internal medicine practice, understanding the factors that influence practice value can help you approach the transaction with greater financial clarity.
