How to Value a Dermatology Practice
Determining the value of a dermatology practice is an important step when buying or selling an established practice. While revenue is an important consideration, a practice’s value can also depend on profitability, cash flow, assets, patient relationships, equipment, location, and other factors.
For physicians considering dermatology practice financing, understanding how a practice may be valued can also help when evaluating a potential acquisition.
Revenue Can Be an Important Starting Point
Historical revenue provides information about the size and financial activity of a practice.
However, revenue alone does not determine value. A practice generating substantial revenue may have high operating expenses that significantly reduce its profitability.
Profitability Matters
Buyers and lenders may look closely at the practice’s profitability.
Profit and loss statements can help show how much revenue remains after operating expenses are paid.
Cash Flow Is Important
Cash flow can provide additional insight into the practice’s ability to generate funds from ongoing operations.
A practice with consistent cash flow may present a different acquisition opportunity than one with highly variable financial performance.
Review Several Years of Financial History
Looking at only one year of financial performance may not provide a complete picture.
Reviewing multiple years can help identify trends in revenue, expenses, profitability, patient volume, and other important metrics.
Patient Volume Can Affect Value
The size and stability of a practice’s patient base can be relevant when evaluating its value.
A practice with consistent patient demand may provide a stronger foundation for future revenue than one experiencing declining patient volume.
New Patient Growth
The number of new patients entering a practice can provide insight into its future potential.
Consistent new-patient growth may indicate strong demand and effective referral or marketing channels.
Service Mix Matters
Dermatology practices can generate revenue from medical, surgical, and cosmetic services.
The mix of services can influence both revenue and expenses and should be considered when evaluating the business.
Cosmetic Revenue
Cosmetic services can represent an important portion of revenue for some dermatology practices.
Buyers should evaluate cosmetic revenue separately when appropriate and consider the sustainability of that revenue after the ownership transition.
Equipment and Other Assets
Equipment can contribute to the overall value of a practice.
Buyers should review the age, condition, ownership status, and remaining useful life of major equipment rather than simply assuming that all equipment has its original purchase value.
Real Estate Can Be Separate
If the practice owns its building, the real estate may represent a significant asset.
The value of the real estate should generally be evaluated separately from the value of the operating practice when appropriate.
Location Can Influence Value
A practice’s location can affect patient demand, competition, operating costs, and growth opportunities.
Accessibility, population demographics, nearby healthcare providers, and local market conditions may all be relevant.
Provider Dependence
Buyers should consider how dependent the practice is on the current owner.
If nearly all revenue is generated directly by the selling physician, the transition to a new owner may require additional planning.
Staff and Operations
Experienced employees and established operational systems can make a practice more attractive to a buyer.
A practice with documented processes and a stable workforce may provide greater operational continuity after the acquisition.
Accounts Receivable
Accounts receivable should also be reviewed as part of the valuation and due diligence process.
The buyer should understand how much is outstanding, how old the balances are, and how consistently the practice collects amounts owed.
Liabilities Must Be Considered
A practice’s obligations can affect the economics of an acquisition.
Buyers should identify outstanding loans, equipment financing, leases, contracts, and other liabilities that may be associated with the business.
Valuation Methods Can Differ
There is no single formula that determines the value of every dermatology practice.
Different valuation approaches may consider earnings, cash flow, assets, market transactions, or other financial and business factors.
Purchase Price Is Not Always the Same as Value
The agreed purchase price can differ from an independent assessment of value.
Negotiation, market conditions, seller financing, transaction structure, and other factors can influence the final purchase price.
Final Thought
Valuing a dermatology practice requires looking beyond annual revenue. Profitability, cash flow, patient volume, service mix, equipment, location, staff, accounts receivable, liabilities, and dependence on the current owner can all affect the economics of an acquisition.
Physicians considering a purchase should review the practice’s financial and operational information carefully and consider obtaining professional guidance when determining whether the proposed purchase price makes sense.
