How to Value a Dermatology Practice Before Buying
Determining what a dermatology practice is worth is an important step before completing an acquisition. The value of a practice can depend on its financial performance, patient base, services, equipment, location, staffing, and future growth opportunities.
For physicians considering dermatology practice financing, understanding how a practice is valued can also help when evaluating a purchase price and determining the potential financing needed.
Review Revenue and Collections
Revenue is an important starting point when evaluating a dermatology practice.
Buyers should review several years of financial information when available rather than relying on a single year’s results. Collections can provide additional insight into the consistency of the practice’s revenue.
Analyze Profitability
Revenue alone does not determine the value of a practice.
A dermatology practice with high revenue but unusually high expenses may have less cash flow available to a new owner than a practice with lower revenue and stronger profitability.
Buyers should examine operating expenses and the cash flow generated by the business.
Consider the Patient Base
The size and stability of the patient base can influence a practice’s value.
Buyers may review:
- Active patients
- New-patient volume
- Patient retention
- Referral sources
- Appointment volume
A stable patient base can provide a stronger foundation for future operations.
Evaluate the Services Offered
Dermatology practices can generate revenue from a variety of services.
Medical dermatology, surgical procedures, cosmetic treatments, and other specialized services can have different economics.
A buyer should understand how much revenue comes from each major service category and whether those revenue sources are sustainable.
Review the Equipment
Equipment can be an important part of a dermatology practice acquisition.
Buyers should determine what equipment is included in the transaction and evaluate its:
- Age
- Condition
- Maintenance history
- Remaining useful life
- Replacement cost
Older equipment that needs to be replaced soon may affect the overall economics of the acquisition.
Location Matters
The location of a dermatology practice can affect its long-term potential.
Factors to consider include population, competition, accessibility, visibility, nearby medical providers, and local demand for dermatology services.
Review the Real Estate
If the practice owns its building, the real estate should be evaluated as part of the transaction.
If the practice leases its space, the buyer should review the lease terms, rent, renewal options, and assignment provisions.
The value of the operating practice and the value of the real estate may need to be considered separately.
Evaluate Staffing
Staffing can have a significant impact on profitability and operations.
Buyers should understand the practice’s current staffing structure, compensation costs, employee roles, and whether additional hiring may be required after the acquisition.
Consider Physician Dependence
A buyer should determine how dependent the practice’s revenue is on the selling physician.
If most patients are closely associated with the seller, the transition plan can be particularly important.
The buyer should understand how patient relationships will be transferred and whether the seller will remain involved after closing.
Look at Cosmetic Revenue Carefully
Cosmetic services can be an important revenue source for some dermatology practices.
However, buyers should evaluate whether cosmetic revenue is consistent and sustainable rather than assuming historical performance will automatically continue after the acquisition.
Equipment, marketing, pricing, and physician involvement can all affect cosmetic revenue.
Review Accounts Receivable
Accounts receivable can provide additional information about the practice’s financial position.
Buyers should understand the age and collectability of outstanding receivables and determine how accounts receivable will be handled as part of the transaction.
Consider Future Growth
A practice’s value is not based solely on its current performance.
Potential growth opportunities can include adding providers, expanding hours, increasing procedure capacity, adding services, or improving the use of existing space.
However, growth projections should be realistic and supported by market demand.
Obtain Professional Valuation Advice
A professional valuation can provide an independent perspective on the practice’s value.
Depending on the transaction, buyers may work with valuation professionals, accountants, attorneys, and financing specialists as part of the acquisition process.
Compare the Price With Cash Flow
A buyer should evaluate whether the proposed purchase price is supported by the practice’s financial performance.
The purchase price should be considered alongside expected debt payments, operating expenses, physician compensation, working capital requirements, and other financial obligations.
Final Thought
Valuing a dermatology practice involves much more than looking at annual revenue. Buyers should evaluate profitability, cash flow, patients, services, equipment, staffing, real estate, accounts receivable, and the practice’s future potential.
A thorough valuation can help a physician determine whether the asking price is reasonable and whether the acquisition can support the proposed financing and ongoing business expenses.
