How to Evaluate the Value of Your Dermatology PracticeAug 25, 2022
When you're thinking about selling your dermatology practice, you have a lot to keep in mind — the most important of which is its value. Clearly, you want to get the best price possible. But what determines your dermatology practice's value, and how do you get to that number in the first place? Read below to learn how to evaluate your dermatology practice.
What Factors Determine Practice Value?
It's crucial to understand which factors contribute most to the value of your practice. This way, you'll know where to make adjustments to potentially improve its appeal. Consider the following characteristics as you evaluate your practice:
The location of your practice matters, as it can determine whether your practice receives or will receive a steady flow of new and returning patients. Some geographical factors make it more difficult for patients to travel to or locate businesses, and your practice could be subject to them. Ask yourself the following questions:
- Is your practice in a popular spot, like a shopping center, or a less-frequented part of town?
- What are the demographics — income, age, gender — of the surrounding community?
- Have you seen any signs of development in the area, such as the construction of new housing or businesses?
These variables can shed light on your practice's current and future performance and growth. If your practice has put down roots in an up-and-coming part of the area, you'll likely have few issues finding and retaining patients. The opposite may be true of more isolated practices in markets that haven't seen much growth. Either way, location is just one variable that can impact valuations.
A talented staff can boost your practice's valuation. When patients search for local dermatologists, one of the most crucial points they look for is experience. Therefore, hiring and maintaining a diverse, qualified team of doctors, assistants and management will have a positive impact on your practice's value. Be sure to create a balanced dynamic in your team that allows you to see and treat patients efficiently and effectively.
The reputation of your practice can give potential buyers insight into how it operates. For that reason, you should look internally and think about the presence your practice has in your community. A practice that fails to retain patients and has many negative reviews and testimonials will likely see a lower valuation. In comparison, a well-respected practice that offers consistently thoughtful care makes a great investment for a buyer.
Specifically, how your staff cares for patients makes a difference in your practice's reputation. A rude, disorganized and incompetent staff will quickly turn patients away, leading them to your competition. Whether it's an office assistant scheduling appointments or a physician assessing conditions, your entire team should strive to supply the most attentive and positive care possible.
Of course, your practice's track record when it comes to financials can impact its valuation. When you're preparing to sell your practice, you must have all of your financial records in order. Being organized and transparent in that regard helps you position your practice in the best light, as it gives possible buyers a clear picture of its potential. Consider working with an accounting firm to ensure all of your financial documents are in order.
Techniques to Value Your Practice
Today's most common reference point for a practice's valuation is earnings before interest, taxes, depreciation and amortization (EBITDA). This measurement illustrates a business's complete profitability, often used as an alternative to net income. When calculated, EBITDA can offer an insightful estimation of profit trends and cash flow. Additionally, potential buyers can use it to compare business investments against each other.
Still, other evaluation strategies exist. Here are three main techniques you can use to determine the value of your practice:
- The income approach: This approach relies on the discounted cash flow (DCF) method, which bases an investment's value on its predicted prospective cash flow. First, forecast the anticipated cash flow per historical financial trends. Then, choose a discount rate, which could be the cost of investment or opportunity cost, and discount the predicted cash flow back to the current day.
- The asset-based approach: Here, you calculate the book value of your practice, which is its total assets minus its total liability. These figures will be available on your balance sheets or as your shareholders' equity value, if applicable.
- The market approach: This option takes the precedent transaction approach, where you consider the previous sale prices of similar companies as an indicator of your practice's value. It involves analyzing the revenue and EBITDA of said businesses.
Using any of the above methods comes with pros and cons. For example, the market approach can offer you some insight into what similar businesses cost to purchase, but it may not provide a truly fair valuation of your specific company. Be sure to consider all aspects of the above methods as you evaluate your practice.
What Does the Selling Process Involve?
If you've decided it's in your, your staff's and your patient's best interests to sell your practice, you'll want to know what to expect. In a general sense, selling a dermatology practice requires navigating many steps, all of which require a careful approach. This sale may be the most significant transaction you've ever made.
While the process for every sale will differ, you may find it helpful to read about the ins and outs of what it's like to partner with DermCare:
- First call: This initial call allows us to connect with you and learn more about why you wish to sell your practice. If you feel confident that we can meet your needs and goals for your practice, we'll move on to the next step.
- Confidentiality agreements: Now, you'll give us insight into your practice's finances and sign confidentiality agreements.
- Initial due diligence phase: This step allows us to initially determine your practice's value via your practice's financial information. Additionally, you'll learn more about our acquisition process, so every party can be on the same page.
- Letter of intent (LOI): Now, we'll present you with an LOI that outlines the full terms of the transaction. This isn't a binding agreement — it's simply a document that gives you a complete rundown of our future partnership.
- Final due diligence phase: Here, we'll conduct a more thorough version of step three — we complete a few methods of valuation to fully assess your practice's value. Further, we'll talk about integration and protocols for your practice.
- Closing the deal: Finally, after both parties have reviewed the terms of the agreement and made any necessary negotiations and adjustments, we'll close the deal and you'll receive your proceeds via a wire transfer. This step solidifies our role as the new operations managers of your practice.
As you can see, the process of selling your practice can take several months to complete. Fully understanding what's involved will help you make the best decision for your practice in terms of selling it to the right investor.
Contact DermCare for More Information About Selling Your Dermatology Practice
Whether you've decided to retire or want to join a larger network of physicians, selling your dermatology practice can be a great choice. If you're curious about what it's like to transfer your business to a practice management company, we're here to help you through the process. With over 600,000 patients and 120 of the country's best medical providers, DermCare has the network and experience to successfully manage your dermatology practice.
Learn more about us to take a closer look at our goals and values. Contact us at 844.633.9358 to speak with us and get the sales process started.