Practitioner dependence decides how much goodwill transfers
Patients follow doctors and dentists. When the principal practitioner leaves, some part of the billings leaves with them, and the value of that part is personal goodwill rather than practice goodwill. A valuation separates the two by asking how patients are allocated, whether they book with the practice or with an individual, and what happened when a practitioner left in the past.
A practice with several practitioners, a shared patient base and a front desk that books by availability has more transferable goodwill than a solo practice where every patient knows the principal by name. Check the age profile of the practitioners and any restraint arrangements. Your lawyer should confirm what a restraint actually binds. Our guide on business goodwill explains how the split between personal and practice goodwill is approached.
Service-fee and facility models change what the entity earns
Many practices do not employ their practitioners. The practitioner bills patients in their own right and pays the practice a service fee, often a percentage of billings, for rooms, staff, equipment and administration. The practice entity's revenue is then the service fee, not the gross billings. Employed practitioners, by contrast, produce revenue for the entity and receive a salary.
The two models produce different revenue lines, different margins and different risks, so identify which applies before reading the accounts. As a hypothetical example, a practice with $2 million of gross billings and a 40 per cent service fee has entity revenue of $800,000, and its costs should be read against that figure. Where the principal both owns the entity and bills through it, a market service fee or salary must be assumed so that the entity's earnings are not overstated. Our guide on EBITDA adjustments covers that adjustment.
Rooms, utilisation and billing mix
Consulting rooms and dental chairs are the practice's productive capacity. Count the rooms, the sessions each is used, and the sessions that could be filled. A practice running at full utilisation has limited headroom without a fit-out, while a practice with empty rooms has capacity that a buyer can fill only if practitioners can be recruited.
Billing mix affects both margin and risk. Bulk-billed, privately billed, insurer-funded and procedural work carry different fees, different collection patterns and different exposure to policy change. Describe the mix in general terms rather than assuming it is stable, and note any reliance on a single funding stream. Ask how fees have moved over the past three years and whether the practice has passed cost increases on to patients.
Leases, fit-out, equipment and staff
The lease determines whether the practice can stay where its patients are. Examine the remaining term, options, rent reviews, make-good obligations and whether the landlord is a related party. A practice owned in the same family as its premises may pay rent above or below market, which needs adjusting.
Fit-out and equipment in medical and dental settings are expensive and specific. Dental chairs, imaging, sterilisation and clinical software have replacement cycles, and a fit-out near the end of its life is a cost the buyer will bear. Confirm what is owned, leased or financed, and whether equipment finance transfers. Support staff, practice managers and nurses hold much of the operational knowledge, so review tenure, awards and any accrued entitlements.
Regulatory standing and the type of buyer
Practices operate within registration, accreditation and privacy obligations that vary by discipline. A valuation does not audit compliance, but it notes whether accreditation is current, whether any conditions apply, and whether records are kept in a way that would survive a change of owner. Your lawyer and professional body should confirm the transfer requirements.
Corporate groups and practitioner buyers look at a practice differently. A corporate buyer values the service-fee stream, the practitioner contracts and the scope to add practitioners, and usually requires the principal to stay for a period. A practitioner buyer is purchasing their own future income and rooms to earn it in, and may weigh location and lifestyle over margin. The valuation states which buyer its assumptions reflect.
Valuing the practice entity is not the same as valuing a partner's interest
The practice entity as a whole is valued on its maintainable earnings and the assets that support them. A single partner's interest is a share of that entity, and its value depends on the partnership or shareholder agreement, the rights attached to the interest, and whether the partner's departure changes the earnings themselves. A minority shareholding may warrant a different approach from a controlling interest, and a formula in the agreement may differ from market value.
Healthcare practice valuations are a specialist area, and our sister brand HPNA works exclusively with healthcare practices. Valuation Group handles medical and dental matters within its general practice, and we will tell you if a matter is better placed with HPNA.
Records and the questions they answer
| Record | Valuation question it answers |
|---|---|
| Billings by practitioner and room | How much income depends on the departing practitioner, and how full the rooms are |
| Practitioner agreements | Whether the entity earns a service fee or a margin on employed practitioners |
| Fee schedule and billing mix report | Where revenue comes from and how exposed it is to funding changes |
| Lease and fit-out schedule | Whether the practice can stay in place, and what the buyer must spend on refurbishment |
| Equipment register and finance agreements | What is owned, what is financed, and what is due for replacement |
| Partnership or shareholder agreement | How a partner's interest is defined and whether a formula applies |
Tell us whether the matter concerns a sale, a shareholder exit or another purpose. The purpose determines whether the whole practice or an individual interest is being valued and what assumptions about the departing practitioner apply.
Before we begin
Your industry information checklist
- Financial statements and monthly management accounts
- Billings by practitioner, room and service
- Practitioner agreements and service-fee percentages
- Lease, fit-out schedule and equipment register
- Accreditation records and staff roster
We confirm the documents needed once the purpose and scope are clear. For the common starting documents, see our valuation preparation guide.
General business valuation guidance. Service suitability, specialist input and fee are assessed for the individual matter.