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What if my practice isn't worth enough yet?

If the practice will not currently reach the number you need, the right answer is usually to wait and improve it rather than to sell it — working on doctor capacity, cost of goods, staffing, and margins over one to three years, and then going to market.

Sometimes we underwrite a practice and the number does not reach what an owner needs to retire on. Telling somebody that is not the fun part of this job, but it is the part that matters most, because the alternative is selling into a number that does not work and having no second chance.

There is usually real room. Adding a part-time doctor two days a week can change what the practice earns, and earnings are what the multiple applies to. Cost of goods is often the largest single opportunity — corporate groups buy the same supplies substantially cheaper, and some of that gap is available to an independent practice that knows to go looking for it. Staffing mix, scheduling and capacity all move the number.

We have worked with owners for two and three years before taking them to market. One client we worked with for two years, adding doctors and improving margins, until the practice reached the number he needed. If that is the honest recommendation for you, you will hear it from us early rather than after you have signed something.

Where the improvement actually lands

Four levers that change what a practice sells for, sorted by which half of the calculation they touch. Add-backs and cost of goods change the earnings figure. Timing the right buyer changes the multiple applied to it. Adding a part-time doctor does both.

Moves your earnings

The figure being multiplied

Add-backsEverything running through the business that will not be there next year. One of the biggest mistakes he sees is not capturing all of them.
Cost of goodsBuying groups purchase the same goods 30 to 40 percent cheaper. Part of that saving can often be credited to your EBITDA rather than theirs.
A part-time doctorMoves bothTwo days a week raises what the practice earns, and can be worth an extra one or two turns on the multiple as well. On a $400,000 or $500,000 EBITDA that is real money on the back end.

Moves the multiple

What it gets multiplied by

A part-time doctorMoves bothTwo days a week raises what the practice earns, and can be worth an extra one or two turns on the multiple as well. On a $400,000 or $500,000 EBITDA that is real money on the back end.
Which buyer, and whenBuying groups tend to pay the highest multiples when they are closer to selling or recapitalizing, because they are trying to add practices towards the end of the cycle.

Which of these is worth doing depends entirely on the practice. Some are worth months of preparation before going to market; some do not apply at all.

Related

Veterinary Practice Brokerage →Veterinary Practice Valuation →Quality of Earnings Review →Data Room Preparation →

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