Valuing a physical therapy practice is part art, part science, and part math. Generally, the math and science, which we discuss below, is more easily calculated. It is the art – knowing how to sell a business and to whom – where true value is realized. For purposes of this article, we will discuss the valuation of a physical therapy practice where a controlling interest and/or 100% of assets are sold.
There are three performance indicators that are analyzed when determining the value of a practice: Adjusted EBITDA, Adjusted Seller’s Discretionary Earnings (SDE), and Gross Revenue (billings). Each of the above are impacted by different variables, and, as such, will warrant a different multiplier range. And while you can use “rules of thumb” and comparable sales to determine appropriate ranges, there is a lot more to it than simply multiplying sets of numbers. You must take into consideration other valuable aspects of your practice and include those in the final valuation as well.
How Much is a Practice Worth? Formulas for Determining Your Practice’s Value.
Below are the basic steps you need to take to determine your physical therapy practice’s value based on Adjusted EBITDA, Adjusted SDE, and Gross Revenue:
- Adjusted EBITDA Formula: EBITDA stands for ‘Earnings Before Interest, Taxes, Depreciation, and Amortization’ and it is commonly used when valuing private practices. After determining your earnings (ordinary income after all expenses), you then add back interest, taxes, depreciation, and amortization paid in order to arrive at EBITDA. From there, you can also “adjust” EBITDA by making additional add-backs for non-recurring or one-time expenses. Then, the “rules of thumb” for an Adjusted EBITDA of less than $1 million would be to multiply your Adjusted EBITDA by between 3.0 and 5.0. For Adjusted EBITDA above $1 million, the range increases.
- Adjusted SDE Formula: SDE stands for Seller’s Discretionary Earnings and is calculated by taking Adjusted EBITDA and adding the Owner’s Compensation. As such, the multiplier ranges are smaller than above and would generally be between 2.5 and 4.0. Other factors to consider are current assets and liabilities.
- Gross Revenue Formula: You can use your gross revenues for the trailing twelve (12) months prior to sale as well to determine value. While the above methods are more commonly used, looking at 1.0 times your trailing 12-month revenue, including all assets, is another valuation that can be used to compare/contrast against the Adjusted EBITDA and Adjusted SDE formulas.
Any of the above formulas will help you determine a value that can work as a starting point for your business’ valuation. However, there are other factors you must consider, as well. See below.
Five Factors That Increase the Value of Your Practice
Buyers will also take other factors into consideration when determining whether they will pay more for a practice. The five factors that increase the value of a practice are:
- Solid staff: Strong tenured staff can add significant value to your physical therapy practice, especially when a new owner will need to replace your production as you retire.
- Multiple revenue streams: Of course, physical therapy services are your main source of revenue. However, if you can increase that income with products, massage therapy services, or orthotics to name a few, this also increases the value of your business.
- Different locations: A practice with multiple locations is typically considered more stable because these businesses have higher revenue, are more profitable and have a larger market reach.
- Experience: You know your physical therapy practice better than anyone. If you are willing to stay on temporarily after the sale to provide management services, you may get more for your practice.
- Updated equipment: Physical therapy equipment is expensive and buyers will not want to invest in repairs. If you have newer equipment, this is also a selling point that can increase the value of your business.
Our Business Brokers in Washington Can Help Value Your Business
The chances are good that you have never sold a physical therapy practice before and so, you have never had to value one either. If you’re wondering how much your practice is worth, contact us at Private Practice Transitions. Our Washington business brokers have the necessary experience to fairly value your practice and find a buyer that will pay what it is worth. If you are considering selling your practice, call us at (253) 509-9224 or contact us online to learn how we can help you through the process.