How To Value a Medical Practice

We get asked this question all the time: what’s my medical practice actually worth?

Sometimes it’s because someone’s thinking about selling — all of it or just a slice. Other times they’re looking to buy into a practice. Occasionally it’s part of a separation or restructuring.

And sometimes, people just want clarity. Fair enough — if you’ve spent years building something, you want to know its value.

This question comes up far more often in partnerships than in solo practices. That’s simply because partnerships change more. Partners come and go, percentages shift, and every one of those changes needs a clear, fair value put around it.

No matter the reason, it’s a question that sits in the back of many practitioners’ minds.

And at the heart of it all is goodwill — often the most valuable (and misunderstood) part of a medical practice. Understanding how that’s measured is usually the key to understanding what the whole practice is really worth.

Most specialists practices don't have goodwill 

For specialists, the buy-versus-build decision is usually a no-brainer: they don’t buy practices.

Why? Because specialist work is highly personal. Patients come for you, not the postcode. Location matters less, start-up costs are low, and it’s usually cheaper (and smarter) to start from scratch than to pay for goodwill that may never stack up.

Goodwill only really shows up where the income relies on expensive equipment or multiple practitioners, not just the specialist’s hands. Think radiology, sleep clinics, or cardiac testing centres.

Most specialists build gradually — often starting part-time while working elsewhere, then easing into full-time private practice. Joining an established group can speed things up thanks to shared referrals and spillover work.

There are exceptions. Some dental specialties, like periodontics, can command serious goodwill for a busy practice. Rule of thumb: for most medical specialists, goodwill is worth little to nothing. Your skills are the asset — not the practice name. The situation for General Practices  however is different. 

Let’s make this real

This stuff only clicks when you see it in action, so here’s a true story from a real general medical practice.  I’ve nudged the numbers a bit to keep it simple and anonymous.

The practice sits in a well located suburb of Melbourne— the kind of place where patients value good care and are happy to pay for it. There are five owner doctors. They own the building, employ four full-time nurses, and have five full-time-equivalent non-owner doctors working alongside them.

The practice mostly private bills and runs a strict pay-on-the-day policy. A capable practice manager handles the day-to-day, backed by a small team. The owners are largely hands-off, meeting fortnightly for clinical matters and monthly for admin.

The trigger for the valuation? One of the owners has decided to retire.

The incoming owner isn’t a stranger. He’s worked there for five years.  He knows the place, likes the place, and sees it as home for the long haul.

Now, about goodwill 

There’s no magic checklist. Goodwill looks different in every practice. But the ones that hold real, bankable value tend to share a few things.

First: people. Friendly, efficient staff who like patients create loyalty before the doctor even says hello.

Second: the space. Clean, modern rooms, easy access, decent parking, and a welcoming feel all matter. Relaxed patients come back.

Third: strong associates. Doctors with their own following, full books, and no desire to set up down the road.

Then there are relationships — good links with physios, pharmacists, pathologists and others keep referrals flowing and care coordinated.

The best practices often have a niche too: skin cancer, women’s health, sports medicine, geriatrics, another language. A specialty attracts the right patients without excluding everyone else.

And yes, location still counts. The right suburb, the right street, and good street appeal give you a head start.

Put it all together and you get something powerful: a practice that works without the original owner being in the room. That’s goodwill — value that sticks around and can be handed to the next owner.

Step # 1: Work out the real earnings

Before you can put a value on anything, you need to know one thing: how much cash the practice actually spits out for the owners.

In this example, each doctor collects 100% of their fees, then pays a 35% service fee to the main service entity — a Unit Trust.

Each owner holds units in that trust via their family trust. So when a doctor buys in, they’re simply buying the units from the doctor who’s selling.

To work out what those units are worth, we start with the tax returns. They tell us the practice’s real earnings.

We take the average profit from the past three years, then strip out depreciation and one-off items that won’t repeat.

Here, that adjusted net profit comes to $1 million, shared between five owners. That’s the number being valued.

In plain English: this is the practice’s repeatable, ongoing profit. From this point on, every valuation decision hangs off this figure.

And just to be clear — this is on top of what each doctor earns from seeing patients (after paying a 35% service fee).

Step # 2: Pick the multiple

This is where the calculator goes back in the drawer and judgement takes over.

Unlike Step 1, there’s no magic formula for choosing a multiple. It’s about common sense, experience, and a good feel for risk. In other words, it’s more art than science.

Two valuers can look at the same practice and land on different answers — and that’s okay. In the real world, we see multiples anywhere from three to five times earnings. The gap usually comes down to how strong — or risky — the practice looks.

Here’s the rule of thumb:

• Higher multiple = lower risk, stronger business
  
• Lower multiple = higher risk, more uncertainty
  

One sensible way to choose a multiple is to break the practice into the things that actually drive success. Each factor gets an “ideal” score based on its importance, and the practice is then measured against it.

That gives you a grounded, defensible multiple — not a number plucked from the air.

PRACTICE SCORE SHEET

Add up the scores and compare them to the maximum, and you quickly see how strong the practice really is — and what sort of multiple it deserves. In this example we have a score of 385 which is 3.85 x multiple. 

The beauty of this approach is flexibility. Different doctors can weight things differently, add or drop factors, and tailor it to the practice in front of them.

And it’s worth repeating: this number isn’t carved in stone. It’s a judgement call. Two valuers can look at the same practice and reach different conclusions — and that’s not a flaw. It simply reflects different views on risk and sustainability.

In fact, doctors should build their own list and decide what matters most to them. The framework gives you structure; the weighting reflects personal priorities.

That’s why different buyers will score the same practice differently. What matters to one may barely rate for another — and that flexibility is exactly what makes this method work.

Step #3: Put a price on it

Once the multiple is set, the math is easy.

We apply it to the future maintainable earnings of $1 million. Using a 3.85 x multiple, the goodwill comes to $3.85 million. Split five ways, that puts each doctor’s share at $770,000

In simple terms, a willing (but not desperate) buyer and seller would likely shake hands around $770,000  for a one-fifth share of this practice — a business that’s delivered about $200,000 per owner, working four days a week, for the past three years.

The buyer was happy to pay it because he'd  already spent five years building her career there. Replicating that setup elsewhere would’ve cost time, money, and a lot of emotional energy. Being part of a leading practice mattered.

That price also includes plant and equipment. But in most medical practices, second-hand gear doesn’t move the needle much. The real value sits in the goodwill — that’s where the heavy lifting happens.

Negotiating the deal

Negotiations are rarely neat or logical. Only one thing really matters: you must feel comfortable with the price. It’s completely fine to ask for time to think, or even to hand the negotiation over to someone else if emotions start getting in the way. A bit of emotional distance can be a huge advantage.

Once the price is agreed, park it. Negotiations are draining, and you’ll never really know if you could have squeezed out a slightly better deal. Once it’s done, shift your focus to making the practice successful.

Deferring part of the price

If you can, try to defer part of the purchase price — say for 12 months. This gives you a safety net. If the practice doesn’t perform as expected, you at least have some leverage to renegotiate or withhold the final payment.

This won’t work in every situation, but it’s worth exploring. Once everything is paid upfront, your negotiating power disappears.

Splitting the purchase price

How the price is split between goodwill and plant and equipment is a common sticking point.

Vendors usually want a low value on equipment to reduce tax. Buyers want the opposite, because higher equipment values mean better depreciation deductions.

There’s no magic formula. A sensible and commonly accepted approach is to use the vendor’s written-down tax values. Just don’t push things too far — unrealistic values can cause real problems if the ATO ever takes a closer look.

Financing the practice

Getting the right finance matters more than most people realise. There are plenty of lenders and brokers all promising the “best deal”.

Be cautious. Brokers often earn commissions, and that doesn’t always align with your interests. The cheapest loan is rarely found through someone who isn’t fully independent. Transparency matters.

The sale agreement

Usually, the vendor’s solicitor prepares the sale of practice agreement, along with any consulting or handover arrangements. Your solicitor’s role is to review the documents and make sure they reflect what you actually agreed to.

Importantly, solicitors shouldn’t be doing the deal — they should be documenting it. Over-lawyering can turn a good deal into a failed one.

Hidden liabilities and debts

In our practice example we spoke about a doctor buying into an existing practice as a part owner,

But in the situation where you are buying an entire practice from someone, you should not buy shares in a practice company . When you buy shares, you also inherit every liability — including ones no one knows about yet. Instead, all you do is buy the goodwill and set a new structure. 

Restraint of trade — don’t skip this

A restraint of trade clause is essential. Without it, a seller could pop up down the road and slowly take patients back.

A reasonable restraint usually limits:

• What the seller can do (medical services)
  
• Where they can do it (often within 2–3 km)
  
• How long it lasts (commonly three years)
  

Deferring part of the purchase price helps here too — money held back gives you leverage if things go wrong.

Courts don’t love broad restraints, so a narrow promise (for example, not treating former patients for 12 months) is often far more enforceable.

The premises really matter

There’s no point paying good money for goodwill if you might lose the premises shortly after. If lease security isn’t guaranteed, goodwill should be heavily discounted.

This is usually handled by assigning the existing lease or granting a new long-term lease. Either way, get the lease checked properly before committing.

Warranties and guarantees

Personal guarantees from directors or trustees add comfort. One warranty you should never compromise on is confirmation that everything relevant to the value of the practice has been disclosed.

If a vendor won’t agree to that, it’s usually a sign to walk away.

Managing patients through the changeover

Doctors don’t own patients — loyalty has to be earned. How patients are handled during the transition is the single biggest factor in whether the purchase succeeds.

Patients should be clearly informed about the change and reassured about the incoming doctor. Notices in the practice are essential, and letters or local advertising may help.

In partnerships, giving patients a choice between existing and new doctors improves retention. In solo practices, a gradual phase-in / phase-out works best. When done properly, patients barely notice the change.

Staggered payments during the handover period can reduce risk. Losing a small deposit is far better than paying full price for goodwill that doesn’t stick.

Some patient loss is normal, but it should be limited to around 10%. The goal is to grow the practice in year one so any losses are quickly replaced.

Thinking of buying or selling a practice?

As you can see, there is a lot involved in buying or selling a practice, so make sure you get expert advice by booking  your complimentary consultation today.