Before listing your business for sale, you need to take time to evaluate the fair market value and set an asking price. There are several methods for valuing a business, but most healthcare business owners and buyers will use either a market-based or asset valuation approach. While the market-based valuation approach allows prospective buyers to look at current market trends and compare recent sales of similar businesses to benchmark a new listings value, asset-method valuations are instrumental as they comply with federal laws when there is an ongoing referral relationship between provider and patients. These two approaches help business owners establish a competitive and fair asking price and help to eliminate any biases developed after years of building the business.
Market-based valuations compare businesses to other, similar companies that have recently sold. Owners and prospective buyers rely on industry-specific revenue and cash flow pricing multiples to determine what a business is worth relative to recent sale prices. For healthcare business owners with earnings under $1 million, seller's discretionary earnings (SDE) is the appropriate cash flow metric to use. For SDE, discretionary expenses, including owner compensation, are added back to the company’s net income.
EBITDA, earnings before interest, taxes, depreciation, and amortization, is the cash flow metric used to value mid to large-sized businesses. The primary difference between SDE and EBITDA is that EBITDA does not include the owner’s salary as an adjustment.
|
Category |
Average Earnings Multiple |
Average Revenue Multiple |
|
All Healthcare Businesses |
2.62 |
0.90 |
|
Assisted Living and Nursing Homes |
4.35 |
1.30 |
|
Dental Practices |
2.17 |
0.59 |
|
Home Healthcare Businesses |
3.02 |
0.67 |
|
Medical Practices |
2.29 |
0.79 |
|
Other Healthcare Businesses |
2.51 |
0.89 |
While business valuations fall within a certain range, the value of each individual business is unique and depends on several factors, including the local market, specific financials, and operations of the business.
For the broader healthcare industry, the average cash flow multiple is 2.62. It’s important to remember that local market trends and distinctive business operations have an impact on valuation and sales price.
While many healthcare businesses will use cash flow or earnings multiples to value their business, it can also be helpful to calculate revenue-based valuations. Using this secondary method helps narrow down your price range. Average healthcare business revenue multiples are 0.80.
An asset-based business valuation focuses on the book value of a business and deducts liabilities. It is often used in conjunction with the market-based valuation method. There are three distinct categories for assets included in an asset-based valuation: 1. tangible assets, like furniture, fixtures, and equipment, 2. account receivables of the company, and 3. goodwill. Among the intangible assets, or goodwill, of a healthcare business are reputation, patient base, referral system, and convenient location.
It’s important to note that state and federal laws must be considered when selling a provider healthcare business or skilled assisted living or home healthcare business. For example, patient records are prohibited from being included in the sale by law. The seller must adequately notify their patients that the business is for sale so that they may seek alternative healthcare options. Adequate notification varies and is dependent on the patient’s care and treatment. Consult with an attorney and business broker with experience in the healthcare sector to ensure compliance with selling your business.
You’ll need to gather a variety of documents, and you’ll want to ensure you have records going back three years. Providing potential buyers with clear, organized records of financial data will demonstrate the success of your business in the past and its potential for the future. You’ll want to make sure to have these documents, and any additional financial documents specific to your business and industry, available:
To ensure the highest potential return on your business sale, you'll want to assemble an experienced team of professionals. Knowing the value of a business, as well as having the right knowledge and expertise to negotiate and close the deal, requires a team of professionals with specific skill sets, which helps the business run smoothly while it’s on the market. The sale process can be made easier with the help of accountants, appraisers, attorneys, business brokers, and consultants to ensure a smooth transaction.
Having gathered accurate financial records for the past three years, it’s beneficial to consult with a trusted accountant. They can help organize your financial documents and provide guidance. Potential buyers will closely analyze your financials during the due diligence phase, so it's advantageous to have a CPA to ensure their accuracy.
Having an experienced business acquisition attorney concentrating on healthcare law is essential to help navigate the legal aspects of selling your healthcare business. There are many laws specific to the industry that must be taken into consideration when selling a healthcare business. For example, when selling a medical practice, HIPPA mandates that patient privacy must be upheld. There are also associated federal and state regulations that require owners to notify and provide patients with the option to select another healthcare provider within a designated time period. From drafting non-disclosure and buy-sell agreements to negotiations, an attorney experienced in healthcare transactions will provide guidance and assurance that your interests are secure.
Business brokers act as intermediaries throughout the process of selling your business. Their services range from market appraisals and pricing evaluations to strategic counsel for boosting value. Select a broker with specialized knowledge of the healthcare industry, as they can offer specific insights into market trends and access to potential buyers. Brokers typically work on commission, with fees ranging from 10 to 15% of the final sale price.
Understanding the main levers of your business's value is essential to make improvements that will attract buyers, increase price, and most importantly, enable it to run autonomously.
Many factors influence the timeline for selling a healthcare business — expect the process to last between six months and a year. For business sales, the average days on the market in 2024 were 192 days. Last year saw 449 healthcare businesses sold on BizBuySell. Key factors to consider when assessing how long selling your business will take are the purchase price, location, reputation and goodwill, among others.
Prior to selling your business, take a look at it from a buyer's point of view to determine which areas need to be improved. By taking the time to analyze and fine-tune your business, you can boost its value and better your chances of a successful sale.
|
Improves Price Multiple |
Reduces Price Multiple |
|---|---|
|
Reliable and well-documented practice: organized financials, detailed operating procedures, comprehensive vendor policies, etc. |
Obscure practice: Complicated or non-existent bookkeeping, unreliable vendor relationships, undocumented agreements, etc. |
|
Strong reputation and quality of service. |
Unestablished reputation and inconsistent quality of service. |
|
Seasoned, professional service staff that will stay on under new ownership. |
Staffed by family or friends that are likely to leave along with the owner. |
|
Good location, with favorable rent and good lease terms. |
Poor location, with above market rent and/or unfavorable lease terms. |
|
Modern, well-maintained tools/equipment. |
Older, inefficient, or worn-out equipment. |
|
Strong brand expertise and relevant certificates and licenses where applicable. |
Unestablished brand, lacking needed certifications. |
There are a variety of options available when it comes to thinking about potential buyers for your business. In addition to listing a business on the open market, consider selling to qualified family members or employees, private equity groups or competitors. Local providers may be interested in growing their practice and interested in your healthcare business. The goal is to get your business in front of enough interested parties to generate multiple offers.
Many healthcare business owners prefer to maintain confidentiality during this sale process. Keeping the sale confidential helps maintain value. Business brokers are adept at fielding inquiries from would-be buyers without revealing the company name and will have an NDA prepared for anyone interested in reviewing the details of your business. There are instances, however, that publicly announcing the sale to a few trusted advisors and competitors may be beneficial to see if they are interested in an acquisition.
Brokers will create a “blind listing” on business-for-sale marketplaces. The listing may be the first impression for
potential buyers, so it’s important to take the time to
create a comprehensive and compelling listing. The top five components of a successful listing are:
The final steps when selling your provider healthcare business come down to negotiating the terms and closing the deal. Depending on the complexity of the deal, the due diligence phase can take a few weeks to a few months. The buyer will want to go over your financials, understand the framework of your business, analyze your contracts and liabilities, look into customer data, evaluate employee information, consider any legal issues, inspect physical assets, among other details. It’s not uncommon for issues to surface, so be prepared to negotiate. A few minor changes to the price or terms of the deal can help to ease a variety of issues.
Once final terms of the deal have been agreed upon, it’s time to close the deal. At the closing, the business owner(s), buyers, attorneys, and brokers will gather to review and sign all necessary documentation to complete the transaction. After the sale is complete, it’s time to transfer the business operations to the new owner. The BizBuySell team put together a comprehensive checklist to guide you through the process of transferring the business to the new owner.
By understanding the value of your business and the workings of the business-for-sale market, selling a healthcare business can be a much simpler process. This will allow you to put a process into place that will attract the best opportunities.
Download our free Guide to Selling your Small Business for an in-depth guide that will walk you, step-by-step, through the process of valuing and selling your healthcare business.
