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Buying or selling a clinic

More and more often I am seeing an interesting occurrence with people selling their clinics for reasons other than relocation or retirement. In quite a number of sales I am seeing principals who have had enough of running a business and are prepared to sell out and become an associate so that they can relieve themselves of the stress and strain. This has significantly increased the number of practice purchases/sales in which I have been involved over the last 6-7 years.

The starting point for all of these transactions is trying to arrive at a suitable and realistic valuation for the business. What, after all, is the correct value of a practice? This is both a very simple and very complex process. If you are a seller – as high a price as you can get; if you are a buyer – for as little as you can get away with. Please note – there are 2 starting points for the starting point!

Starting point number 1 – turnover.

I normally expect to multiply these by something between 0.75 and 1.25. The reason for basing the initial approach on turnover is that this is probably the only really verifiable figure appearing in a set of accounts for the practice prepared by the seller. The turnover can be substantiated by a review of bankings; these may be slightly less than the turnover as a result of cash takings being used directly for either the practice or the principal’s own drawings.

However, there is a flaw with the turnover approach in that if the practice includes in gross patient fees all of the income generated by associates who then take 50% of the fees as their income, this leads to an over exaggerated GPF.

Starting point number 2 – profit.

The profitability of the business will not always be the profit as disclosed in the practice accounts as these often include items that reflect the seller’s ‘modus operandi’, rather than inescapable expense of the practice. For example, motor expenses will vary considerably dependent upon the way in which you are set up for tax purposes in terms of ‘primary business address’ and their proximity to the practice premises.

It should be possible to isolate those expenses that are specific to the business (as against to the practitioner) and the profit derived on this basis should be taken into consideration. This leads into the concept of payback – how long do you feel it is reasonable to wait to get your money back. Most businesses will be sold on a 2-year payback i.e. purchase price equal to about 2 years average profit excluding unusual or practitioner specific ‘additional’ expenses.

The “base price” (or starting point) is therefore the lower of starting point 1 or starting point 2.

We then go into those factors which will serve to enhance or diminish the value of the business. I will try to keep this fairly simple, but in practice the weighting of each factor is usually a subject of much debate.

  1. Are you buying premises and a practice together? Obviously this increases the price (excluding the cost of the freehold/leasehold) because the established patient base will be able to continue in exactly the same way as before.

  2. If the premises are included but are on a lease, how good are the premises? What is the level of referrals from within the premises (assuming cross-disciplinary premises)? How suitable are the premises? How onerous is the lease (years to run, annual rent and service charges, when are the rent reviews, what limits are then on those reviews) etc?

  3. If premises are to be included there are three key considerations; location, location and location! You then go on to the next level of consideration, proximity to public transport, car-parking facilities, passing trade etc.

  4. Do the premises require redecoration or refurbishment? What will this cost?

  5. What is the condition of any equipment being included in the sale?

  6. What have the patient figures been like for the last year – look for new patients, cancelled appointments, do not shows, etc?

  7. If you are being offered just a patient list, then you need to consider whether the patients will be prepared to re-locate to your existing or new premises. In any event, expect a 15-20% drop in patient numbers. These will be patients who were looking for an excuse to stop going on a regular/ semi-regular basis. Also, if there are a large number of historic patient records, how many of them have not been seen for 2 years or more? – do they actually have any value?

  8. What is the local reputation of the business; if it is bad, why is it bad? If it is bad, you will have to work very hard to reverse that reputation. If it is good, how much of this is because of the personality of the outgoing principal, rather than their technical prowess.

  9. What has been the turnover trend for the last three years? Why has there been this trend?

  10. What is the vendor going to do afterwards? If they are moving away, are they prepared to be a ‘consultant’ during a hand-over period? (Do you want them to be?) Imagine if you buy a practice only to find that they have changed their mind about re-locating and have opened a surgery a mile down the road. Of course, with the current trend of selling but continuing as an associate, this could, in the long run, be an even bigger consideration. Where the principal moves away for the period of a restrictive covenant, normally 2 years, it could be harder for them to re-establish themselves in the area. On the other hand, after enjoying all of the money they earn for themselves for many years, if the principal has now stepped down to associate status, they may feel after a few years that they want to go back to a higher level of income.

As you will by now appreciate, establishing a price is not simple and I strongly recommend that you use the services of a professional adviser whenever you are considering buying or selling a practice and/or patient list.

There are also some sellers who pick a figure out of thin air for no reason other than that is what they want and have no regard for whether the price is reasonable. The problem when dealing with these situations is that you could find yourself investing time and money in putting forward offers etc., only to find that there is no chance of ever reaching a mutually acceptable figure.

The bottom line is that the value is what a willing buyer and a willing seller agree on – whether it is supported by the facts or not.

One other point to be aware of – a number of companies will offer to put together a valuation report for you, which is fine, but don’t be sucked into paying thousands of pounds for it. Most valuers, including me, tend to have a standard format saved on their PC and they just change those areas specific to the practice in question. So as a guide using my charge out rate of £250 per hour, I would expect the charge to be somewhere between £750 and £900 absolute tops. (Prices quoted June 2023)

Michael B Bennett FCCA

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