How Medical Practices Are Valued: Methods and Multiples

Every valuation of a medical practice ends with a single number, but three different roads get you there. The income approach, market approach, and asset approach each look at the practice from a different angle, and a proper valuation usually runs all three and reconciles them. For a physician-owner in Idaho or Utah who has been approached by a buyer, is planning a partner transaction, or is thinking about succession, understanding how the number is built matters as much as the number itself.

Confidence around practice multiples is common in industry articles and rarely justified. Real ranges are wide, deal specifics move the number materially, and the “market multiple” for a specialty in Boise is not the same as in Salt Lake or Provo. This piece walks through the three approaches, why owner-doctor compensation adjustments drive the math, what personal versus enterprise goodwill actually means at closing, and how the real estate question should be handled separately.

The Three Valuation Approaches (Income, Market, Asset)

The income approach values the practice based on the cash flow it produces for its owners. The most common variant is a capitalization-of-earnings or discounted-cash-flow model built on adjusted earnings, which for a physician-owned practice means Seller’s Discretionary Earnings (SDE) for smaller practices and EBITDA for larger ones. The multiple applied to those earnings reflects the buyer’s required rate of return.

The market approach values the practice by comparing it to similar practices that have recently sold. The quality of a market-approach valuation depends entirely on the quality of the comparable data. Nationwide averages are less useful than comparables from the same specialty and roughly the same market size.

The asset approach values the practice by summing the fair market value of its tangible and intangible assets, less liabilities. For most medical practices, this approach produces a floor value rather than the operating value, because the going-concern goodwill is where the real value lives.

Why Owner-Doctor Compensation Adjustments Matter

A physician-owner’s compensation on the P&L is almost never what an incoming buyer would pay a replacement physician to do the same work. The owner might be taking $600,000 in a practice where a replacement would cost $350,000 in salary, or vice versa. The valuation math has to normalize that difference.

The adjustment is called “recasting” or “normalizing” the earnings. Owner-doctor comp is adjusted to a market-rate replacement salary for the specialty and market. The resulting “adjusted EBITDA” or SDE is what a buyer is really buying, and it is the number the multiple applies to. Two identical practices with different owner-comp practices can have very different reported earnings and nearly identical adjusted earnings.

Multiples: What the Ranges Actually Mean

Practice multiples are typically expressed as a multiple of adjusted EBITDA (for larger, more sophisticated buyers) or SDE (for smaller, individual-buyer transactions). Ranges vary widely by specialty, market, buyer type, and the individual practice’s growth, margin, and diversification.

Two things to watch:

• Advertised “market multiples” from brokers and roll-up buyers are usually the top of the range, not the median
• The multiple applied to a $500,000 EBITDA practice is not the same as the multiple applied to a $2 million EBITDA practice; larger practices generally command higher multiples

A rural Idaho or Utah practice with a single physician-owner and $400,000 in adjusted earnings does not sell at the same multiple as a five-physician group in Salt Lake with $2.5 million in adjusted EBITDA. Assuming otherwise is one of the most common expensive mistakes at the beginning of a sale process.

Personal Goodwill vs. Enterprise Goodwill

Goodwill in a medical practice sits in two places. Enterprise goodwill belongs to the practice: brand, systems, staff, referral relationships that would transfer to a new owner. Personal goodwill belongs to the physician: reputation, individual referring relationships, and the patient loyalty that follows the doctor rather than the shingle.

The split matters for two reasons. First, tax treatment: in many transaction structures, sale proceeds allocated to personal goodwill are taxed to the physician as long-term capital gain, potentially outside the entity’s tax structure, which can materially change the physician’s net take-home. Second, deal reality: buyers often push back on personal goodwill because it is harder to acquire and retain.

The Real Estate Question (Sell With the Practice or Not?)

Most owner-doctors who own their office real estate hold it in a separate entity that leases to the practice. When a sale happens, the real estate can be sold with the practice, retained and leased to the new owner, or sold to a separate real estate buyer.

Retaining the real estate and leasing it to the acquirer is a common structure. It generates ongoing lease income for the former owner and lets the acquirer avoid a real estate purchase they may not want. It also complicates future flexibility; a five-to-ten year lease is a long commitment.

Cooper Norman’s healthcare business valuation team builds practice valuations for physician-owners across Idaho and Utah, running the income, market, and asset approaches together and connecting the number to the tax and deal-structure math. To have your practice valued honestly before a sale conversation starts, talk with a Cooper Norman advisor.