How to Value a Physical Therapy Clinic
Physical therapy clinics provide a range of services to help individuals recover from injuries, manage chronic conditions, improve mobility, and enhance physical well-being. The physical therapy industry has experienced slight revenue and profit decline in recent years. However, IBIS World predicts healthy growth in the near future. This is due to various factors including increasing demand for physical therapy, the aging population, and increasing federal funding. These conditions are beneficial for those looking to buy, grow, or sell a physical therapy clinic. However, this industry comes with many challenges. To succeed, it is important to understand how to value a physical therapy clinic
To learn about valuing a physical therapy clinic, it is best to receive a business appraisal. During a business appraisal, a valuation expert helps you understand the value of a physical therapy clinic. In addition, the expert may discuss the strengths and weaknesses of your physical therapy clinic. This information can help you take steps to increase the value of a physical therapy clinic.
Peak Business Valuation, business appraiser, values physical therapy clinics often. We are passionate about helping businesses succeed. As such, Peak is happy to provide you with a business valuation for a physical therapy clinic. We can also discuss any questions you have on valuing a physical therapy clinic. Start by scheduling a free consultation with Peak Business Valuation, business appraiser, below!
How to Value a Physical Therapy Clinic
When valuing a physical therapy clinic, a business appraiser considers various valuation approaches. Peak Business Valuation generally uses the market approach and/or the income approach to value a physical therapy clinic. Each valuation method uses a different metric to calculate the value of a business. Valuation experts will determine the most applicable method as part of the valuation process. This may involve using a combination of valuation approaches.
Valuing a Physical Therapy Clinic Using the Market Approach
The market approach is similar to the real estate appraisal process. When a real estate appraiser values a home, they assess similar properties that recently sold in the area. This helps them determine an accurate value of the home. When using the market approach to value a physical therapy clinic, business appraisers look at similar clinics that were recently sold. If the physical therapy clinic is a private entity, the expert will refer to private transaction databases.
Multiples for a Physical Therapy Clinic
Valuation multiples are a critical component when using the market approach. These are ratios that help calculate the value of a physical therapy clinic in relation to a financial metric. These metrics typically include cash flow, earnings, or sales. To determine the valuation multiples for a physical therapy clinic, business appraisers use the applicable NAICS or SIC code. Below we review how to value a physical therapy clinic using market multiples.
SDE (Seller’s Discretionary Earnings) Multiple for a Physical Therapy Clinic
- The SDE multiple reflects the seller’s discretionary earnings of a physical therapy clinic. Business appraisers determine the value of a physical therapy clinic by multiplying its SDE by the multiple.
EBITDA Multiple for a Physical Therapy Clinic
- The EBITDA multiple measures a physical therapy clinic’s earnings before interest, taxes, depreciation, and amortization. This helps the valuation expert determine the return on investment (ROI) a physical therapy clinic can expect.
REVENUE or SALES Multiple for a Physical Therapy Clinic
- The REVENUE or SALES multiple measures the value of a physical therapy clinic based on the total amount of revenue it generates. This multiple is less common when valuing a physical therapy clinic.
Business appraisers determine which multiple is most suitable when deciding how to value a physical therapy clinic. To learn more, see Valuation Multiples for a Physical Therapy Practice.
Valuing a Physical Therapy Clinic Using the Income Approach
Another common valuation approach is the income approach. With the income approach, business appraisers calculate the future income potential of a physical therapy clinic. In addition, they will assess the risks that may prevent an investor from meeting the expected earnings. Below, we list a few common risks associated with buying or selling a physical therapy clinic.
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- Regulatory Compliance: There are many regulations and policies that protect physical therapy patients. It is vital to understand and comply with these regulations to operate a physical therapy clinic.
- Skilled Workforce: Physical therapy clinics must hire trained and educated professionals to provide services. Physical therapists should have sufficient education and assistants should receive extensive training.
- Competition: The physical therapy industry is extremely fragmented and competitive. It is vital to differentiate from competitors to build a successful clinic.
- Financial Strength: Many physical therapy clinics struggle to remain profitable. As such, physical therapy clinics need to have effective financial planning.
Methods to Value a Physical Therapy Clinic Using the Income Approach
There are several variations for valuing a physical therapy clinic under the income approach. Two common methods are the capitalization of cash flow method and the discounted cash flow method. Both of these methods calculate a physical therapy clinic’s value based on its cash flow potential. We discuss these valuation methods in the following paragraphs.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is best for clinics with long and stable financial histories. The capitalization of cash flow method calculates the value of a physical therapy clinic by dividing its potential future earnings by a capitalization rate. The capitalization rate represents the rate of return a physical therapy clinic can expect. The capitalization of cash flow method also assesses the risks associated with the physical therapy clinic.
Discounted Cash Flow Method
- The discounted cash flow method projects a physical therapy clinic’s future cash flows over a 3-5 year period. These projections are then divided using a discount rate rather than a capitalization rate. This process calculates the present value of a physical therapy clinic. The discounted cash flow method is ideal for clinics with a strong financial history. It is also beneficial for clinics that have reliable forecasts. However, it is important to note that this method is less common because it relies on future cash flow estimates which can be arbitrary.
Summary
When valuing a physical therapy clinic, business appraisers may use various valuation approaches. Generally, they use the market approach and/or the income approach. These approaches give important insights into the value of a physical therapy clinic. To know which method is most applicable to your physical therapy clinic, receive a business appraisal. As part of a business appraisal, you will learn the fair market value of a physical therapy clinic. This is helpful whether you are buying, growing, or selling a physical therapy clinic.
Peak Business Valuation, business appraiser, works with physical therapy clinics on a regular basis. Peak is happy to provide you with a business appraisal for a physical therapy clinic. We can also answer any questions you have about how to value a physical therapy clinic. Start now by scheduling a free consultation with Peak Business Valuation below!
To learn more, read: Valuing a Physical Therapy Practice. Valuation Multiples for a Physical Therapy Clinic. Value Drivers for a Physical Therapy Practice
