Dermatology Practice Valuation: When a Sale Falls Through

As a business valuation professional specializing in healthcare, I often encounter unique and challenging cases. One such case was the valuation of a dermatology practice on the West Coast. This group practice had three physicians and two physician assistants operating out of two locations. The solo physician owner was retiring and had planned to sell the practice to two of his associates, with each location sold separately. Unfortunately, one of the deals fell through, leaving uncertainty about the future of the practice.

The Challenges

The valuation presented several challenges:

• Intertwined locations: The two locations were close together, and both associates saw patients at both clinics. The first clinic sold successfully to one associate, but the second deal fell through — and the main provider left with the intent to compete.
• Referral-source retention: Most of the business at the second location came from Mohs surgery. Retaining those referral sources was crucial to the practice’s continued success.
• Equipment updates: The equipment at the second location needed updating, which had to be factored into the valuation.

The Valuation Approach

My client — an outside buyer interested in taking over the second clinic — hired me to appraise the business. We considered all three valuation approaches but determined that a discounted future cash flow method under the income approach was the most appropriate. To conduct the valuation, we:

• Analyzed historic productivity by provider
• Examined the practice’s historic income and expenses
• Performed detailed projections of Work RVUs, revenue, expenses, and the capital expenditures needed to update the equipment

The Outcome

The valuation gave our client the information needed to make an informed decision about how much to offer for the opportunity. It also provided insight into the practice’s profitability, provider productivity, and the types of procedures performed.

This case highlights the complexity and nuance involved in valuing medical practices. Each practice has its own challenges, and it’s essential to consider factors like provider productivity, referral sources, and necessary equipment updates when conducting a valuation.

At Nechay Advisors, we specialize in helping healthcare professionals navigate their business dealings. Our expertise in valuing medical practices lets us give clients the insight they need to make informed decisions — even in the face of unexpected challenges like a failed practice sale.

If you’re a healthcare professional looking to buy or sell a practice, or you need a valuation for litigation or divorce purposes, we’re here to help. Contact us to discuss your specific needs.

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Alexey Nechay, CVA, is the principal of Nechay Advisors, a medical practice valuation and brokerage firm in Newport Beach, California. Schedule a confidential call at (855) 955-2565.