Definition
Ancillary revenue is the income your practice generates from services that supplement your primary specialty. These are often services like in-house laboratory services, an imaging center, physical therapy, or an infusion center. While not your core service, these ancillary lines are powerful drivers of practice value in an M&A transaction.
Why This Matters to Healthcare Providers
For practice owners, ancillary services do more than just add to the top line. They show potential buyers that your practice is operationally sophisticated, offers integrated patient care, and has diversified, high-margin income streams. A practice with well-run ancillary services will almost always command a higher valuation than one that refers those services out.
Example in Healthcare M&A
Scenario: An orthopedic group is considering a sale to a private equity firm. For years, the group has operated its own in-house physical therapy wing and an MRI machine. Another orthopedic group of similar size in the same city refers all its PT and imaging to outside facilities.
Application: During the valuation process, the buyer analyzes not just the revenue from surgeries and consultations but also the significant, consistent income from the PT and imaging services. They see this ancillary revenue as a stable, high-margin asset that makes the practice a stronger platform for future growth. Buyers view these integrated services as a key strategic advantage.
Outcome: The group with the in-house services receives a valuation multiple that is substantially higher than the group without them. The buyer is willing to pay a premium because the practice captures more of the patient’s care journey, which increases profitability per patient and makes the business more scalable. The ancillary revenue directly increases the practice’s EBITDA, leading to a much higher final purchase price for the physician owners.
Related Terms
- Stark Law – Understanding the strict federal regulations that govern physician referrals to ancillary services you own is essential for compliance.
- EBITDA – Your ancillary revenue directly boosts this key profitability metric, which is the foundation of your practice’s valuation.
- Ambulatory Surgery Center (ASC) – A premier example of a high-value ancillary service line that can transform a practice’s enterprise value.
Physicians who understand EBITDA optimization typically achieve 25-40% higher valuations. Maximize Your Practice Value →
About the SovDoc M&A Glossary
Hand-curated by our deal-makers and analysts, the SovDoc glossary turns complex mergers-and-acquisitions jargon into clear, plain-English definitions.
Want to learn more? Explore the rest of our glossary or reach out to our team for deeper insights.
Frequently Asked Questions
What is ancillary revenue in a healthcare practice?
Ancillary revenue is the income generated from services that supplement a healthcare practice’s primary specialty, such as in-house laboratory services, imaging centers, physical therapy, or infusion centers.
Why is ancillary revenue important for healthcare providers?
Ancillary revenue demonstrates operational sophistication, integrated patient care, and diversified, high-margin income streams, which can lead to a higher valuation in M&A transactions compared to practices that refer out these services.
How does ancillary revenue affect the valuation in healthcare M&A transactions?
Practices with ancillary services typically receive higher valuation multiples because buyers consider the consistent, high-margin income from these services as a stable asset that enhances future growth potential and increases profitability per patient.
Can you provide an example of how ancillary revenue impacts purchase price in a healthcare practice sale?
In an example with two orthopedic groups, the one with in-house physical therapy and MRI services received a substantially higher valuation multiple and purchase price than the group referring these services out, because the buyer valued the integrated, profitable ancillary revenue streams.
What are some related terms important to understand ancillary revenue in healthcare?
Key related terms include Stark Law (federal regulations on physician referrals to services they own), EBITDA (profitability metric boosted by ancillary revenue), and Ambulatory Surgery Center (ASC), a high-value ancillary service line impacting practice value.