
The market for dermatology practices is active. Physician owners like you are seeing significant interest from a range of buyers, from private equity groups to large strategic health systems. When you are considering a sale, one of the first questions you will ask is, “What is my practice worth?”
Standard valuation formulas can give you a starting number, but that figure is rarely the whole story. A true dermatology practice valuation goes beyond simple math. Sophisticated buyers look deeper into your practice’s quality, its specific risks, and its potential for future growth. This guide will provide a clear framework for how your practice is valued, covering the key financial metrics, the factors that influence your multiple, and the strategic considerations that define a successful sale.
Establishing Your Financial Baseline: Beyond Basic EBITDA
Before anyone can place a value on your practice, you need a clear picture of its underlying profitability. Most buyers start with a metric called Earnings Before Interest, Taxes, Depreciation, and Amortization or EBITDA. But they do not stop there. They calculate an Adjusted EBITDA.
Adjusted EBITDA represents the true, ongoing cash flow of your business. The calculation starts with your net income and adds back non-cash expenses like depreciation and amortization. Then, it “normalizeAs” your financials by adjusting for one-time expenses and owner-related costs that a new owner would not incur.
We often find practice owners run personal expenses through the business or pay themselves a salary that is above or below the market rate for a replacement physician. These are common adjustments. For example, if your practice paid for your personal vehicle lease of $12,000 per year, a buyer would add that amount back to your profit because they would not continue that expense.
Here is a simplified look at how the calculation works.
Line Item | Amount | Notes |
---|---|---|
Net Income | $750,000 | As reported on your income statement. |
Add: Interest | $15,000 | From equipment loans or lines of credit. |
Add: Taxes | $210,000 | Federal and state income taxes. |
Add: Depreciation & Amortization | $90,000 | Non-cash expenses for equipment and goodwill. |
EBITDA | $1,065,000 | Your starting point. |
Add: Owner’s Vehicle Lease | $12,000 | A personal expense run through the business. |
Add: Above-Market Officer Salary | $100,000 | Adjusting owner’s salary to a fair market rate. |
Add: One-Time Legal Fees | $25,000 | From a non-recurring legal matter last year. |
Adjusted EBITDA | $1,202,000 | The figure used for valuation. |
This Adjusted EBITDA figure is the foundation upon which your practice’s value is built.
The Art and Science of the Valuation Multiple
Once you have your Adjusted EBITDA, the next step is to apply a valuation multiple. This is where the “art” of valuation comes into play. The multiple is not a fixed number. It is a reflection of your practice’s quality, stability, and growth prospects in the eyes of a buyer.
For dermatology practices, several factors heavily influence your multiple.
- Scale: Larger practices with higher EBITDA levels generally command higher multiples. They offer a more significant platform for a buyer’s growth plans.
- Provider Model: A practice with a strong team of physicians, physician assistants, and nurse practitioners who are likely to remain after a sale is more valuable than a practice dependent on a single owner.
- Service Mix: Buyers closely examine the split between medical, surgical, and cosmetic dermatology. While cosmetic services can offer high margins, a strong base of medical dermatology provides recurring revenue and stability. A balanced mix is often viewed favorably.
- Payer Mix: A diversified mix of commercial payers and self-pay patients is ideal. Over-reliance on a single insurance plan can be seen as a concentration risk, potentially lowering your multiple.
- Growth Profile: Demonstrating consistent year-over-year growth in patient volume and revenue is a powerful signal to buyers and can significantly increase your valuation.
Multiples can vary widely, but here are some general ranges you might see in the current market. These are for illustrative purposes. Your specific multiple depends on the factors above. For more detail, you can review our guide on Valuation Multiples by Medical Specialty.
Adjusted EBITDA Tier | Typical Multiple Range |
---|---|
Under $1 Million | 4.0x – 6.0x |
$1 Million – $3 Million | 5.5x – 8.0x |
$3 Million – $5 Million | 7.0x – 9.5x |
Over $5 Million | 9.0x – 12.0x+ |
From Enterprise Value to Your Net Proceeds
Using the numbers from our example, we can calculate a theoretical Enterprise Value (EV). Let’s assume the practice, with its $1.2 million in Adjusted EBITDA, earns a 6.5x multiple.
$1,202,000 (Adjusted EBITDA) x 6.5 (Multiple) = $7,813,000 (Enterprise Value)
This EV represents the total value of the practice. It is not the amount that will be wired to your bank account at closing. To get to your net proceeds, you must account for several items that are paid off with the sale proceeds.
- Practice Debt: Any outstanding loans for equipment, lines of credit, or other business debts are paid off.
- Transaction Fees: These include fees for legal counsel and your M&A advisor. You can learn more about how advisors are compensated in our article on M&A Advisor Fee Structures.
- Working Capital Adjustment: Deals typically require you to leave a certain amount of normal working capital in the business for the new owner.
Continuing our example, the path to net proceeds might look like this.
- Enterprise Value: $7,813,000
- Less: Practice Debt ($350,000)
- Less: Transaction Fees ($400,000)
- Equals: Estimated Net Proceeds: $7,063,000 (before taxes)
This calculation shows why understanding the full deal structure is just as meaningful as the headline valuation multiple.
Advanced Deal Structures: The “Second Bite of the Apple”
When a private equity firm acquires a dermatology practice, the deal often includes more than just cash at closing. Many transactions involve an equity rollover, which can be a powerful wealth creation tool for physician owners.
In an equity rollover, you reinvest a portion of your sale proceeds back into the new, larger entity that the PE firm is building. You are trading some cash today for ownership in a bigger, faster-growing company. This gives you a “second bite of the apple” when that larger company is sold again a few years down the line, often at a higher multiple.
By rolling over equity, you are aligning yourself with a well-capitalized partner. You are betting on your own success and the continued growth of the platform you helped build. This second liquidity event can often be just as large, or even larger, than your initial sale proceeds.
Other structures like earnouts, where you receive additional payments based on the practice hitting future performance targets, are also used. These require careful consideration, but they show how modern deals are structured to share risk and reward. Understanding these advanced PE Deal Structures is fundamental to maximizing your outcome.
Your Practice is More Than a Number
Determining your dermatology practice’s value is a detailed process. It requires a clean presentation of your financials, a clear story about your practice’s strengths, and a strategic approach to the market. Your Adjusted EBITDA sets the baseline, and your practice’s unique qualities define the multiple. Finally, the deal structure determines how that value translates into your personal financial outcome. Understanding each component empowers you to make the best decision for your future.
Curious about what your practice might be worth in today’s market? Request a Complimentary Value Estimate →
Frequently Asked Questions
What is the starting point for valuing a dermatology practice?
The starting point for valuing a dermatology practice is calculating the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which is then further refined to an Adjusted EBITDA to reflect the true ongoing cash flow by normalizing for one-time expenses and owner-related costs.
How does Adjusted EBITDA differ from standard EBITDA in the valuation process?
Adjusted EBITDA accounts for non-cash expenses like depreciation and amortization, adds back personal or owner-related expenses run through the business, and removes one-time expenses. This gives a clearer picture of the practice’s true profitability from an ongoing operations standpoint.
Which factors heavily influence the valuation multiple for a dermatology practice?
Valuation multiples are influenced by factors such as practice scale, provider model (e.g., team vs. single owner), service mix (balance of medical, surgical, and cosmetic services), payer mix (diversified payers preferred), and growth profile (consistent revenue and patient growth).
What deductions need to be made from the Enterprise Value to determine the net proceeds from the sale?
To determine net proceeds, you must deduct outstanding practice debts, transaction fees (legal counsel, M&A advisors), and maintain normal working capital in the business for the new owner from the Enterprise Value.
What are advanced deal structures like equity rollovers and earnouts, and how do they benefit physician owners?
Equity rollovers allow physician owners to reinvest part of their sale proceeds into the acquiring company, giving them a stake in a potentially larger, faster-growing entity and a chance for additional future payouts. Earnouts provide additional payments based on achieving future performance targets, sharing risk and rewards between buyer and seller.