Step 1: Establish Your Baseline with Adjusted EBITDA
EBITDA means Earnings Before Interest, Taxes, Depreciation, and Amortization. More important is Adjusted EBITDA, which has become the universal language in practice transactions. It represents your practice’s true, normalized cash flow by adding back expenses that a new owner would not incur.
Think of it as the “real” profit a buyer inherits. Getting this number right is the foundation of your entire valuation.
For a pediatric PT practice, common adjustments include:
* Owner Salary Normalization. If you pay yourself $250,000 but the market rate for a clinical director is $120,000, a buyer will add back the $130,000 difference to the practice’s earnings.
* Discretionary Spending. Personal auto leases, family members on payroll who do not have a clear role, or personal travel expensed through the business.
* One-Time Costs. A significant software implementation fee or legal fees from a past, non-recurring issue.
The process of identifying and justifying these “add-backs” is a critical first step. An expert-led EBITDA normalization process ensures you get full credit for the underlying profitability of your business.
Step 2: Uncovering Your Multiple—Benchmarks in Pediatric Therapy
Once you have your Adjusted EBITDA, the next step is applying a valuation multiple. This is where your specialty provides a significant advantage. While a general orthopedic PT practice might be valued in one range, pediatric and autism-focused therapy practices have commanded premium multiples due to high investor demand.
Historically, middle-market pediatric therapy platforms have seen multiples in the 12x to 18x range. While the market has adjusted from that peak, valuations remain very strong. However, a multiple is not a single number. It is a range influenced by your practice’s specific profile.
| Practice Profile | Typical EBITDA Multiple Range |
|---|---|
| General PT Practice (<$1M EBITDA) | 4.0x – 6.0x |
| Pediatric PT Platform ($1M+ EBITDA) | 7.0x – 12.0x+ |
How This Works in Practice
Let’s say your pediatric PT practice generates $1M in Adjusted EBITDA.
* A valuation based on general PT multiples might be $5M (5.0x).
* A valuation recognizing its pediatric specialty could be $9M (9.0x).
That $4M difference is not found with a simple calculator. It is secured by running a competitive process that highlights your specialty’s value to the right buyers. Understanding the nuances of valuation multiples by medical specialty is key to not leaving millions on the table.
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Step 3: Beyond the Math—Four Factors That Drive Your Multiple Higher
Two pediatric PT practices with the same exact EBITDA can receive vastly different valuation multiples. Why? Because sophisticated buyers look beyond the numbers to assess risk and future growth potential. Focusing on these four areas before a sale can dramatically increase the value of your practice.
- Low Provider Reliance. Is your practice’s success tied entirely to you, the owner? Or do you have a team of associate therapists with their own patient followings? An associate-driven model is seen as less risky and more scalable, commanding a higher multiple.
- Diverse Referral Sources. If 80% of your new patients come from a single pediatrician’s office, buyers will see that as a major risk. A healthy mix of referrals from various pediatricians, schools, and direct-to-parent marketing demonstrates stability.
- Favorable Payer Mix. While cash-pay services can boost margins, a solid foundation of in-network contracts with major commercial payers signals predictable, recurring revenue. Buyers pay a premium for this stability.
- Clear Growth Story. Have you identified opportunities for a new location, a new service line like speech therapy, or a telehealth program? Buyers do not just buy your past performance; they pay for future potential. A well-defined growth plan is a powerful value driver.
Costly Mistakes to Avoid When Valuing Your Practice
An uninformed approach to valuation can cost you millions. Owners often make preventable errors that weaken their negotiating position and lead to disappointing outcomes.
Here are the most common pitfalls we see:
* Using a “Revenue Rule of Thumb.” Selling for “1x revenue” is an outdated and inaccurate shortcut that almost always undervalues a profitable practice.
* Accepting the First Unsolicited Offer. Private equity groups and large strategic buyers actively look for practices to acquire. Their first offer is designed to be a bargain for them, not a premium for you. It is rarely their best.
* Ignoring a Messy QuickBooks File. Unclear or poorly categorized financials create suspicion during due diligence. It suggests you do not have a firm grasp on your numbers, which makes buyers nervous and causes them to reduce their offers.
* Failing to “Re-Cast” Financials. Presenting a standard Profit & Loss statement without making the EBITDA adjustments we discussed earlier means you are showing a less profitable version of your business.
Valuing a medical practice correctly is a combination of math, market knowledge, and mindset. Preparing your financials, understanding your value drivers, and running a structured process are the keys to a successful outcome.
The right exit approach depends on your personal and financial objectives.
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Frequently Asked Questions
What is Adjusted EBITDA and why is it important for valuing a pediatric physical therapy practice?
Adjusted EBITDA means Earnings Before Interest, Taxes, Depreciation, and Amortization with additional adjustments for expenses a new owner wouldn’t incur. It’s important because it reflects the ‘real’ profit and normalized cash flow of the practice, providing a solid foundation for valuation.
How do valuation multiples differ for pediatric physical therapy practices compared to general PT practices?
Pediatric physical therapy practices, especially those with $1M+ EBITDA, tend to have higher valuation multiples, typically in the 7.0x to 12.0x+ range, compared to general PT practices which usually fall in the 4.0x to 6.0x range due to higher demand and specialty focus.
What factors can increase the valuation multiple of a pediatric physical therapy practice?
Key factors include low provider reliance with a team of associate therapists, diverse referral sources rather than dependence on one source, a favorable payer mix with solid in-network contracts, and a clear growth story like expansion plans or new service lines.
What are common mistakes to avoid when trying to value a pediatric physical therapy practice?
Common mistakes include using outdated revenue rules of thumb, accepting the first unsolicited offer, having unclear or messy financial records, and failing to re-cast financials to present adjusted EBITDA that shows true profitability.
Why is it important to customize the valuation process rather than relying on simple rules of thumb?
Generic rules of thumb don’t account for the unique market dynamics and specialty value of pediatric therapy practices. A customized approach that includes Adjusted EBITDA normalization and competitive market processes ensures you capture the full value and don’t leave money on the table.