How the number is worked out

Capitalisation of future maintainable earnings is the most common primary method for an established, profitable practice, pharmacy or provider. It suits a business with a settled earnings history, because the normalised result of recent trading is a reasonable guide to what a purchaser could expect to sustain. It is less suitable where the business has recently opened, has just lost or gained a principal practitioner, or sits part way through a funding change. In those cases a discounted cash flow, or an earnings assessment built on forward information rather than history, is usually more informative.

A discounted cash flow suits a business whose future will differ from its past in a way that can be described and supported: a clinic still recruiting practitioners toward capacity, an aged care provider working through the change to Support at Home, or a practice that registered part way through a period for a new incentive program. It depends on forward-looking information, and ASIC's Regulatory Guide 111 states that where there are no reasonable grounds for that information, other valuation methodologies should be used. A budget prepared for a sale is not, on its own, reasonable grounds.

Capitalisation of future maintainable earnings is the usual primary method for an established practice: normalised earnings multiplied by a multiple reflecting risk and growth prospects. Where the future will differ from the past in a way that can be supported, a discounted cash flow values expected future cash flows in today's dollars. A net asset basis applies where earnings do not support goodwill. Both earnings methods produce an enterprise value, from which borrowings are deducted to reach equity value. Market evidence and any genuine offer act as cross-checks, and the Australian Taxation Office recommends a secondary or cross-check methodology where possible. Healthcare business valuation methods explains the choice.

Usually not. EBITDA is earnings before interest, tax, depreciation and amortisation. It is not a measure the accounting standards define or require, so it is a subtotal the preparer constructs rather than a line you can rely on to mean the same thing in two sets of accounts. Reported profit in a healthcare business also reflects decisions made for tax and owner remuneration reasons rather than commercial ones: how much the owner practitioner draws, what rent is paid to a related landlord, and whether personal costs run through the business. Those items are normalised before any multiple is applied.

It will be examined closely rather than accepted or discarded. The questions are whether the payment is conditional, whether the business currently satisfies those conditions, whether the conditions are assessed periodically, and whether the business would still be profitable at the earlier level. Services Australia states that eligibility for the Bulk Billing Practice Incentive Program payment is assessed quarterly and that participation is voluntary, so a payment of that kind is real income but conditional income, and maintainable earnings should reflect the condition rather than only the recent result.

There is no universal threshold, and any figure presented as one should be treated with caution. What matters is the combination of how much revenue sits with the program, how much of the cost base is fixed against it, how quickly the settings have moved in the past, whether an announced change already affects it, and whether the service could be delivered profitably to another payer. Two businesses with the same funding share can present very differently once those questions are answered.

EBITDA is earnings before interest, tax, depreciation and amortisation. EBIT is earnings before interest and tax, so it still carries depreciation. NPAT is net profit after tax. EBITDA and EBIT strip out financing and tax, which depend on the current owner's structure and borrowings rather than on the business itself. EBITDA also strips out depreciation, which understates the ongoing cost of replacing chairs, imaging equipment, sterilisers or vehicles unless capital expenditure is allowed for separately. NPAT is rarely used for an unlisted practice because two identical practices in different structures report different after-tax profits.

Long enough to show a pattern and recent enough to reflect the practice as it is now. Several completed financial years plus management accounts to the valuation date is typical. What matters more than the number of years is knowing which periods are representative: a year when two doctors left, a year distorted by a program payment paid quarterly in arrears, or a year before an incentive change may need to be weighted differently or set aside with reasons recorded.

Because the money behaves differently. Private fee for service lets the practice set and raise its own fee. Medicare and veterans' funding set the fee and cap the number of services per patient, so the practice cannot price its way out of a cost increase. Insurer and contract work can end on notice. A practice weighted to funding it does not control carries more risk for the same reported profit, and that difference is reflected in the capitalisation rate rather than in the earnings.

No. EBITDA is an earnings base, maintainable earnings is a conclusion about the level of earnings that will continue. A valuation can express maintainable earnings as EBITDA, as EBIT or as net profit after tax, and the figure differs in each case. What makes earnings maintainable is the normalisation and weighting behind them, not the line of the profit and loss statement they are drawn from. If a report quotes maintainable EBITDA, it should also state which years were used, how they were weighted and what was adjusted.

Because a purchaser has to pay someone to do the owner's work. Many practice owners take drawings, dividends or trust distributions rather than a wage, and some pay themselves well above or below what a replacement would cost. Normalisation replaces those arrangements with the market cost of the same work, including superannuation and on-costs. In a clinical business the replacement is often a practitioner engaged on the practice's usual service agreement, so the adjustment covers both the cost of the replacement and the billings that the owner personally generates.

Commonly three to five completed financial years plus the current year to date, with monthly figures where the practice management or accounting system can produce them. The number is less important than the relevance of the periods. A practice that added a site, changed its billing model or lost a principal practitioner may be valued mainly on recent months, while a stable practice with steady activity may support an average of several years. Every year used is normalised on the same basis so the comparison is meaningful.

They can, and they are examined rather than assumed away. Temporary Medicare telehealth items commenced on 13 March 2020 and extended until 31 December 2021, and JobKeeper finished on 28 March 2021, so results for those periods may contain activity and support payments that will not repeat. Some practices were also closed or reduced. Where the distortion is large, those years are excluded or given little weight, and the reasoning is set out so the reader can see what was removed and why.

Maintainable earnings is reduced to reflect the position at the valuation date. A departure that is known, or reasonably foreseeable at that date, is taken into account even though the accounts do not yet show it. The adjustment is the contribution the practitioner made net of the cost of engaging them, plus any recruitment cost and the period the position is likely to be vacant. Where the practitioner had a strong personal following, part of the lost earnings may reflect personal goodwill that would not have transferred to a purchaser in any event.

Sometimes, and only on evidence. A signed contract, an approved funding arrangement or a registration that is already in place can be built into maintainable earnings if the business has the workforce, premises and systems to deliver it and the pricing is known. Budgets, proposals and pipeline discussions generally are not, because a purchaser does not pay for intention. Where the next few years will look materially different from a single representative year, a discounted cash flow analysis is usually a better fit than capitalising one figure.

Yes, at a market rate. Where the practice occupies premises owned by the owner, a family trust or a self managed superannuation fund, the rent recorded in the accounts may be set for tax or superannuation reasons rather than by negotiation. Normalisation substitutes a market rent for comparable premises, in either direction. Where the practice entity owns the property itself, the property outgoings are removed, a market rent is included, and the property is valued separately as a surplus asset.

On what a buyer would pay for it as it stands, which usually means the assets plus whatever part of the business still earns. A loss does not automatically mean there is no goodwill. Many practice losses are the product of owner remuneration set for tax reasons, one-off costs, a recent fit-out being written off, or a second site that has not yet filled, and normalising those out can reveal earnings the statutory accounts never showed. Where the loss is structural, the analysis shifts to what the net assets would realise and whether the patient base, the lease or an approval has value to someone who can operate it at lower cost. A forward-looking method can be used where there is a documented plan and evidence the turnaround has actually begun, but a forecast that exists only because the history does not support a value carries little weight with a buyer or a court. The report should say which of these it has done, and why.

From forecasts, tested against whatever evidence exists, with the assets as the floor. A practice open for months has no maintainable earnings to capitalise, so the analysis moves to what it can reasonably be expected to earn and how much confidence anyone can have in that. In practice that means examining the actual book: new patient numbers by month, conversion and rebooking rates, practitioner hours contracted rather than hoped for, the fee schedule, and the funding the practice can access. It also means pricing the risk honestly, because the range of outcomes for a new practice is much wider than for an established one and the weight a forecast carries falls as the evidence behind it thins. The conclusion is frequently bounded below by what it would cost to build the same thing, since a buyer always has that alternative. Start-ups are common in allied health and NDIS, which is why so many of them change hands near asset value.

Sometimes, and the reason is usually depth of buyer rather than arithmetic. A group is worth more than its sites sold separately when it has genuine head office capability: management that is not the owner, consistent clinical and billing systems, consolidated reporting, and a workforce pipeline. That combination reduces practitioner dependence and opens the business to acquirers who will not look at a single site. It can equally be worth less, where head office costs are carried by the group but the sites share nothing operationally, or where one site quietly subsidises another and the accounts have never separated them. So the first thing a multi-site valuation does is build a profit and loss for each site and allocate head office cost properly. That shows which sites a buyer actually wants, and whether the group premium is real or is an average concealing a problem. Different leases, different practitioner arrangements and different funding mixes are different risks.

The earnings and the finance have to be looked at together, or the same item gets counted twice. Where a chair, a scanner or a vehicle sits under a finance arrangement, the accounting treatment determines whether the cost appears above or below the earnings line, so the reported EBITDA of two otherwise identical practices can differ purely because one financed its equipment. The outstanding balance is then a liability that comes out of the enterprise value on the way to what the owner actually receives. Operating leases and rental agreements behave differently: the cost stays in the earnings, but no asset transfers, so the buyer inherits a commitment rather than something they own. What matters commercially is what the buyer gets and what they must keep paying for it. A valuation should list each item, say whether it is owned, financed or rented, whether the agreement can be assigned or must be paid out on sale, and what residual or balloon payment falls due.

A loan account changes what you receive, not what the business is worth. The valuation concludes an enterprise value from the earnings of the business; the value of your shares is that figure less borrowings and other claims, plus any surplus assets. A loan the company owes you is a claim you get repaid at settlement. A loan you owe the company reduces your proceeds, and if it is a loan from a private company to a shareholder or an associate it may fall within Division 7A, which the Australian Taxation Office describes as part of the Income Tax Assessment Act 1936 intended to prevent profits or assets being provided to shareholders or their associates tax free, with the payment treated as an unfranked deemed dividend unless it is repaid or put on complying terms. Personal guarantees rarely change value, but they change your exposure: unless released at completion you remain liable under the lease or the equipment finance after you have gone. Both belong in the report's bridge from enterprise value to equity value.

Whatever the assets realise, less what it costs to shut down, and that is almost always well below a sale. On a closure the goodwill goes to nothing, because nobody is buying the expectation that patients return. What remains is equipment and fit-out at second-hand values, stock, debtors, and any bond, against which sit make-good obligations under the lease and the cost of ending employment. The Fair Work Ombudsman explains that redundancy pay depends on an employee's period of continuous service, and that most small business employers do not have to pay redundancy under the National Employment Standards, so this figure varies widely between practices of similar size. Records still have to be retained and patients given continuity of care, and both cost something. Working out the closure figure is worth doing even when you fully intend to sell, because it is the floor beneath every offer you receive and it tells you when walking away is genuinely the worse outcome.

Not as a number. Benchmarking in a review is qualitative: we compare the practice with the characteristics buyers and financiers in its sector reward, such as the spread of billings across practitioners, patient or participant retention, funder and referrer concentration, lease term, equipment, systems and compliance, and show where the practice sits on each. Published multiples are averages of businesses that differ from yours in size, sector, dependence and risk, so applying one as a rule of thumb would give a false precision. See EBITDA multiples for healthcare businesses.

There is no normal multiple, and HPNA does not publish one. A multiple is the inverse of a required rate of return, so it can only be set once the earnings base has been normalised and the risks attaching to those earnings have been assessed. Two practices in the same discipline, in the same city, with the same revenue, can support very different multiples if one depends on a single owner practitioner and the other has a stable salaried and contracted clinical team. Anyone quoting a figure before seeing the accounts, the practitioner agreements and the lease is quoting a market rumour, not a valuation.

Because they are a convenient shorthand, and in a narrow context they can be a useful sanity check. The problem is comparability. A reported sale price rarely discloses whether the earnings were reported or normalised, whether the buyer acquired the business or the shares, whether stock and work in progress were included, and whether the price included earn-outs, restraints or retained equity. The Australian Taxation Office lists inappropriate choice of comparable assets and insufficient market evidence for inputs and assumptions among the issues it commonly sees in valuations it reviews.

It depends on how capital intensive the business is and, above all, on consistency. EBITDA ignores the cost of replacing equipment, which matters for a dental practice, an imaging business, a pharmacy with dispensing automation or a community care provider running a vehicle fleet. EBIT (earnings before interest and tax) picks that cost up through the depreciation charge, though the charge may not match the real replacement cycle. Some valuations instead use EBITDA less sustaining capital expenditure. Whichever measure is used, the multiple must have been derived on the same basis.

It can. Multiples observed in trade sales are control multiples: the buyer acquires the ability to set strategy, remuneration and distributions. A minority shareholder generally has none of that. ASIC's guidance for independent experts notes that some valuation methodologies include a premium for control while others do not, and that the choice of methodology must suit the transaction. Outside regulated control transactions, whether a discount applies to a minority parcel depends on the purpose of the valuation, the shareholders agreement and the constitution.

Applying a multiple to normalised EBITDA produces enterprise value, which is the value of the operating business before its funding structure. Equity value, being what the owners' interests are worth, follows after deducting interest bearing debt, adding the realisable value of any surplus assets, and adjusting for a normal level of working capital. Confusing the two is one of the more common errors in informal appraisals, and the gap between them can be substantial in a practice carrying equipment finance or a property loan.

Both, and they need to be separated. A funding change alters the earnings base, so its effect on maintainable earnings is assessed first. The Department of Health, Disability and Ageing guidelines for the Bulk Billing Practice Incentive Program, for example, describe an additional incentive paid on eligible bulk billed services from 1 November 2025, split evenly between the general practitioner and the practice, which changes both revenue and billing behaviour. The exposure itself is then a separate question about risk. A business whose earnings depend on a program that government can vary carries a risk a buyer prices, and that shows up in the multiple rather than in the earnings.

It should not be. For tax purposes the Australian Taxation Office says it is highly recommended that a secondary or cross-check methodology is provided where possible to support the primary methodology estimate, and ASIC expects an independent expert to justify its choice of methodology and to discuss how much weight is placed on each one. In practice a capitalisation of maintainable earnings conclusion is tested against net assets, against any discounted cash flow analysis where the forecasts are reliable, and against market evidence adjusted for comparability.

No. Rules of thumb of that kind describe turnover, not earnings, and two businesses with identical revenue can produce very different profits once rent, wages, practitioner arrangements and product mix are counted. They also say nothing about what is included in the figure, whether stock, plant, the property or debt sit inside or outside it, and nothing about whether the goodwill would survive the departure of the owner. A rule of thumb can be a rough sanity check on a conclusion reached properly. It is not a valuation.

No. Revenue rules of thumb are quoting shorthand, not valuation. Two practices with identical turnover can be worth very different amounts if one runs four therapists at high utilisation in leased rooms with no spare capacity, and the other runs the same billings through a principal who treats most of the patients personally. The valuation works from earnings after a market cost for every hour of clinical and management work the owner performs, and then from the risk that those earnings do not repeat under new ownership.

Usually the multiple, sometimes both. Maintainable earnings are the profit the business can reasonably be expected to repeat under normal conditions, and concentration does not by itself make this year's profit smaller. Where a large source has already given notice, has been lost after the last reported period, or is funded under settings that are known to be changing, the earnings figure itself is adjusted. Otherwise the risk sits in the capitalisation multiple, and in the assessment of how much of the goodwill is transferable to a buyer.

Because a multiple is a conclusion about a specific business rather than a fact about a sector. It is the inverse of the return a buyer requires for that business's risk, so it moves with owner dependence, funding durability, premises security and concentration. A published figure also has to be matched to the earnings measure it came from, and applied to normalised earnings rather than reported profit. Used without both, it produces a number that is confidently wrong.

Market value is the price a hypothetical willing but not anxious buyer and seller, both fully informed and acting at arm's length, would agree at the valuation date. Fair value is defined for financial reporting in accounting standard AASB 13 as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date, and it carries different meanings again in shareholders agreements and legal proceedings, where it often describes a value that is equitable between the specific parties. The agreement, the order or the provision calling for the valuation determines which basis applies, and HPNA states the basis adopted.

Enterprise value is the value of the business operations, before borrowings and before assets that are not needed to run it. Equity value is what the owners' interests are worth: enterprise value less interest-bearing debt, plus the realisable value of surplus assets and surplus cash, and after allowing for liabilities the accounts may not show. The distinction matters most where the subject is shares or units rather than the business, because the value of a shareholding is an equity figure and the entity may hold assets and debts unrelated to the practice.

Stock is usually valued separately at cost and added to the value of goodwill and plant, because in most sales the stock is counted at settlement and paid for on top of the agreed price. The valuation states which basis it has adopted so the figure is not misread. We also review the stocktake and ageing report, because dated, slow-moving and non-returnable stock inflates cost of goods sold and working capital, and 60-day dispensing changes the quantity of stock the dispensary needs to hold.

Stock is normally treated as a working capital item and dealt with separately from goodwill, commonly at cost on a physical count taken at the valuation or completion date. Veterinary stock includes retail food and parasite control, pharmacy lines, consumables and Schedule 4 and Schedule 8 medicines, and it can be material. Expired and slow-moving lines are identified. The valuer also considers whether stock levels are normal for the practice's turnover, because excess stock inflates the balance sheet while understocking can flatter reported margin.

They are settled at the valuation date by cut-off. Medicare, DVA, health fund and NDIS claims lodged but unpaid, and treatment plans started but not billed, are identified by practitioner and either included in working capital or paid to the entitled owner separately, depending on what the agreement says. The same exercise covers creditors, stock and any loans between the owners and the entity. Getting the cut-off right often moves the outcome more than the argument over goodwill, which is why we ask for billing and claims data by practitioner rather than the aggregate accounts.

Usually as separate items from goodwill, and the valuation states its assumption on each. In an asset sale the vendor commonly keeps debtors and collects them after settlement, and work in progress (WIP), such as unbilled treatment plans or NDIS supports delivered but not yet claimed, is apportioned at completion. Pharmacy stock is typically counted at settlement and paid for at cost. In a share sale everything stays in the entity, a target level of working capital is agreed and a completion adjustment picks up the difference. Where these items are defined at heads of agreement stage, a second negotiation at completion is usually avoided.

It depends on the basis stated in the report, which is why the report should say so explicitly. An earnings-based value normally assumes the business changes hands with a normal level of working capital, meaning the stock, debtors and creditors needed to keep trading. In pharmacy sales, stock is commonly counted at settlement and paid at cost on top of the amount agreed for goodwill and plant, so the concluded value may sit outside stock altogether. Providers billing government programs or insurers often carry longer debtor cycles, which raises the working capital a purchaser must fund.