Independent valuations of healthcare businesses, for a stated purpose and date

Market value and the Spencer test

Most valuations are prepared on the basis of market value. The Australian starting point is Spencer v Commonwealth of Australia (1907) 5 CLR 418, a compulsory acquisition case whose principles the ATO applies across asset types, including businesses, securities and goodwill. The test supposes a notional sale reached by voluntary bargaining between a willing but not anxious seller and a willing but not anxious buyer, rather than a forced sale, both perfectly acquainted with the asset and cognisant of the circumstances that might affect its value, and neither so anxious to trade that they would overlook any ordinary business consideration.

The ATO guide Market valuation for tax purposes (the publication states it was current at February 2025) applies those principles and treats the International Valuation Standards Council definition as consistent with them: an exchange on the valuation date between a willing buyer and a willing seller, at arm's length and after proper marketing, each acting knowledgeably, prudently and without compulsion. Market value disregards any element of value available only to a specific owner or purchaser, because only a hypothetical willing buyer is assumed, not a particular one.

Market value is not the only basis of value. Fair value, used in financial reporting and written into many shareholders and unitholders agreements, is defined separately and can produce a different figure, so the report states the basis adopted and why the purpose calls for it.

Purpose, scope, valuation date and reliance

The purpose sets the basis of value, the valuation date, the scope and the standard the report must meet. An indicative or limited scope assessment applies fewer procedures to a narrower information set and states its restrictions: it can inform internal planning or an opening negotiating position, but it is generally not enough where a co-owner, a financier, a tribunal or the ATO will rely on the figure. A full valuation report follows the complete process on how it works and documents every step: the purpose, the scope, the interest valued, the basis of value, the evidence, the reasoning and the conclusion.

The report is addressed to the party who engages us, for the purpose stated in it, and that party is the one entitled to rely on it. If anyone else will need to, tell us before scope is settled, because the intended reader affects the procedures and the evidence.

The valuation date may be current or historical. A retrospective valuation uses only what was known, or reasonably foreseeable, at that date: the ATO lists reliance on post-valuation-date information, and on events that were not reasonably foreseeable then, among the issues it commonly sees when reviewing market value estimates. A value struck for a future date will not be accepted for tax purposes.

Maintainable earnings and method

Future maintainable earnings are the earnings the business can be expected to sustain in a normal year, assessed from historical results after normalisation: removing owner-specific, related-party and non-recurring items and restating owner wages and rent at market rates. Earnings are usually expressed as EBITDA (earnings before interest, tax, depreciation and amortisation) or EBIT (before interest and tax), and any multiple must come from evidence measured on the same basis. See what is maintainable earnings.

Capitalisation of future maintainable earnings applies a multiple, the inverse of a capitalisation rate, reflecting the risk attached to those earnings and their growth prospects. Discounted cash flow instead brings forecast cash flows, and a terminal value, back to the valuation date at a rate reflecting their risk, and suits a business whose future will differ materially from its past. A net assets basis, assets less liabilities with the assets restated to current values, applies where the earnings do not support a goodwill value or the entity mainly holds assets, and what the assets would realise on an orderly sale commonly sets a floor. Market evidence, the prices at which comparable businesses have changed hands, tests whichever method leads, although private healthcare transactions are seldom disclosed in enough detail to compare scale, funding mix, practitioner dependence and terms such as earn-outs and restraints. The ATO recommends a secondary or cross-check methodology wherever possible. See healthcare business valuation methods.

Capitalising EBITDA or EBIT gives enterprise value, the value of the business before borrowings, assuming it changes hands with the working capital it needs to trade: the debtors, stock and creditors that fund day-to-day operations. Where the actual position sits away from that level, or the entity holds surplus assets, the report deals with them separately, and in a sale the same ground is usually covered by a completion adjustment. Equity value, the value of the shares, units or partnership interest, is reached by deducting interest-bearing debt and adding surplus assets. A value built from the whole business is a control value; an interest that cannot direct the business, its distributions or its sale may be worth less than its proportionate share, although some purposes, constitutions and shareholders agreements instead require a proportionate value with no minority discount. See share and equity valuations.

Healthcare factors

We assess practitioner dependence and key-person risk, the risk that earnings leave with an individual, and separate personal goodwill, which attaches to a practitioner, from transferable goodwill, which attaches to the business through its systems, premises, contracts and workforce. Ahpra and the National Boards register individual health practitioners, and the National Law requires every registered practitioner to renew with their National Board each year, so clinical registration sits with the person and not with the business. Approvals held by the entity, such as a pharmacy approval or NDIS registration, may not simply pass on a change of ownership. We also examine Medicare, PBS and NDIS funding exposure, contractor structures and payroll tax, lease security, and the concentration of patients, participants or referrers. The medical practice, pharmacy and NDIS pages show how the weight of each changes by sector.