Healthcare Business Valuation Methods

What methods are available, and how is one chosen?

The Australian Taxation Office, in its guide Market valuation for tax purposes, groups valuation methods under three approaches: the market approach, which works from prices in actual transactions for comparable assets; the income approach, which works from the income or cash flows the asset can be expected to generate; and the cost approach, which works from the cost of replicating it and mostly values plant and equipment. The ATO states that the valuer must choose the most appropriate method and explain why it is the most suitable.

Two definitions frame that choice. The valuation date is the single date as at which value is assessed. Market value, in the International Valuation Standards Council definition the ATO adopts, is the estimated amount for which an asset should exchange on that date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and without compulsion. The ATO adds that value is time specific: markets change, and an estimate may be inappropriate for another time.

ASIC's Regulatory Guide 111 sets out a comparable range for expert reports and does not prescribe which to use: the expert exercises its own skill and judgment and justifies the choice. For most privately owned healthcare businesses the value sits in sustainable earnings rather than the fitout, so an income method usually does the work and the others test it.

Capitalisation of future maintainable earnings

Future maintainable earnings are the profit the business can reasonably be expected to sustain under new ownership, not last period's accounting profit. They are derived by normalising the reported results: removing items a purchaser would not inherit and adding costs it would have to incur. See maintainable earnings and the information a valuer needs.

Four normalisations do most of the work in healthcare. Owner remuneration comes first: a principal who treats patients and also draws dividends is doing two jobs, so the clinical work is charged at the cost of a replacement practitioner. Related-party rent comes second, common where the premises sit in a family trust or a self managed superannuation fund, and is restated to a market rent so the property is valued separately. Third is the service arrangement: in many medical and dental centres the practitioners bill in their own right and the entity earns a service fee, so its revenue is the fee, not total patient billings.

Fourth are part-period and one-off items, common in healthcare because funding programs start mid-year. Services Australia states that from 1 November 2025 participating practices meeting the eligibility criteria can receive an additional 12.5 per cent incentive payment on every dollar of MBS benefit earned from eligible services under the Bulk Billing Practice Incentive Program, that eligibility is assessed quarterly on the basis that all eligible services are bulk billed, and that the payment is distributed equally between the practice and the provider. A practice that registered mid-year shows only part of that effect, and only its share.

Revenue NSW Revenue Ruling PTA 041 explains how the relevant contract provisions of the Payroll Tax Act 2007 apply to an entity conducting a medical centre business, including dental clinics, physiotherapy practices and radiology centres that contract with practitioners to give patients access to their services. Payments under a relevant contract are deemed to be wages, so a practice that has not treated practitioner payments that way may carry a payroll tax cost its accounts do not show.

The normalised figure is then capitalised, meaning multiplied by a multiple: the number of times the earnings figure a purchaser would pay, and the inverse of a capitalisation rate. Key-person risk, meaning the degree to which earnings depend on one identified individual, together with patient or referrer concentration, lease insecurity, thin management and reliance on a single funding program, all press the multiple down. It has to match the earnings base it was drawn from and the interest being valued.

The method suits an established business with a settled history and no step change ahead: a general practice, a community pharmacy at a mature site, a multi-practitioner allied health practice.

Which earnings base: EBITDA, EBIT or net profit after tax

EBITDA is earnings before interest, tax, depreciation and amortisation. It removes financing and tax, which belong to the owner's structure rather than the business, and depreciation, which makes businesses with different asset ages comparable. Its weakness in healthcare is real: a dental practice with chairs and imaging, or a provider running a vehicle fleet, must keep replacing that equipment, so replacement capital expenditure has to be deducted separately or carried in the multiple.

EBIT is earnings before interest and tax, so depreciation stays in as a proxy for the cost of maintaining the asset base, which often makes it the more informative base for equipment-heavy practices. Net profit after tax is rarely used for an unlisted practice, because interest depends on how the owner funded the purchase and tax on the structure. A multiple observed on an EBITDA basis cannot be applied to an EBIT figure, and a stated multiple is meaningless until the base is named. Lease accounting is part of that definition: where leases are capitalised as right-of-use assets, rent leaves the earnings figure and returns as depreciation and interest.

Discounted cash flow

A discounted cash flow, or DCF, forecasts the cash the business will generate over a defined period, adds a terminal value for the period beyond it, and discounts the total to present value at a rate reflecting risk and the time value of money. Flows and rate must match: flows before debt servicing, discounted at a weighted average cost of capital, give an enterprise value, while flows to the owners after debt servicing, discounted at a cost of equity, give an equity value.

A DCF earns its place where a change is known, datable and capable of being modelled. Aged care is the clearest example at the time of writing. The Department of Health, Disability and Ageing records that Support at Home started on 1 November 2025, replacing the Home Care Packages Program and the Short-Term Restorative Care Programme, and that the Commonwealth Home Support Program will transition no earlier than 1 July 2027. A provider part way through that change has a history that does not describe its future. A general practice that joined the Bulk Billing Practice Incentive Program mid-year has a run rate rather than a history, and quarterly assessment means eligibility can be lost as well as gained.

RG 111 states that an expert should not include forward-looking information unless there are reasonable grounds for it, and that without reasonable grounds other methodologies should be used. A budget prepared for a sale is not, by itself, reasonable grounds. Because small movements in the discount rate and the terminal growth assumption move the answer materially, a DCF is normally presented with sensitivities and tested against an earnings figure.

Net assets and orderly realisation

A net asset method values the business as its assets less its liabilities, each restated from book value to market value: plant written down for tax may still be worth a real amount, and make-good obligations and employee entitlements are genuine liabilities. Orderly realisation, the version ASIC describes, is the amount available on a sale over a reasonable period rather than a forced sale, net of realisation costs and any tax falling due.

The method fills one of two roles. It is the primary method where the business earns no more than a fair return on its assets plus a market wage for the working owner, common in a sole-practitioner psychology or physiotherapy practice, or where a retiring principal's patients will follow them. Otherwise it is the floor: a conclusion below net asset value invites the question why the assets would not simply be sold.

That role connects to goodwill. In Taxation Ruling TR 1999/16 the ATO treats goodwill as one composite asset attaching to the business as a whole, and states that if a sole practitioner disposes of their business, the part of the goodwill emanating from their personality, reputation, skills or attributes is not transferable, while other sources continue to draw custom and can be sold. That distinction, between personal goodwill and transferable goodwill, decides whether an earnings method describes the business at all.

Healthcare adds a question the balance sheet does not answer: what carries the right to trade. Professional registration is held by the individual practitioner, and a pharmacy's ability to dispense under the PBS depends on an approval tied to particular premises. Net assets alone will not describe a business whose earnings depend on approvals the purchaser must hold in its own name.

Market evidence and comparable transactions

The market approach values by comparison with prices achieved for similar assets. It is intuitive, and the hardest to apply in healthcare, because almost every Australian practice, pharmacy and provider that changes hands is privately owned and prices are not published. Figures circulating through the sector are usually undated, unattributed and silent on what was included, whether part of the price was deferred and whether a restraint was given.

Deal structure makes it harder still, because it changes what was sold. The NDIS Quality and Safeguards Commission states that a provider's registration is linked to a single ABN and is not transferable to a different ABN, that a change of ownership must be notified, and that a change of ownership from 1 July 2026 can require the buyer of a provider delivering high-risk or complex supports to start a condition audit within three months. It also states that participants must not be automatically moved to the new owner. A share sale and an asset sale of the same disability services provider are not comparable transactions.

The pool of purchasers is narrower than in general business. In pharmacy, the Pharmacy Location Rules, a legislative instrument made under the National Health Act 1953, set location-based criteria that must be met before the Australian Community Pharmacy Authority can recommend approval of a new or relocating pharmacy. A purchaser cannot freely replicate a site, so part of the value attaches to the existing approval. Listed healthcare companies differ from a single-site practice in scale, access to capital and liquidity, so their trading multiples do not carry across without adjustment. Evidence about the business itself is stronger, which is why ASIC lists recent genuine offers as a methodology in its own right.

Rules of thumb and why they mislead

Rules of thumb circulate in every healthcare sector: a share of turnover for a pharmacy, an amount per prescription, a sum per participant for a disability services provider. They are quick, and they mislead.

• They describe revenue rather than earnings, and assume a cost structure that may not hold. Rent for a shopping centre pharmacy and a strip site are not comparable, and wage cost depends on the mix of employed and contracted practitioners.
• They ignore transferability and known changes ahead, treating an owner-dependent solo practice, one with a stable clinical team and one facing a funding reform as equivalent.

Among the errors the ATO says it commonly sees are an inappropriate choice of comparables and the inappropriate use of averaging. A rule of thumb can test a conclusion reached properly, but it is not a valuation.

Price, value and the use of more than one method

A valuation estimates value between hypothetical willing parties. A price is what two identified parties actually agreed, and it carries their circumstances: spare capacity to fill, pressure to settle, an earn-out that shifts risk back to the seller. The definition the ATO adopts excludes an amount inflated or deflated by special terms, which is why a valuation and an achievable price can differ without either being wrong.

That gap is one reason a single method is not enough. The ATO recommends a secondary or cross-check methodology where possible, and says that where the selected method leads to a range the report should explain why the figure adopted was chosen. ASIC's guidance is that an expert should, when possible, use more than one methodology, compare the figures and comment on any differences. Where methods disagree that is itself information: a capitalised earnings figure above net assets says the goodwill is real, and one below says it is not. See how a valuation runs.

Enterprise value, equity value and surplus assets

Enterprise value is the value of the business operations, before borrowings and before assets 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, net of the costs and tax that realising them would trigger.

Surplus assets are assets the business does not need to produce its earnings: an investment portfolio inside the practice company, a loan to a director, or the premises where earnings have been normalised to a market rent. Leaving them inside operating earnings double counts them; leaving them out of the equity calculation loses them. Liabilities the accounts do not show belong in the same step, an unprovided payroll tax exposure among them, as do lease liabilities where rent has left the earnings base.

A further question follows for shares rather than the whole business. A figure built by capitalising maintainable earnings generally describes a controlling interest, because it assumes the holder can set remuneration, distributions and the timing of a sale. A minority interest carries none of those rights and may be worth less per share, and ASIC notes that some methodologies include a premium for control while others do not.

Working capital

Working capital is the money tied up in the day-to-day operating cycle: stock and debtors, less trade creditors and accruals. An earnings-based valuation normally assumes the business is handed over with a normal level of it, measured against the way this business trades rather than a sector average, because a purchaser who receives it stripped of debtors and stock must fund the shortfall and prices accordingly. In a pharmacy, stock is the largest item, commonly counted at settlement and paid at cost on top of the amount agreed for goodwill and plant, so the report must say whether the concluded value sits inside or outside stock. A disability services provider may hold receivables for services delivered but not yet paid, and amounts received for services not yet delivered, which are a liability rather than profit.

How purpose and valuation date shape the method

The same business can support different conclusions for different purposes, so the report states its purpose, its basis of value and its valuation date. Basis of value is the definition of value being applied. Market value is the usual one, but a constitution or shareholders agreement may require a different basis, often described as fair value, and the wording in the document governs. That wording is worth confirming with your lawyer, because it may decide whether a minority adjustment applies at all.

A valuation for a tax matter or restructure needs to be replicable, and the ATO states that on review the onus of providing a replicable and defensible valuation remains with the taxpayer even when a professional is engaged. One prepared for a family law matter or a shareholder dispute is read closely by people with opposing interests, so the assumptions behind each judgment carry as much weight as the conclusion.

To have these methods applied to a specific business, request a valuation and we will confirm the scope, basis and valuation date.