What Reduces the Value of a Medical Practice?

How a medical practice actually loses value

A practice loses value through one of three channels, and they are not repaired the same way.

The earnings. Future maintainable earnings is the profit the practice should keep producing year after year, taken from results that have been normalised, that is, restated to show ordinary arm's length trading instead of the present owner's arrangements, and generally reported before interest, tax, depreciation and amortisation. Anything that permanently lowers it, or exposes a cost the accounts have never carried, reduces value directly. See what is maintainable earnings.

The risk attached to those earnings. Under a capitalisation of future maintainable earnings, the usual method for a consistently profitable practice, that figure is multiplied by a factor reflecting risk and growth prospects, inferred from market evidence (observed transactions in comparable businesses). Risk a buyer cannot manage away lowers the factor, so identical earnings are worth less. Where the future is expected to differ materially from the past, a discounted cash flow is used instead, projecting the cash flows and discounting them to a present value.

What transfers. Goodwill is the premium a buyer pays over the identifiable assets net of liabilities, and in general practice it is essentially the expectation that patients keep coming back. Where that expectation rests on one doctor's skill, manner and standing, it is personal: it leaves the building when the doctor does. Where it rests on the location, the patient record, the roster and the name, it is commercial and it can be sold. When too little of it is commercial, the number falls back to what the practice owns, its equipment, fitout and collectable debtors, less what it owes.

Capitalising earnings gives an enterprise value, the value of the business itself before borrowings. Equity value, what the owner actually receives, deducts interest-bearing debt and adjusts for any shortfall or surplus in working capital, the debtors, stock, creditors and accrued doctor payments the practice needs to trade. Earnings can be unchanged while equity value falls, because debt has risen or because the practice would transfer carrying less working capital than it ordinarily needs.

Dependence on a single doctor

The most common reason a medical practice is worth less than its owner expects is that the owner is the practice.

In a solo or principal-heavy practice, the reported profit banks the owner's clinical income while recording none of the cost of producing it. The correction is to price that consulting the way the practice already prices everyone else's: at its standard service fee percentage, or at the salary plus on-costs an incoming doctor would require for the same sessions. In many solo practices that one entry consumes most of the profit on the page.

Key-person risk, the risk that earnings depend on an individual who may leave, then works on the multiple: the earnings are produced by a person the buyer cannot acquire with the business. It also narrows the buyer pool: a corporate or group acquirer looking for a business that runs without its founder will usually not bid, leaving a single incoming practitioner buying a job as well as an asset. See how practitioner dependence affects business value and does a medical practice have transferable goodwill.

Contractor arrangements carrying an unpriced payroll tax cost

Many Australian medical practices engage doctors as contractors under service agreements rather than as employees. Where that arrangement has never been tested, the earnings may be carrying less cost than they should.

Revenue NSW has published its view that a payment made to a practitioner who is not an employee can still fall within the relevant contract rules of the payroll tax legislation, and relies on Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2023] NSWCA 40 for the proposition that a doctor treating patients is simultaneously supplying a service to the entity. Carve-outs exist, among them the exemption for services of the same or a similar kind supplied on no more than 90 days in a financial year.

If the cost should be borne and has not been, maintainable earnings fall by the amount of it, and capitalising a lower figure reduces value by more than the annual cost alone. Unquantified historical exposure is separately a contingent liability a buyer will want indemnified or deducted from the price.

Relief complicates that picture rather than removing it. Revenue NSW states that a pause on audits was lifted with the introduction of the Bulk Billing Support Initiative, audits recommenced on 4 September 2024, and a rebate is available under the initiative to medical centres making payments to contractor general practitioners that meet certain bulk billing thresholds. That ties the payroll tax cost to the billing mix: moving away from bulk billing can raise the cost and remove the relief at once. Payroll tax is a state and territory tax, so the position differs by jurisdiction and should be confirmed with your accountant or lawyer. See payroll tax, contractor arrangements and medical practice value.

A billing profile that leans on one funding stream

Revenue set by policy can be changed by policy.

Take the Bulk Billing Practice Incentive Program, which the Department of Health, Disability and Ageing describes as a further quarterly payment worth 12.5 per cent of the MBS benefits generated by eligible services, shared equally with the treating general practitioner, and open only to MyMedicare-registered practices that bulk bill every eligible service for every Medicare-eligible patient. Two features matter to the number. Half the money belongs to the doctor, not the entity being sold. And because the qualifying test is absolute rather than proportional, introducing a gap fee on a single service type can switch the whole payment off instead of trimming it.

The same applies where income depends on one referrer, one contract, one insurer or one workers compensation scheme. Concentration converts a decision made by someone else into a change in the practice's earnings, and a valuation tests how quickly that revenue could be replaced and at what margin. See government funding exposure and business value and patient, participant and referral concentration.

Losing accreditation, and the incentive income attached to it

In general practice, accreditation is an eligibility condition for money, not a marketing credential.

Services Australia states that to participate in the Practice Incentives Program a practice must be accredited, or registered for accreditation, against the RACGP Standards for general practices, and must be assessed by an approved accrediting agency.

What happens on a sale is sharper again. Under the Workforce Incentive Program Practice Stream guidelines effective 1 July 2026, the accreditation has to be included in what is sold. Include it and the buyer keeps both the accreditation and the trading history that sits behind the payments, including the Standardised Whole Patient Equivalent value, which measures the fractions of care the practice provides to each of its patients, weighted for their age and gender. Leave it out and none of that history moves: the buyer starts again as a new practice, on a new SWPE, with the incentive income rebuilt from zero.

For a valuation, incentive income that cannot be shown to continue in the buyer's hands is excluded from maintainable earnings or heavily discounted. Lapsed accreditation reduces value twice: it removes current income, and the presumption that the rest is durable.

A short or unfavourable lease

A medical fitout is expensive, immobile and specific: consulting rooms, treatment areas, sterilisation and compliant storage are not easily replicated in another tenancy, and in many practices the patient base is attached to the location rather than to any individual.

A practice at the end of its lease with no remaining options presents a buyer with two poor choices: renegotiate from a weak position, or relocate and find out how many patients follow. Where relocation is a real prospect, the risk moves into the projected cash flows rather than the multiple. Other terms do similar work more quietly: an unreleased personal guarantee, a make-good obligation, a demolition clause, a rent review that outpaces fee growth, or a permitted use too narrow for the service mix to change.

Rent paid to a related landlord is an adjustment rather than a risk. Where the title sits with the owner personally, with a family trust or inside the owner's superannuation fund, the rent line is reset to what an unrelated landlord would charge, so the conclusion does not turn on who happens to hold the deed. See premises and lease terms in healthcare valuations.

Ageing clinical and practice management systems

Old systems reduce value in three ways: the capital a buyer must spend, the income that depends on the system working, and the reliability of the information the valuation rests on.

The dependency is direct. The Practice Incentives Program Quality Improvement Incentive requires a practice to participate in continuous quality improvement activities in partnership with its local Primary Health Network and to submit the PIP Eligible Data Set to that network quarterly from its general practice clinical information system. A practice that cannot extract that data cannot meet the condition.

The information effect is less obvious and often more damaging. Where billings cannot be reported by doctor, by item and by billing type, and the accounts are the only record of what happened, the earnings analysis rests on assumption rather than data, and a buyer conducting due diligence reaches the same point. A known migration is a cost; an unreportable practice is a discount.

Patient records and recall that do not support the earnings

Patient records are the mechanism by which a practice's earnings repeat. Recall and reminder systems, chronic disease registers and complete, legible histories let the next owner bring patients back rather than wait for them.

They also carry compliance weight. The Professional Services Review states that medical records must clearly identify the patient, contain a separate entry for each attendance, be able to be understood by another practitioner providing ongoing care, and be completed at the time of the service or as soon as practicable afterwards, under the Health Insurance (Professional Services Review Scheme) Regulations 2019.

A practice with thin records has a weaker case that goodwill transfers, because a buyer is asked to pay for a patient base it cannot see, contact or clinically continue. Handling of health information on a sale is governed by privacy law and should be confirmed with your lawyer.

Staff turnover and a thin non-clinical layer

Reception, nursing and practice management are usually treated as overhead. In a valuation they are part of what is being sold.

Persistent turnover raises recruitment and training costs and degrades what produces revenue: recalls that are not made, appointment books that are not filled, results that are not followed up and billing that is not reconciled. The structural version is a practice where the owner is also the practice manager, the human resources function and the billing supervisor, a management cost the accounts have never recorded and normalisation adds. See how the clinical workforce affects healthcare business value.

A compliance history a buyer has to price

Medicare compliance is where a practice's history becomes a number.

The Professional Services Review administers the review scheme under Part VAA of the Health Insurance Act 1973 and reviews whether a practitioner has engaged in inappropriate practice, described as conduct a practitioner's peers could reasonably conclude is unacceptable to the general body of their profession. A practitioner who renders a prescribed pattern of services, 80 or more relevant services on each of 20 or more days in a 12-month period, or 30 or more relevant phone services on the same basis, is deemed to have engaged in inappropriate practice unless exceptional circumstances affected the rendering of those services. Outcomes include repaying benefits and partial or full disqualification from the MBS or the Child Dental Benefits Schedule. A practitioner can also be referred to Ahpra, the Australian Health Practitioner Regulation Agency, on whose registration the practice's billings depend.

The practice entity is not always a bystander. The Department of Health, Disability and Ageing states that where incorrect Medicare payments are detected during a compliance audit, the Shared Debt Recovery Scheme allows a debt to be split between the practitioner as primary debtor and the employer of the person who manages billing as secondary debtor, by default 65 per cent to the practitioner and 35 per cent to the employer or corporate. A determination requires a contractual arrangement between them and that the secondary debtor could have controlled or influenced the false or misleading statement or benefited from it, and the scheme does not apply to debts arising from inappropriate practice following a Professional Services Review referral.

An unresolved matter is therefore a contingent liability a buyer will want quantified, and earnings produced by a billing pattern that may not be sustainable are not maintainable earnings, whatever the accounts show.

Unresolved partnership and shareholder issues

Practices with several owners accumulate documentation risk quietly: a shareholders or partnership agreement that was never signed, one that is silent on how an exit is priced, doctor service agreements that expired or were never executed, restraints drafted for a different practice, loan accounts nobody has reconciled, an owner who has reduced clinical work while retaining full equity.

Each is a discount to a buyer and a source of dispute to the owners, and they change what a valuation can conclude. Where an agreement specifies a basis of value or a mechanism for pricing an interest, the agreement governs and the analysis follows it. Where the interest being valued is a minority holding, one without the ability to control distributions, remuneration or a sale, its value is not simply a proportionate share of the whole, and the absence of control is considered separately. See share and equity valuations and shareholder and partnership dispute valuations.

Unclear ownership of goodwill between the doctor and the service entity

This factor decides what is being sold before any figure is calculated.

Many medical practices operate with a service entity: a company or trust that holds the lease, employs the non-clinical staff and owns the systems, providing those things to the practitioners for a fee while each practitioner bills patients in their own right. The patient relationships then belong to the doctors, and what the service entity owns is a business of providing services to practitioners, its earnings being the fees less the cost of delivering them.

The durability of those earnings depends on the practitioner agreements: how long they run, what notice applies, whether restraints exist and whether they are enforceable in the relevant jurisdiction. Where those agreements are short, unsigned or terminable at will, the entity's goodwill is weak, no matter how large the billings passing through the practice look. Where the practice instead owns the billings and engages doctors under service agreements, the boundary sits elsewhere and so does the goodwill. See what is goodwill in a medical practice.

What this means for a valuation

None of these factors is fatal on its own, and a valuation does not add them up as penalties. It prices the practice that exists at the valuation date, the specific date as at which the conclusion is expressed, with the earnings it can sustain and the risks a buyer would face.

Value and price are also worth separating. Market value is generally understood as the price a willing but not anxious buyer and seller would agree, each properly informed and with adequate time to market, so a low price achieved in a rushed sale reflects that sale rather than the business. A conclusion prepared for a tax matter, a family law proceeding or a shareholder dispute follows the basis of value that applies to that purpose, which is why the purpose is settled before the analysis begins.

Many of these are matters of documentation rather than performance: an unsigned agreement, an accreditation that is not part of the sale, a lease with no options exercised, a system that cannot report by doctor. They are usually cheaper to correct before a valuation date than to argue about afterwards, though what is worth doing should be confirmed with your accountant or lawyer. See preparing a healthcare business for sale and how to value a medical practice in Australia.

For how HPNA approaches the sector, see medical practice valuations, or request a valuation to discuss the purpose, scope and information required.