Independent valuations for transactions between related parties in healthcare businesses

Fix the subject, the valuation date and the basis of value

We settle three things in writing before any analysis: what is being valued (the practice, a parcel of shares or units, or a specific asset), the valuation date, and the basis of value, usually market value. Some practice agreements call instead for fair value, or set a formula. We apply the basis the agreement sets and explain how that result relates to market value.

Normalise what the practice actually earns

Future maintainable earnings are the profit the practice can be expected to sustain, taken from normalised results rather than from the tax return. Normalisation restates related-party dealings at market rates and removes what an arm's length buyer would not inherit: owner practitioners' clinical income and drawings, restated to a market service fee or market remuneration for the hours actually worked; service entity fees, which often reflect the family's structure rather than the market; related-party rent, restated to market rent; locum or agency cover used to fill an owner's absence; one-off items such as a fit-out or an accreditation cycle; and personal expenses.

Earnings are then expressed as EBITDA (earnings before interest, tax, depreciation and amortisation), or as EBIT (earnings before interest and tax) where the clinical equipment base, dental chairs, imaging, sterilisation or rehabilitation plant, makes replacement a real cost of staying in business. We also test how contractor arrangements are priced and documented against the practice's payroll tax position, because a change there moves maintainable earnings. See what is maintainable earnings and payroll tax, contractor arrangements and medical practice value.

Choose the method, then cross-check it

Capitalisation of future maintainable earnings converts sustainable earnings into a value by applying a multiple that reflects the practice's risk and prospects, the multiple being the inverse of the capitalisation rate. It suits an established practice with a settled billing pattern. A discounted cash flow discounts projected cash flows to a present value at a rate reflecting risk and the time value of money, and suits a practice whose earnings are not yet maintainable: a new clinic, extra rooms or chairs, or a provider still building its participant base.

A net asset approach, identifiable assets restated to current values less liabilities, is the primary method where the business is asset-heavy or earns no more than a market return on its assets and the owner's own labour, and a cross-check otherwise. Market evidence is used where it exists, but healthcare practice transactions are largely private and rarely disclose what was included, goodwill alone or goodwill with equipment, premises, restraints and service agreements, so we do not apply a published multiple to a healthcare business.

Whose goodwill is changing hands

Personal goodwill depends on an individual practitioner, their patients and their referrers, and leaves when they do. Transferable, or commercial, goodwill attaches to the practice: its location, systems, brand, lease, contracts, administrative team and the practitioners who remain.

Internal transactions turn on that difference, because the practitioner whose personal goodwill is in question is usually a party. An incoming practitioner should not pay again for goodwill they generate themselves, which is why every practitioner is charged at market rates before earnings are capitalised. An outgoing owner cannot sell goodwill that leaves with them, which is why restraints, handover arrangements and the transfer of patient or participant records are examined. See does a medical practice have transferable goodwill and how practitioner dependence affects business value.

From the business to the interest

Equity value is what remains for owners after deducting borrowings and adding surplus assets, and it is then apportioned to the interest being transferred. A capitalised earnings value assumes the practice carries the working capital it needs, being debtors (including outstanding Medicare, health fund, NDIS and scheme claims), stock and prepayments less creditors and accruals, so a surplus or shortfall against a normal level is adjusted. A minority interest, one that cannot control the entity, may be worth less per share than a controlling one: the reduction is a minority discount, and the additional amount attaching to control is a control premium. Whether either applies depends on the basis of value and on the agreement, and many practice agreements provide that owners buy and sell at a proportionate share of the whole.

What does not move with the entity

A restructure can change the entity that owns the practice without changing the practice, and healthcare registrations and approvals do not always follow. Registration as a health practitioner is held by the individual through Ahpra, and a Medicare provider number is held by the practitioner for the location at which they practise, with a further number needed for a new practice location. A new owning entity does not inherit either.

The NDIS Quality and Safeguards Commission states that a registration is linked to a single ABN, is not transferable to a different ABN, and that a business needing a different ABN must complete a new registration application. It requires a change of ownership to be notified as soon as possible and, for changes occurring from 1 July 2026, requires a buyer of a provider delivering high-risk or complex supports to start an audit no later than three months after the change where the change significantly affects the organisation or its governance.

For pharmacies, under section 90 of the National Health Act 1953 a pharmacist who intends to become the new owner of an existing approved pharmacy must apply for approval to supply PBS medicines, and must provide evidence that the requirements of the relevant state or territory regulatory authority have been met. The Department of Health, Disability and Ageing states that it may take up to 30 business days to process a change of ownership application that does not involve a relocation. A gap in any of these approvals interrupts the revenue that maintainable earnings assume, so the report states what it assumes about continuity and the step plan can be built around the approval dates.

Flags for your advisers, and one figure across the documents

Because the parties are related, the report has to show what independent parties would have agreed, and to show its working. We do not give tax or legal advice, and we do flag the matters that recur. Division 7A can treat a payment from a private company to a shareholder or their associate as a deemed dividend, generally unfranked, and the ATO's guidance is that a payment includes a transfer of property, with the amount of the dividend being what parties dealing at arm's length would have paid for the transfer, less any consideration given for it. The capital gains tax market value substitution rule can apply where the parties were not dealing at arm's length and what was received was more or less than market value. Duty is commonly assessed by reference to value rather than to the price the parties set, so a value may be needed even where little or no money changes hands; transfer duty and landholder duty differ between the states and territories and should be confirmed with your lawyer or the relevant revenue office. See tax and restructure valuations.

The agreement, the step plan, the resolutions, the duty lodgement and the tax return should carry one figure, on one basis, at one date. We point out where a draft proposes a different basis, date or subject so it can be reconciled before anyone signs.