Independent valuations for succession planning in healthcare businesses

Value the whole business first, then the interest

We value the business as a whole before the interest. For an established practice the usual method is the capitalisation of future maintainable earnings: the earnings the business can reasonably be expected to sustain, multiplied by a capitalisation multiple. That multiple is the inverse of a capitalisation rate, being the return a buyer would require on those earnings adjusted for expected sustainable growth, so it moves with the risk attached to the earnings and with growth prospects.

Maintainable earnings are usually expressed as EBITDA (earnings before interest, tax, depreciation and amortisation), or as EBIT (earnings before interest and tax) where depreciation reflects a real cost of replacing clinical equipment, and are struck after normalisation: removing one-off items, private expenses and related-party arrangements that are not on market terms. A discounted cash flow, which discounts forecast cash flows back to a present value, can be more informative where earnings will change materially through the transition. Net assets, being assets less liabilities, generally sets the value only where earnings do not support a value above asset backing. Market evidence from comparable healthcare transactions is a cross-check rather than a substitute, and reported prices are rarely comparable on their face, because they may include or exclude the freehold, equipment, work in progress and debt, and may be shaped by earn-outs and restraints.

Capitalised earnings give an enterprise value: the operating business before borrowings, assuming a normal level of working capital, being the funds tied up in receivables, stock and prepayments less trade and accrued payables, with any surplus or shortfall against that level adjusted for. Deducting interest-bearing debt and adding surplus assets gives equity value, which is what a successor acquires. A minority interest, one that does not carry control over distributions, remuneration or the timing of a sale, may be discounted from its pro rata share of that value, or priced pro rata where the agreement requires it.

Separate personal goodwill from transferable goodwill

Goodwill is the value of the business above its identifiable net assets. In healthcare much of it can be personal goodwill, attached to the principal's relationships, reputation and clinical skill, rather than transferable (commercial) goodwill attached to the location, systems, brand, contracts, referral pathways and team. Personal goodwill is worth little to an outside buyer because it leaves with the person, but it can be worth more in a succession, where a successor inside the practice may absorb it across the handover.

We assess how much of the goodwill is personal at the valuation date and what the plan does to shift it: the successor taking over the patient or participant list and recall system, introductions to referrers, joint consulting before handover and restraints in the service agreements. Where practitioners hold their own records under a service agreement, we check what the successor is actually acquiring, because the practice may be transferring facilities, systems and a location rather than a patient base. A practitioner's Medicare provider number is tied to the individual and to a practice location, with a separate number required for each location, so it does not pass with the business. Key-person risk, the exposure of earnings to the loss of one individual, is recorded separately rather than buried in the multiple, so later updates can show whether it has fallen. See how practitioner dependence affects business value.

The principal's remuneration and the agreement's formula

Normalisation replaces the principal's drawings with a market rate of pay for the work they actually do, and that adjustment moves through the plan: as the successor absorbs management and the principal's sessions fall, the cost of replacing them changes, and so do maintainable earnings. Where practitioners are engaged as contractors we check how the arrangement is priced and documented, because contractor structures in medical and allied health practices have attracted state payroll tax attention and an unbudgeted liability changes what the successor is buying. See payroll tax and medical practice value.

Where an agreement sets a valuation formula, we report the formula value beside market value. Agreements also use terms such as fair value or fair market value without defining them, and the wording matters: a clause read as requiring a pro rata share of the whole gives a different answer to one read as requiring the value of a minority parcel on its own. We state the basis applied and leave the construction of the clause to the parties' lawyers.

Family transfers and estate planning

A family transfer is not at arm's length, so the ATO's Market valuation for tax purposes guide is directly relevant: income tax is levied on the market value of assets transferred to related parties, not necessarily the contract price. A report is usually needed even where little or nothing changes hands.

Timing can also affect the tax concessions available on an exit. At the time of writing the ATO states that the small business 15-year exemption requires, among other conditions, continuous ownership of the asset for the 15-year period ending just before the CGT event, and that the owner (or, where the owner is a company or trust, the significant individual) is 55 or older with the event happening in connection with retirement, or permanently incapacitated. Whether any concession applies is a question for your accountant; see tax and restructure valuations.

If an owner dies before the plan completes, the valuation date moves to the date of death. The ATO states that where a CGT asset passes to a tax-advantaged entity, and in specified circumstances where it passes to a foreign resident beneficiary, CGT applies to the deceased at that time by reference to market value at the date of death, and that a beneficiary inheriting an asset the deceased acquired before 20 September 1985 needs its market value at that date. A buy-sell arrangement and the cover behind it are worth revisiting alongside the valuation for the same reason.

Regulatory steps and periodic updates

Regulatory steps decide when value can actually transfer. The NDIS Quality and Safeguards Commission states that a registration is linked to a single ABN and is not transferable to a different ABN, so a successor taking over through a new entity applies afresh, and a change of ownership must be notified as soon as possible. In a community pharmacy, the Department of Health, Disability and Ageing states that a pharmacist intending to become the new owner of an existing approved pharmacy must apply for approval under section 90 of the National Health Act 1953 to supply PBS medicines, with evidence that the relevant state or territory regulator's requirements have been met, and advises lodging at least 30 days before the anticipated settlement date. State and territory law also governs who may own a pharmacy, which narrows the field of possible successors; see pharmacy valuations. Where aged care approved provider status or the successor's own Ahpra registration sits on the critical path, the report says so.

Because succession runs over years, the first report is built so that updates follow the same basis, normalisation schedule and treatment of the interest, each carrying its own valuation date. See strategic valuation reviews.