Start with cash flow, not a percentage
You'll sometimes hear a practice valued as a flat percentage of its collections. It's a shortcut that misleads more than it helps — two practices with identical collections can be worth very different amounts depending on profitability, trend, and risk.
Serious buyers, lenders, and appraisers value on earnings, not on collections. That's why a broker or a professional valuation — not a rule of thumb — sets a defensible price.
The cash-flow method: SDE and multiples
The rigorous approach values the practice on its earnings. SDE (Seller's Discretionary Earnings) = net income + owner's salary + owner's perks + one-time and non-operating expenses (the 'add-backs'). The practice is then valued as a multiple of SDE that reflects its size, growth, and risk — a stronger, faster-growing, lower-risk practice earns a higher multiple.
Because SDE normalizes for how each owner runs the books, it lets buyers and lenders compare practices apples-to-apples.
Add-backs: where value is found (and lost)
An add-back schedule restores discretionary and non-recurring costs to earnings: owner compensation above an associate's wage, auto and travel, family on payroll, one-time legal or equipment expenses, and personal items run through the practice.
Legitimate, documentable add-backs raise SDE and therefore value. Aggressive or unsupported add-backs get stripped out in due diligence, so they must be defensible.
Factors that move the multiple
Value goes up with: growing collections, a strong hygiene program, fee-for-service payor mix, low owner-dependence, modern equipment, a long assignable lease, and a stable team. Value goes down with: declining collections, heavy HMO/Medicaid dependence, production concentrated in the owner, deferred-maintenance equipment, or a short or unassignable lease.
Real estate and equipment
If the building is included, it is valued and financed separately from the practice (often via a 1031 exchange or its own loan). Equipment is generally already reflected in the practice value rather than added on top.