Selling a behavioral health practice takes more than emotional and operational readiness. It also requires financial readiness where you have an accurate understanding of what your practice is worth, and a clear view of your personal finances.
These are the five items to settle before you seriously consider selling.
1. What is your behavioral health practice worth?
The value of your behavioral health practice is based on a multiple of EBITDA. Understanding what that means, and how the multiple is set, is the foundation for every conversation that follows, whether with a buyer, your CPA, or your wealth planner.
How we arrive at EBITDA. EBITDA is earnings before interest, taxes, depreciation, and amortization. It begins with your profit and loss statement. This is where we normalize earnings, which reflect how the practice will perform under new ownership. Typical adjustments include owner compensation reset to a market wage, personal or discretionary expenses run through the practice, one-time costs and one-time revenue, family members on payroll above or below market rates, rent that differs from market on owner-held real estate, and inconsistencies in how revenue and expenses are recorded. Each adjustment moves EBITDA up or down, and each needs support that a buyer’s diligence team will accept. This normalization is the work the TUSK analytics team does on your behalf.
How the multiple is decided. The multiple is a measure of risk. It answers one question: how confident is a buyer that this EBITDA will continue after you step back? The more durable the earnings, the higher the multiple. Scale, payer mix, clinician retention, how much revenue depends on you, and the growth of your service lines all feed that confidence. Market conditions and the buyer’s own strategy and capital then move the number further.
Once the buyer reaches a set multiple, they apply that multiple to your EBITDA. For example, if you have $1 million of EBITDA and the buyer is willing to put a 6.5x multiple on it, the total value of your practice is $6.5 million. You will not receive the $6.5 million all in cash, but that is what the business is worth to that buyer.
2. What is a fair market wage for you as an employee of the practice?
If you are still a practicing clinician, or you are key to the day-to-day operation of the practice, buyers will expect you to stay for anywhere between one and five years after the sale. Over that period, you move from owner to employee.
For valuation, the buyer modifies your current salary to align with your job description. If you see patients, that is a clinical wage for your license and specialty. If you run the practice without a caseload, it is an administrative or executive wage. Compensation above market is added back to earnings, and compensation below market reduces them. As a hypothetical illustration, an owner who takes $400,000 from the practice in a role a buyer would fill at $200,000 has $200,000 added back to EBITDA. At a 5x multiple, that adjustment alone represents $1 million of value. If what you’re earning today is market, then no changes will be made.
Now, every salary is negotiable, and that’s something that you and your advisor will negotiate alongside the buyer to ensure that you’re receiving fair compensation for your role.
3. What do you need financially from the sale of your practice?
This is where you plan what life looks like after the transaction. Start with three inputs.
First, look at your new normalized salary. Second, look at what your potential proceeds from the transaction would be, split between cash and equity. Third, look at what you already have in the bank and in other assets.
Then sit down with your CPA and your wealth planner and work through three statements. This is my cost of living. This is what I am bringing in every year. Where does that leave you financially?
4. How much debt must be paid off at closing?
Debt is repaid from proceeds at closing. Buyers typically acquire a practice free of debt, so equipment loans, lines of credit, SBA loans, credit card balances, and any liens on practice assets are paid off through the closing funds flow and released.
Personal debt is more nuanced. A personal obligation such as a home mortgage is generally not paid at closing unless it is secured by practice assets or tied to the practice. For example, a home equity line that funded the business or a personal guarantee on a practice loan would be taken out of the transaction funds.
5. How will you plan for taxes and allocate the proceeds?
Uncle Sam always takes his cut, and the sale of a practice is no exception. Taxes are part of this deal too, and they are far easier to plan for than to be surprised by.
As your advisor is negotiating deal structure, understand how the cash you receive at closing will be taxed. If the practice real estate is part of the sale, that transaction carries its own tax treatment, separate from the practice itself.
This is where your CPA comes in. Ask what your tax exposure looks like under different price and structure scenarios, and how much of the proceeds needs to be set aside so that the amount you plan around is the amount you keep. Then work with your wealth planner on where the rest goes: debt payoff, reserves, retirement, reinvestment, and family goals.
Know the numbers before you sell
For most owners, this will be the largest transaction of your career.
To maximize the value, it takes the right team: your broker, your CPA, and your wealth planner, working from the same set of numbers. Owners who maximize the value of a deal, and who reach the right financial outcome for themselves, tend to settle these questions early, allowing for a much smoother transaction process.
The good news is that TUSK can conduct this analysis for you at no cost. If you already have a CPA and a wealth planner, we work hand in hand with them to help you map it out. Ideally, you know these things before you sell.
Frequently Asked Questions
How is a behavioral health practice valued?
A behavioral health practice is valued as a multiple of its EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization. The multiple is a factor applied to EBITDA, and it reflects the risk a buyer sees in those earnings continuing. As a hypothetical example, a practice with $1 million of EBITDA and a buyer applying a 6.5x multiple has a value of $6.5 million.
What is a fair market wage for a behavioral health owner?
A fair market wage for a behavioral health owner depends on the role the owner will hold in the practice and the service lines they will work in after the sale. An owner who stays on as a clinician is paid a clinical wage for their license and specialty, such as therapy or psychiatry. An owner who stays in an administrative or executive role is paid a salary for that position. In either case, the salary is benchmarked to the local market and to what a buyer would pay an employee in the same role.
Do you have to pay off debt when you sell a behavioral health practice?
When you sell a behavioral health practice, business debt and liens are typically paid off at closing from the sale proceeds, based on lender payoff letters. Personal debt generally is not, unless it is secured by or guaranteed against the practice.
How does tax planning affect the sale of a behavioral health practice?
Tax planning affects the sale of a behavioral health practice because deal structure, including how the purchase price is allocated and how much is paid in cash, deferred, or rolled into equity, influences how much the owner keeps after taxes. Owners should review structure with a CPA before signing a letter of intent.
