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What a practice is worth, and how that number is built
Whether you sell in two years or twelve, a buyer will look at three years of financials. Those years are happening now, and the quality of the books during them determines the number you're offered.
Owner earnings, not profit
A practice is rarely valued on the net income line. It's valued on owner earnings or adjusted EBITDA — profit plus the owner's compensation, plus genuine one-time or personal expenses that a new owner wouldn't carry. The add-backs are where the negotiation actually happens.
A practice with disciplined books can defend each add-back with documentation. A practice with personal expenses scattered untracked through the P&L cannot, and every undefendable add-back is discounted or discarded by the buyer — at a multiple.
Why messy books cost multiples, not dollars
This is the part owners underestimate. If a buyer refuses a $40,000 add-back and the practice trades at a five multiple, that single line cost $200,000 of enterprise value. Diligence is where sloppy bookkeeping gets expensive, and by then it's far too late to fix, because the buyer is looking at years already closed.
What diligence will actually ask for
Three years of closed financials with consistent methodology. A defensible deferred revenue position. Provider compensation clearly separated. Revenue by service line. Clean separation between practice and personal expense. Documented equipment and financing. Reconciliation between the practice management system and the accounting.
None of this can be assembled retroactively in the month an offer arrives, which is exactly when most owners first attempt it.
Growth decisions use the same information
The work that makes a practice sellable is the same work that makes it growable. Knowing your margin by provider tells you whether the next hire pays for itself. Knowing your service-line economics tells you which room to build. Sale readiness isn't a separate project — it's what good financial management looks like from the outside.
When to start
Two to three years before any anticipated transition. If a corporate group or DSO is already active in your market, start now regardless of your timeline, because the offer tends to arrive unannounced and the practices that negotiate well are the ones already holding clean numbers.
Start the sale-readiness work two to three years out, not two months. By the time an offer arrives, the years being diligenced have already closed.