This is the second article in a series on internal GP practice buyouts. The series began with Why internal GP practice buyouts fail more often than they should by Dr Chris Mitchell AM, FAICD. This article covers valuation. The third article, Structuring the deal: vendor finance, earnouts and staged equity, addresses how the transaction should be documented and secured.
Most GP practice owners entering an internal buyout negotiation have already formed an opinion about the practice's value. Typically, this view is based on either a broker's estimate, an accountant's valuation, knowledge of a recent comparable sale in the area, or an EBITDA multiple the owner believes is appropriate. Each source may carry assumptions or limitations that merit careful evaluation before decisions are made.
All four are external-market reference points. They reflect what a well-capitalised buyer, corporate group, or private equity firm would pay for a practice with stable, transferable earnings and management that runs independently of the selling owner. The multiple applies to normalised EBITDA, which removes the owner's personal income, adjusts for related-party expenses, and shows the practice's earning power on an arm's-length basis.
That number is not wrong, it accurately states what it describes. The issue is that the internal buyer does not represent what that transaction assumes. An internal buyer lacks a strong balance sheet, does not fully assume the operational risk of a corporate acquirer, and does not inherit a neutral earnings stream because the outgoing owner usually remains after settlement.
Why single and multi-site practices are often overvalued
Doctors often overestimate the value of a single or multi-site GP practice. Significant value in GP practice businesses appears at four or more sites, where the business is managed independently rather than as an extension of the clinician. Below that size, a practice may generate revenue but remain fragile, principal-dependent, and hard to transfer. External multiples ignore this fragility, which the internal buyer typically sees clearly.
A second problem follows from this. The seller has priced at external-market comparables without fully weighing what the internal buyer actually acquires: a business that still depends on the selling owner's clinical presence, referral relationships, and management involvement. The buyer's discount for these factors is not unreasonable. The tension between the two positions is structural rather than personal.
The three objections the internal buyer brings to the number
Buyers' objections to price fall into three categories, each needing to be addressed separately to avoid stalled negotiations.
The multiple
The most visible argument. The internal buyer will cite owner-dependency risk, limitations in comparing the practice to the seller's chosen precedent, and their own limited capital. Multiples are most easily debated because they are explicit, but they are rarely the core disagreement. Resolving the multiple dispute without addressing the other two usually produces a temporary pause in negotiation rather than a settlement.
The EBITDA base
The second, and usually deeper, argument. Normalisation adjusts reported earnings to reflect the practice's underlying profitability on an arm's-length basis. In a GP practice, add-backs often include the owner's personal compensation, related-party rent, family members on payroll, and other discretionary expenses.
The internal buyer, having reviewed the full financial records during due diligence, may find the practice has been used for non-related expenses beyond standard normalisation. Personal vehicles, travel, equipment and investments outside the practice may be involved. Some are legitimate business expenses; others are borderline.
Tax exposure and the EBITDA base
The buyer's concern is twofold. First, reported EBITDA may overstate sustainable earning capacity, as some expenses are personal and may remain as business costs or cease under new ownership. Second, in a share sale, the buyer inherits the entity's historical tax position and all legal and financial risks. Tax advice should be sought from an accountant or tax lawyer, commissioned separately from the transaction lawyer. The issue shapes the buyer's sense of actual value and cannot be separated from the price negotiation.
Owner's clinical income compensation
The third objection is the one that most often ends the negotiation. The seller, having priced at external-market EBITDA multiples, also needs to decide what happens to their clinical income after settlement. The usual structure is that the outgoing owner continues to consult under a facilities and services agreement, paying a service fee on gross billings. The internal buyer wants that fee at a rate that reflects the cost of servicing the acquisition debt and running the practice under the new structure. The seller wants a fee that preserves their clinical take-home.
The buyer's underlying point, which is rarely stated this directly, is that the seller has had the practice as a vehicle for non-related expenses for the life of the business, and the buyer is not only paying for the practice but also giving up the right to use the entity in the same way. That right has commercial value. A straight service fee priced on gross billings does not replace it.
Resolving the gap requires either a higher share of retained earnings for the selling GP under the ongoing arrangement, a different structure for the clinical relationship post-settlement, or an adjustment to the headline sale price. The negotiation has moved from the multiple into the post-settlement economics of the relationship between the parties.
Why an independent valuation clarifies but does not end the dispute
An independent valuation is worth commissioning. It provides a documented, defensible price basis for both parties, supports the seller's position on CGT, and anchors the transaction for any subsequent tax review. It should be commissioned early, from a qualified business valuer with health sector experience. Neither party should conduct it themselves or rely on the other party's preferred number.
The valuation clarifies the first two objections. A qualified valuer uses market methods, tests normalisation, and sets a value based on what an external buyer would pay for adjusted EBITDA. This analysis resolves much of the dispute over multiple and EBITDA base.
The valuation does not address the third objection. The post-settlement clinical arrangement is a business decision between the parties, not a valuation result. No valuation method specifies how outgoing clinicians split future billings under facilities-and-services agreements. That remains a negotiation.
The valuation carries more weight in disputes when both parties help select the valuer and agree on the methodology in advance. Taking this procedural step is worthwhile, even if the resulting figure does not resolve the immediate negotiation.
Staged equity and other bridging structures
A staged equity or earnout model, where the buyer acquires part of the business at settlement and the rest through agreed tranches, can bridge the funding gap without abandoning valuation positions. The key is pre-agreement. If a staged deal defers valuation, the same disputes recur at each tranche.
An effective staged structure defines, before the first settlement:
- The price method for each tranche
- Timing and triggers for subsequent tranches
- What happens if the buyer cannot proceed
- The seller's rights as a minority stakeholder past the planned period
If the gap between the seller's price and what a single internal buyer can fund is too large for vendor finance or staging, two further options exist: bring in additional partners or investors to share ownership and funding, or develop alternative revenue streams to boost servicing capacity before or alongside the acquisition. Both create new legal and commercial issues that must be resolved before proceeding.
When the transaction should not proceed
Sometimes the honest answer is that the transaction should not proceed in its current form. If the gap between the seller's external-market number and what the internal buyer can service is structural rather than negotiable, a deal forced together with aggressive vendor finance and optimistic earnout assumptions often produces a worse outcome for both parties than stopping. The practice remains with the seller. The relationship between the parties remains intact if the conversation has been handled honestly. The seller retains the option to continue operating or to sell externally under a different structure.
Identifying that outcome earlier rather than later is one of the reasons a seller should undertake reverse due diligence on the practice before any internal buyout conversation starts. Reverse due diligence surfaces the value problems, operational fragility, owner dependency, non-related expense overlay, documentation and procedural gaps, existing employee and tax liabilities, non-compliance issues, before they become negotiation problems. It gives the seller a choice about which path to take and on what timeline.
From my experience, too many transactions fall over because neither party turned their mind to the many legal, financial, tax and corporate issues involved. Undertaking reverse due diligence on a business can address many of those issues at the outset, increasing the likelihood of completing the transaction.
The next article in this series
Vendor finance, security and earnout structures are covered in Structuring the deal: vendor finance, earnouts and staged equity. That article addresses how vendor finance should be documented and secured, and the specific failure points that leave sellers exposed.