Quick Answer: In a practice sale, financial analysis means the work a buyer’s accountants do to test whether your reported earnings are real and repeatable. Four pieces: quality of earnings, normalisation of one-off items, a working capital assessment, and the net debt bridge that turns a headline price into your actual proceeds.
The version that matters when you are selling
“Financial analysis in healthcare” covers a lot of ground. Budgeting, payer mix analysis, cost accounting, and departmental reporting all sit under that heading, and if you are running a practice day to day those are the versions you deal with.
This article is about a narrower and more consequential one: the analysis a buyer performs on your numbers before they hand over money.
That distinction matters because the two are graded differently. Internal reporting is judged on whether it helps you manage. Pre-transaction analysis is judged on whether it survives a hostile read by someone with a financial interest in finding problems.
Most San Diego owners meet this process for the first time during diligence, which is the worst possible moment. Understanding what the buyer is testing lets you test it yourself first.
📊 At a Glance
- Four components: quality of earnings, normalisation, working capital, and the net debt bridge.
- The headline price is not your proceeds. The bridge between them can move the number materially.
- Quality of earnings is about repeatability, not accuracy. Your books can be correct and still fail it.
- Working capital is negotiated, and owners routinely leave money in it without noticing.
- Everything traces to source. Bank records, merchant processing, and the practice management system all get compared.
- Do it before they do. The findings are the same either way. The difference is who has time to respond.
Quality of earnings
The central question is not whether your profit and loss statement is accurate. It is whether the earnings it reports will still be there next year under someone else’s ownership.
A quality of earnings analysis separates recurring earnings from everything else. Revenue tied to a single referring physician, a payer contract that expires next quarter, a one-time surge from a promotion, or production that only happens because the owner is personally performing it all get identified and treated differently from the durable base.
This is where owners are most often surprised. A practice can have completely accurate financials and still come out of a quality of earnings review with a lower adjusted figure than the owner expected, because accuracy and repeatability are different tests.
The practical defence is to know your own concentration risk before a buyer names it. If one payer, one referral source, or one provider accounts for a large share of revenue, that is worth understanding early enough to do something about.
Normalisation
Normalisation adjusts reported earnings to show what the practice would earn under ordinary ownership.
It runs in both directions. Expenses a new owner would not carry get added back: personal vehicle costs, a family member on payroll who does not work in the practice, one-off legal fees, owner compensation above market rate. Costs the practice will have to carry get subtracted: a market-rate salary for a replacement clinician if the owner has been under-paying themselves, or rent adjusted to market if the building is owned by a related party.
That second half is the one owners forget. If you own your building and charge the practice below-market rent, your earnings look better than they are, and a buyer will normalise that away.
Each adjustment needs support. An add-back you cannot document with a receipt or a contract is one the buyer will normally strike, and because a multiple applies on top, a struck dollar can cost several dollars of price.
Working capital
Most practice transactions include a working capital target, often called a peg. The buyer expects the business to arrive with a normal level of receivables, payables, and supplies, and the purchase price adjusts up or down against that target at close.
Owners underestimate this one consistently. A working capital peg set too high hands the buyer value you never priced. Set correctly, it reflects what the practice genuinely needs to operate.
For a healthcare practice, the composition matters as much as the amount. Receivables aging, the collectability of older balances, prepaid expenses, and deferred revenue from packages or memberships sold but not yet delivered all get examined. Med spas and dental practices with membership plans should expect particular attention on that last item, since revenue collected for services not yet provided is a real obligation transferring to the buyer.
The net debt bridge
This is the piece owners most often miss until closing, and it is the one that determines what actually lands in your account.
The headline number in a letter of intent is typically an enterprise value: what the business is worth, independent of how it is financed. What you receive is equity value, and getting from one to the other means subtracting debt and debt-like items and adding cash.
Debt-like items are broader than a bank loan. Equipment finance and device leases, deferred tax liabilities, accrued paid time off, outstanding earn-outs from a prior acquisition, and unpaid owner distributions can all land in that column depending on how the agreement is drafted.
Two offers with the same enterprise value can produce meaningfully different proceeds once the bridge is applied. Comparing headline numbers without comparing bridges is how owners accept the weaker of two offers.
What this means before you go to market
The findings do not change based on who runs the analysis first. Your concentration risk, your undocumented add-backs, and your device leases exist either way.
What changes is your position. Sell-side analysis done in advance gives you time to fix what can be fixed, document what cannot, and set expectations honestly. The same items discovered by a buyer mid-diligence arrive as a repricing conversation, with an exclusivity period running and your competing bidders already stood down.
That is the entire argument for doing it early, and it is a strong one.
For how this looks in an aesthetic practice, see what a financial analysis reveals about an aesthetic practice.
FAQ
Is this the same as a valuation?
No, though they are related. A valuation estimates what the practice is worth. Financial analysis of this kind tests whether the earnings underpinning that valuation are real and repeatable. The analysis usually comes first, because the valuation depends on its output.
Who performs it?
On the buy side, the buyer’s accountants or a specialist diligence firm. On the sell side, an advisor or accountant working for you. The scope overlaps deliberately, since the point of sell-side work is to find what the buy side will find.
Do I need audited financials?
Most practice transactions do not require an audit. What matters more is that your records reconcile to source documents and that adjustments are supported. Reviewed or compiled statements are common, and reconciliation quality carries more weight than the label.
How far back does it look?
Commonly the trailing two to three years, with the most recent twelve months examined most closely, though scope varies by buyer and by deal size. Older periods provide trend context, and the recent period tends to drive the number.
What if my books are a mess?
That is worth addressing before going to market, not after. Unreconciled records make every figure you present negotiable, because you have given the buyer a reason to re-derive your earnings themselves.
About Aesthetic Brokers
Aesthetic Brokers is a sell-side mergers and acquisitions advisory firm for medical and dental practice owners, headquartered in La Jolla, California. San Diego is the firm’s home market, not a territory it covers from a distance.
The firm represents sellers only and does not represent buyers. On financial analysis that distinction is direct, since the same work performed for a buyer is aimed at finding reasons to pay less.
Aesthetic Brokers works with medical spas, plastic surgery practices, cosmetic dermatology, cosmetic and specialty dental practices, infusion centers, women’s health, regenerative wellness, and endocrinology. Founder and CEO Bill Walker spent his career in private equity healthcare mergers and acquisitions before moving to the sell side, so owners are advised by someone who has run this analysis from the buyer’s side of the table.
Owners who want a confidential ballpark can use the firm’s valuation estimator, which takes about two minutes and requires no email address. For a practice-specific analysis, call 619-742-0310.