Medical Corporation Valuation Methods: A Thorough Explanation of 3 Methods, Market Prices, and Influencing Factors

Three Main Methods for Valuing Medical Corporations

The following three methods are primarily used for valuing medical corporations. It is important to understand the characteristics of each and know when each method is likely to be applied.

1. Net Asset Approach (Cost Approach)

The Net Asset Approach values a company based on its net asset value, calculated by subtracting total liabilities from total assets. While there is the “Fair Market Value Net Asset Method,” which re-evaluates assets and liabilities at their market prices, and the “Book Value Net Asset Method,” which is based on accumulated historical figures, the Fair Market Value Net Asset Method is generally used in M&A.

【Key Points of the Net Asset Approach】

• Calculation Method: (Market Value of Total Assets) – (Market Value of Total Liabilities) = Net Asset Value
• Characteristics:
• Relatively objective and easy to understand
• Valuation tends to be higher when there are significant unrealized gains on fixed assets (land, buildings, etc.)
• Valuation tends to be lower when there is little past profit or accumulation
• Intangible assets (brand strength, know-how, etc.) are difficult to value
• Applicable Cases:
• Medical corporations experiencing continuous losses or unstable profits
• Medical corporations with significant unrealized gains on owned real estate (land/buildings)
• Preliminary valuation in the early stages of M&A

In the case of medical corporations, it is common to own a large amount of fixed assets such as land and buildings, and their unrealized gains significantly impact the valuation.

2. Income Capitalization Approach (Income Approach)

The Income Capitalization Approach values a company by focusing on its future earning potential. For medical corporations, it is calculated by discounting future cash flows to their present value, primarily based on stable revenues such as “medical income” and “medical fees.” A valuation period (typically around 5 to 10 years) is set, and the predicted net profit or cash flow for that period is used, applying a discount rate (such as WACC) that considers a perpetual growth rate.

【Key Points of the Income Capitalization Approach】

• Calculation Method: Future Average Income / Discount Rate (or Capitalization Method)
• Characteristics:
• Can evaluate the intrinsic earning power of a medical corporation
• The higher the future growth potential and earnings stability, the higher the valuation
• Valuation can fluctuate due to the difficulty of forecasting and the setting of the discount rate
• Can indirectly evaluate the contribution of intangible assets (quality of doctors and nurses, regional reputation, etc.) to earnings
• Applicable Cases:
• Medical corporations consistently generating stable and high profits
• Medical corporations with prospects for future earnings growth
• Valuation in business succession (transfer to a successor)

This Income Capitalization Approach tends to be emphasized particularly for medical corporations with a good regional reputation and predictable stable patient numbers and medical fees.

3. Comparable Company Approach (Market Approach)

The Comparable Company Approach calculates the value of the target medical corporation by referencing the stock prices of listed companies (comparable companies) or M&A transaction examples in the same industry and of similar size. It primarily uses multiples (ratios) against sales or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

【Key Points of the Comparable Company Approach】

• Calculation Method: (Financial Indicators of Target Company) × (Multiples of Comparable Companies)
• Characteristics:
• Reflects market evaluation and has high objectivity
• Difficult to select comparable companies, and few listed companies perfectly match medical corporations
• Highly influenced by M&A market trends
• Difficult to apply when there are few comparable companies, such as for clinics or small hospitals
• Applicable Cases:
• Medical corporations (especially large ones) for which numerous comparable companies or M&A cases exist
• When an objective market valuation is desired

For medical corporations, especially unlisted ones, finding perfectly matching comparable companies is difficult, making this method often used in conjunction with other approaches.

Key Factors Influencing the Valuation of Medical Corporations

The valuation of a medical corporation is not determined by a single factor. Various elements interact to significantly influence the valuation amount. Here, we explain the most important factors.

1. Financial Status and Profitability

This is the most fundamental evaluation element. The trends in revenue (sales, medical fees), profits (ordinary profit, net profit), and cash flow over the past few years serve as direct evaluation indicators for the Income Capitalization Approach. Furthermore, the amount and trends of total assets, liabilities, and net assets form the basis for evaluation in the Net Asset Approach.

2. Asset Composition (Especially Real Estate)

The valuation of fixed assets such as land and buildings owned by medical corporations is particularly important in the Net Asset Approach. When there is a large “unrealized gain” where the market value of fixed assets significantly exceeds their book value, the valuation amount under the Net Asset Approach will be higher. Medical corporations located in urban areas or possessing extensive land may have an advantage in this regard.

3. Medical Specialties, Service Offerings, and Expertise

If the corporation offers specialized advanced medical treatments (e.g., cancer therapy, regenerative medicine) or unique services not available elsewhere, its profitability and future potential may be highly valued. Furthermore, the quality of medical staff, including doctors and nurses, the training system, and research and development capabilities can indirectly affect profitability and enhance valuation.

4. Regional Characteristics, Location, and Competitive Landscape

The location of the medical corporation, demographic trends in the surrounding area, aging rates, and medical demand also influence the valuation. Medical institutions in areas with expected population growth or in medically underserved regions may be highly valued for their future profitability and social contribution. Conversely, in areas with many competing medical institutions, if differentiation is not achieved, profitability may be squeezed, leading to a lower valuation.

5. Intangible Assets (Brand Strength, Reputation, Know-how)

Invisible assets (intangible assets) such as patient reputation, trust within the community, medical technology, and management know-how also indirectly affect the valuation. As these intangible assets contribute to stable patient acquisition and revenue maintenance, their value may be considered in the Income Capitalization Approach and Comparable Company Approach.

Trends and Points to Note Regarding Your Institution’s Valuation Method

Which valuation method is likely to be applied to your institution depends on its size, financial status, business content, and other factors. Generally, the following trends exist:

【Trends in Valuation Methods】

• Small Scale, Loss-Making, High Unrealized Assets: The Net Asset Approach tends to be emphasized. In particular, the value of real estate such as land may constitute a large portion of the valuation.
• Medium to Large Scale, Profitable, Stable Revenue: The Income Capitalization Approach tends to be emphasized. Future profitability is key to the valuation.
• When Objective Market Valuation is Required: The Comparable Company Approach is also referenced. However, as there are few comparable cases specifically for medical corporations, it is generally used in combination with other methods.

【Points to Note in Valuation】

• Combination of Valuation Methods: In practice, it is common to use a combination of multiple methods rather than a single one for a comprehensive evaluation.
• Expert Opinions: Valuation amounts can vary among experts (M&A advisors, accountants, tax accountants, etc.) who perform the assessment.
• Purpose of M&A: The emphasis on valuation points differs depending on the desires of both the seller and buyer, and the purpose of the M&A (business succession, business improvement, business expansion, etc.).

【Valuation Benchmark (Simple Comparison Table)】

Importance of Valuation in Medical Corporation M&A

Corporate valuation is an extremely important process in M&A and business succession for medical corporations. By conducting negotiations based on appropriate valuations, sellers can receive fair compensation, and buyers can establish prospects for future investment recovery. Furthermore, objective and logical valuation is essential for smooth business succession to a successor.

【Situations Where Valuation is Important】

• M&A (Sale/Acquisition): Serves as a basis for determining the reasonableness of the transaction price.
• Business Succession (Within Family/Employees/Third Party): Forms the basis for asset transfer to the successor and for post-succession management planning.
• Organizational Restructuring: Necessary for valuation during organizational changes such as mergers or divisions between medical corporations.
• Fundraising: Serves as collateral valuation and substantiation for business plans when obtaining loans or investments from financial institutions.

Since the valuation amount is the basis for management decisions, understanding the calculation process and rationale is crucial to prevent future troubles.

M&A Medical’s Valuation Support

As an M&A support organization certified by the Small and Medium Enterprise Agency, M&A Medical, specializing in medical corporation M&A, offers support from experienced professionals who will conduct detailed interviews about your institution’s situation and assist in calculating corporate value using optimal valuation methods. We can handle everything from valuation calculation to subsequent M&A strategy planning, partner search, negotiation, and contract finalization.

Why not start by understanding the approximate valuation of your institution? By applying for a free preliminary assessment via the button below, our experts will quickly calculate an estimated valuation.

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