Before buying a chiropractic practice, here are five factors to consider about yourself and the practice(s) you may be interested in purchasing. Many chiropractors wonder if they are entrepreneurial enough or whether they have “what it takes” to run their own business. There are many factors that are affiliated with chiropractic business success such as motivation, business savvy and clinical skills – among others.
Specifically, financial lending institutions will consider many “tangible” factors beyond those mentioned above. Here’s a quick list of the most important things that the banks will be looking at and what you should considering BEFORE buying a chiropractic practice.
Good Credit — In most cases, to obtain a chiropractic practice purchase loan, your credit rating will need to be very good (650+). For this reason, it is critical that you stay current on all of your financial obligations. For those who have less than perfect credit, all is not lost. There are some lenders who are willing to lend outside the “typical” credit parameters, but these are simply harder to find and fewer in number. If your score is significantly lower than the 650 mark, if you have current late payments or a recent past bankruptcy, consider cleaning up your credit BEFORE buying a chiropractic practice.
Debt service. Are you $20,000 or $200,000 in debt? Your debt level is another important factor to consider BEFORE buying a chiropractic practice. Obviously, there will be a difference in lending depending on your personal situation based on the debt you have but the overall picture is actually the more critical piece. One of the biggest myths, however, is that chiropractors cannot get financing for practice purchases because they have huge student loans. This is simply not true. All healthcare practitioners are in the same boat in respect to student loans. In the eyes of experienced lenders, all debt is not equal. For example, student loan debt is not the same as careless credit card debt. Similarly, lenders who are experienced in healthcare practice acquisitions (which is who we work with here at Strategic Chiropractor) understand that virtually all younger doctors are going to have high student loan debt; they also understand the high-income potential offered by the chiropractic profession – which is why they are willing to lend. What’s most important here is not just the debts you have but the total picture of your debt service (how much you will be paying out in loans) compared to the income you will be making as the owner of the business you’re seeking to purchase (based on the past track record of performance). For example, if you have $2000 of monthly loan debt service (student loans + practice purchase loan) and as the business owner you can anticipate making $3000 per month (based on the business history) — that’s not a very attractive debt ratio. On the other hand, the same $2000 of monthly debt service on an anticipated owner income of $20,000 per month may be seen as a good opportunity.
Practice Cash Flow. The cash flow of a chiropractic business is a critical component of loan acceptance — and something you need to consider BEFORE buying a chiropractic practice. For example, if the practice you are considering has an overhead of 35 percent versus an overhead of 70 percent, the profitability is very different on those two practices. Ultimately, this is a significant portion of what you are purchasing when you buy a practice: the ability for continued cash flow based on the history of the business. So, it’s important to look a level deeper at not only the collections, but the cash flow and profitability of what the owner puts in his or her pocket. Here it is also critical to understand that, for tax saving purposes, many owners make more than just a simple salary or owner withdrawal. There are often other “perks” built in to being a business owner that can add significant income to the owner – and save them on taxes. Be sure to dive into these discretionary expenses or “addbacks” to get the full picture of what a chiropractor is truly making as owner of the business — BEFORE buying that chiropractic practice
Downpayment: Many chiropractors don’t know what they can afford in terms of a practice purchase. Admittedly, it’s not the same as purchasing a house because the bulk of a bank’s decision to lend is actually based on the business — and not the buyer. That said, most sales will require some form of downpayment and most buyers can figure out the price range they can shop in based on their access to downpayment funds. For example, with SBA (Small Business Administration) loans for practice purchases, the buyer is required to have a minimum 10% downpayment. So, on a practice sale of $300,000 that equates to the buyer needing approximately $30,000 in funds to shop in that ballpark. For SBA loans with partial Seller financing, it’s possible to get the downpayment to as low as 5%. 2023 UPDATE — with Seller financing, it is now possible to get an SBA loan to purchase with a downpayment as little as $0 — see our post here –> Zero Down Chiropractic Practices for Sale: How the New SBA Rules Can Go In Your Favor.
Commercial or conventional bank loans often require 20-25% downpayment (or more).
But anyway you slice it, if you don’t have those kind of funds (and there are no family members, rich uncles or any generous individuals willing to donate them to you), then the most simple route is to shop in a ballpark where you can afford a 5% downpayment — BEFORE buying a chiropractic practice (or attempting to buy or inquire on that practice).
Location: The final factor is actually one that many chiropractors should consider FIRST and that is the location of the practice. Chiropractors have it great. We can literally set up our business just about anywhere on the planet – especially here in the US. As in real estate, location is important – but maybe not in the way that you think. Sure, having a prominent, easy to access location in a particular town may help increase new patient walk-in’s or drive-by recognition. But most healthy chiropractic practices generate the bulk of their new patients from referrals – who will find your clinic thanks to their friends – regardless of its location.
So in this respect, the most important aspect of location starts with asking yourself a key question of where you want to live before you buy a chiropractic practice – not necessarily where a particular practice is located. Instead of looking at a bunch of classified ads for specific offices for sale, determine what part of the country you want to be in – even better, what state or states you’d like to practice in. Better still, narrow it down to a county or region within the state. Now that you’ve determined WHERE you want to live, you can begin researching the demographics about that particular area and asking even better location-related questions BEFORE you buy a chiropractic practice – no matter where it is!
NEXT STEPS
Stuck on the fence? If you are interested in learning more about whether buying a practice is the right move for you, check out our free resources below.
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