When it comes to buying or selling a chiropractic practice, it’s important to consider its price which is determined by both the marketplace and its value on paper.
When looking at the value of a chiropractic practice specifically, the single largest contributor to value is typically an intangible asset called “goodwill.” Basically, what this means for the buyer is that the track record of a long-standing practice has value that a brand-new practice just starting out has not yet achieved. In selling the business, the owner is essentially transferring that goodwill to the buyer so that the buyer can not only assume the patient relationships in place of the owner, but inherit the financial momentum of the business as well.
While this makes goodwill sound like a difficult thing to put a number on, the fact is that a chiropractic practice is an entity, like many other businesses, that has national market averages for practice performance and, to a degree, for business sales as well.
For example, it is often said that the national average for the price of a chiropractic practice is approximately around 60-80% of the gross collections of the business. This is a “ballpark” formula that is based on past sales and what is “typical” for the chiropractic profession. However, it can be very inaccurate.
Such a percentage formula is attempting to calculate the value of a chiropractic business and, as such, it attempts to show some market averages and put a number to what a business is worth. Of course, ballpark formulas can vary widely depending on the trend of the business (if it’s going up, the practice may command the higher end of that ballpark figure; and if going down, perhaps towards the lower end). Perhaps as importantly, a ballpark formula like this also ignores overhead, equipment, and a number of other factors that do affect business value.
Don’t Rely on a Single Ballpark Formula
In fact, smart sellers AND savvy buyers both know that it is dangerous to rely upon a single ballpark formula to discover the value of a chiropractic practice. Both buyers and sellers also need know that it’s not all about the location or the number of patients within the practice that matters. Those can contribute to the value, but in reality, only a practice with a great value and a fair price will deliver measurable results. Thus, it’s important to be able to calculate the value of a chiropractic practice accurately to determine a fair price.
What Drives Value in a Chiropractic Practice?
Done properly, chiropractic practice value is determined by a number of factors. It’s what a practice is worth to someone, given their wants, needs, purchasing power, use, supply and/or demand.
The value of intangibles that constitute goodwill include:
- Practice performance (and trends)
- Location (both locally and nationally)
- Use of seller’s name
- Lease terms
- Covenant not to compete
- Practice reputation
- Patient lists
- Patient care contracts
- Insurance providership
- Employee contracts
- Web presence
- And more…
Valuing a Chiropractic Practice
An evaluation of a chiropractic practice that includes this information is typically provided in a report. Often totals are calculated over a three-year period to provide
a broader snapshot of a practice’s true value and to satisfy banking or financing requirements.
An important factor in the valuation of a practice is why and how value is achieved. Thus, a comprehensive valuation report would contain background information and documentation so that anyone reviewing it could clearly understand and confirm the data and which formulas were used (or not used) to determine the value of a chiropractic practice.
In general, this means that to properly value a chiropractic practice, it’s not a do-it-yourself project that relies upon a gross ballpark formula.
Sellers should be prepared that if they only use such a formula to determine value, their pricing structure may be up for some serious and significant negotiation. Buyers should be aware that a single gross ballpark formula can vary as much as 20% or more from other standard valuation formulas. Consequently, this can mean that the practice price can be off by five or six figures.
Differing Opinions on the Value of a Chiropractic Practice
Another thing to keep in mind is the fact that business valuation isn’t an exact science – and the value of a chiropractic practice is no exception to this rule.
Even highly knowledgeable, skilled appraisers can have vastly different opinions on the value of a practice. However, in every valuation, there should be a clear understanding of the resources used and how the price was determined.
Keeping the “Good” in Goodwill
One item to remember. If goodwill makes up the bulk of what you are buying or selling in a chiropractic sale, it’s very important to keep it “good.”
In many ways, a small service-based business like a chiropractic practice relies on the reputation of the clinic in the community and the efforts of the doctor and the staff to maintain a positive presence…before, during and after the transition.
If the buyer repeatedly beats down the seller in an effort to score a bargain on the asking price, there’s a chance that they jeopardize the goodwill in the process in the basic sense that the Seller won’t feel very “good” about the sale or the transition. And while they may attempt to keep that feeling quiet, all Sellers are human and their humanity can sometimes show behind their smile, a look, a pause or even the tone of voice that they use when speaking about the sale or the new doctor.
The risk of damaging the goodwill equally applies to the other side. A selling doctor who tries to make a quick sale in order to hide something, artificially inflate elements that contribute to the value or even to put the buyer at a disadvantage with a demanding asking price also can destroy goodwill in the process. After all, that Buyer is going to be seeing the patients either stressed and upset over the sale or happy to be the new owner and successor.
In short, regardless of which side of the fence you are on, it makes sense to go for a “win-win” transition or chiropractic practice sale – which typically means getting some objective and outside expertise to help you get there.
If you are considering either of these routes – selling a chiropractic practice or buying a chiropractic business, I’d encourage you to reach out and get some assistance on one of the largest or most significant transactions you will ever make.
For practice owners who may be looking at selling a chiropractic practice, consider our Sell, Switch or Slow Down Webinar: How to Maximize The Value of Your Chiropractic Practice Sale or Transition. Over 6000 chiropractors have taken this webinar to help them learn or launch their transition or chiropractic practice sale plans — and I’d love to help you get there too.
For those who may be considering buying a practice – or who just aren’t sure, check out our FREE WEBINAR Buy, Build or Break Up: How to Make Your Next & Best Career Move to Purchase a Chiropractic Practice, Start One from Scratch or Get a New Associate Job.
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