Chiropractors who are looking to sell or transition their practice often start by asking “How much is it worth?” It’s a great question – but the better answer often depends on WHO this question is posed to.
The question and the conversation typically goes like this:
I am thinking about selling my chiropractic practice and was wondering what it is worth. My chiropractor friend (who practices in a different state) just sold his for $[insert amount] and his numbers were pretty similar to mine. So I’m thinking that’s about what mine is worth. Is that true?
Alternately, the discussion sometimes sounds like:
I have an interested buyer. The chiropractor down the street just sold her practice for $[insert amount] and my practice is pretty similar in terms of size and numbers. So my asking price to the buyer is the same as she got. Can you help me with a contract to seal the deal?
And occasionally, we get a “seasoned” doc who has bought or sold a practice before who says:
When I bought this practice in 1982, I paid $[insert number] which was ___% of the collections. That seemed like it worked out and so I figure that’s what I should ask for my practice.
Four Reasons For Faulty Logic When Pricing Your Practice
The owner’s intentions in all of the above situations are good. But the logic is lacking in each of these scenarios, for several reasons. Here’s why:
Chiropractic Sale Comps Don’t Always Accurately Compare — In real estate terms, the concept of finding a similar size house in the same area and looking at what it sold for is known as a comparable valuation or market appraisal, sometimes abbreviated to “comps.” While this may be a valid method of assessing the value of real estate, it’s horribly inaccurate for chiropractic practices. But in each case above, that’s exactly what the owner was trying to do. The reality of selling your practice is that your business may not be in the same location as your buddy. If your chiropractic friend practices in a different state entirely, the difference can be huge between payer panels, reimbursement rates, utilization of chiropractic services and market saturation rate of how many chiropractors are in the area. Even if you are comparing a local practice, you have different local market dynamics including different rates for rent, different traffic count, different building quality – all of which can affect the practice value.
Overhead Matters – beyond just location, you have a huge variable factor in the issue of overhead. Even if your chiropractic friend collected the exact same amount of money as you down to the dime, but your expenses are different, then you have a different degree of profit margin and/or cash flow. And guess what, your practice value will be different! On the surface, it may seem like you can compare the two practices, but dive a little deeper and realize that a bank is not going to lend the same amount of money to a practice collecting $500,000 with a 64% overhead as it is to a practice collecting $500,000 with only a 32% overhead. The latter practice is twice as profitable and accordingly, worth more!
The Equipment Factor – going a little further into the science of valuation, don’t forget your equipment. Again, your chiropractic colleague who produced a similar amount of money as you and who just sold their practice for $400,000 doesn’t mean that you will sell your chiropractic practice in the same ballpark. What if they had digital x-ray, a $15,000 EMR system, a $40,000 laser and 4 brand new adjusting tables in their office while you have the same equipment you inherited with the practice in 1994, no EMR, no x-ray at all and a penlight (but not a laser)? Don’t you think there should be some value attributed to the equipment as part of the assets that are sold with the business? The answer, of course, is yes and is part of the reason why (again) you can’t easily compare your practice to your colleagues.
Accounts Receivable Can Add Value Too – finally, don’t neglect the fact that your A/R can add value to the practice as well. While the process of assigning value to Accounts Receivable isn’t as straightforward as we would like (for example: $100,000 of A/R does NOT equal $100,000 in increased value), the point is that your A/R is probably worth something! And that’s another asset you didn’t enter into the equation when you crudely compared your practice to the one down the street.
Practice Performance Trends Tell a Lot — The recent revenue & profit trends also can significantly affect your value. While most banks look at the past three years when considering a loan and the worth of your practice, some lenders “weight” recent performance more heavily. For example, if your practice collected $500k, then $400k then most recently, $300k, your three year collections average is $400k. However, the performance trend may impact the value (negatively) more than a practice that has steadily collected $400k over the last three years without a declining trend. The same can go for profit trends.
But Wait…There’s More!
At the risk of sounding like an infomercial pitchman, there is more to your practice than even these big components.
In fact, although the ideas above can tangibly be calculated into the value of your chiropractic practice, there are other factors at work as well. And in some cases, these factors can influence the amount of money you will receive for your chiropractic practice even more!
These are things such as the timing of your chiropractic practice sale, the transition options you will choose, the financing route, the makeup of your practice and many others.
Unfortunately, most chiropractors are understandably (but dangerously) ignorant about the total picture of what it takes to maximize the value of their chiropractic practice sale or transition.
Hopefully, this brief article can help steer you away from making the all-too-common error of hasty ballpark assessment of your practice value so that you don’t sell yourself and your life’s work short!
And if you’d like to learn even more about the concept of selling or transitioning your chiropractic practice, check out our FREE WEBINAR: Exit Essentials: 10 Factors That Affect the Value of Your Chiropractic Practice Sale or Transition. It’s a long title, but the webinar is worth it!