Are you planning to sell a chiropractic practice, transition to your associate or retire from chiropractic this year? Or next? Or even in the next 2-3 years?
Today we’ll discuss some of the latest facts, trends and rumors about chiropractic practice sales, transitions and exit strategies that will affect your business this year and beyond.
Myths About Chiropractic Practice Sales and Transitions
I often hear misinformed statements from potential sellers and buyers that don’t always coincide with current market trends. From our experience helping chiropractors transition, here are a few of these rumors that you can put to rest:
Chiropractic students are potential buyers for your practice. In general, if you are planning to sell a chiropractic practice, students are not going to be the ideal buyers unless they (or their family) have a boat load of cash to buy a business OR unless you are willing to finance the sale 100%. Due to the fact that the entire chiropractic education amounts to approximately 1 week of “real world” experience in a typical chiropractic practice, the vast majority of new grads are not ready to take on the challenge of business ownership and banks know this. Furthermore, most lenders that offer financing for chiropractic practice purchases are going to use the SBA to back their funding and the SBA generally requires two years of work experience in the profession in order to qualify for its lending terms. If you have some MAJOR reason to lend where the bank won’t, perhaps you can consider this student a rare exception. But for most, you would do well to get this option out of your head.
“Banks are not lending to practice buyers.” Fortunately, this is a big myth (and mistake if you believe it!). In fact, over the last several years, banks have made several moves to improve the chances for your buyers to get funded (and thus, making it easier for you to sell a chiropractic practice as well). For example, in 2018, the SBA changed the lending rules which make now a great time to buy a chiropractic practice with as low as a 5% downpayment on the purchase price. For many buyers, this completely changes the answer to one of their biggest questions, namely: What price chiropractic practice can I afford to buy? (see link for full article on this topic).
My New Associate Will Buy My Practice. The notion that a retiring doctor will find a new grad to join his practice as an associate, accept his mentoring, and buy the practice at a later date seems to happen just often enough to perpetuate the myth of this unlikely exit strategy. Anecdotal evidence seems to put the success rate of those scenarios spontaneously occurring to be about 5% of the time and do-it-yourself deals (with all the owner’s best intentions) may succeed 10-15% of the time. The reasons for failure are too numerous for this conversation. However, it is absolutely possible that you can create a properly structured associate agreement that will lead to ownership. The key here is that you intentionally structure this arrangement so that you can beat the previous figures which obviously fails way more than it succeeds. To give you some hope and encouragement on how well this can work: a properly structured associate arrangement can turn those figures around and succeed 85% of the time.
My Practice Sale Will Fully Fund My Retirement. I’m not sure whether we can classify this as a myth for everyone, but it definitely is for some chiropractors. Timing is a key factor when you sell a chiropractic practice and timing will dictate how much a buyer will pay to purchase your practice. Although market factors are certainly important, here the performance of your practice is probably the most important single item that will directly impact value. If your practice is sharply declining, the demands of the market, favorable lending conditions and other positive aspects of the market won’t significantly increase its value. So, it’s critical that you time your sale BEFORE the practice goes into a tailspin.
Realities of Selling Your Chiropractic Practice This Year (And Every Year)
Your practice does not have unlimited potential for a buyer “willing to put in a little effort.” Often times, when a seller advertises that the practice has “unlimited potential” for the buyer willing to put in a little effort (or sweat equity), this translates to the fact that you have let the practice deteriorate over the last several years. While I’m sure the practice has the potential to be profitable again, there are two facts standing in the way of your sale: buyers rarely purchase a practice solely on potential and lenders do not finance “potential.” Buyers need to be able to move in and take over the seller’s cash flow immediately. And they need to pay their student loan debt which may be in the $150-200K range. Oh, yes – and your practice needs to have enough revenue for the buyer to pay the overhead, taxes, financing loan and still have money left over for living expenses. Practices that consistently have been in decline make that tough to accomplish and even tougher to sell at a price that includes the “potential” of what could happen on a sunny day if everything lines up as you say it will.
Your lease may play a bigger role in your success than you think. You may be surprised to find that your nice friendly landlord of your building suddenly transforms into a miniature tyrant once you have a potential buyer in the deal. This issue frequently becomes a major problem in a transition. If space costs go up, cash flow goes down and your sales price may need to be adjusted accordingly. While you are a proven tenant, the buyer is not and there is no value to removing you from the lease. If you have a “no assignment clause” (which you probably do), you may be in for some tough negotiations. Plan ahead so this doesn’t sink your ship.
Some Sellers (But Not All) Are At A Slight Disadvantage. Sellers in some areas may be at a slight disadvantage in terms of attracting prospects to their practice sale. This has little to do with how valuable or profitable their practice is and a lot to do with its location. Put simply, we categorize practice locations into three areas and they all roughly parallel the nationwide real estate market at large: Top Tier (these are the “hot spots” in the country, where many people are moving and want to live or vacation destinations where people dream of living). Bottom Tier locations (in states or areas where more people are leaving than moving in). And Mid Tier locations (basically, everywhere else, or areas that are fairly neutral).
So does this mean if you are in a Bottom Tier location, you won’t sell your practice? Absolutely not! What is does mean is that, statistically speaking, you will have fewer buyers interested and looking at your opportunity than someone in a Top Tier location.
Similarly, a Top Tier location doesn’t guarantee that you will find a buyer nor does it mean that you will sell for top dollar. The value your practice commands is more a factor of the profits, not the number of people looking. And just because a Top Tier practice may have more lookers certainly does not mean that all those lookers are interested and able buyers.
Here is the good news: when you sell a chiropractic practice, it is not the same as selling your house. Location is not everything. Buyers choose less than attractive locations because that’s where they want to live or their family lives or for a number of reasons that don’t always add up on paper. All is not lost if you are on the selling side in a Mid or Bottom Tier location — but it would be prudent to plan your sale sooner, than later, since it may take longer to find that buyer.
Also, Sellers who have a thriving practice may find themselves in a stronger position because of the comparatively weak market. After all, if a Buyer faces the choice of 99 bargain-priced practices that are going to take a lot of effort to turn around, the 1 practice that is thriving may suddenly have added appeal, despite the bigger price tag. And strong practices can be everywhere, even in less than desirable locations.
Chiropractic Practice Transition Options to Consider Now
Despite these myths and realities, there are a number of additional options that many chiropractors fail to consider but are increasingly attractive, given our present marketplace. For example, most chiropractors believe that the “traditional practice sale” — whereby they sell their practice and walk away – is their only option.
While this is the route that many chiropractors will choose, it may not be the best transition option for all situations. Here are a few other exit strategies that you should consider:
- Sell & Switch – This a simple arrangement that has massive win-win potential where the Owner sells to the Buyer and then turns around to Switch roles and work for the Buyer as their Employee. The Sell & Switch has become our most popular transition strategy over the last few years and it’s easy to see why. With the Owner staying on board for a defined time period, the Buyer’s fears of patients disappearing after the sale is eliminated. Furthermore, if the Buyer is uncertain about practice management, procedures, employee issues, etc – all of these challenges can be overcome with the assistance of the former owner acting as mentor or coach, while they are employed by the Buyer. For the Owner, this also helps alleviate their transition fears of leaving the practice and allows them to slow down rather than abruptly stop practice.
- Partnership – two existing docs merge their practice to slow down, enjoy lower overhead and sustainable profitability
- Associate Buy In or Buy-Out – an immediate sale may not be possible but a clearly structured timed sale (buy-in or buy-out) can still achieve goals for both the owner and the associate.
- Hybrid Partnership – for larger practices and/or for owners not ready to fully retire, this may be a great option to sell a portion of the practice and actually gain more for your total sale when all is said and done!
One Final Reality – Now and in the Future
No one would take golf lessons from someone who has been on the links once, and yet I am surprised by chiropractors who will take transition advice from friends who have never sold a chiropractic practice or who did it once 20 years ago. There are certainly way too many landmines that can show up during the sale process that are not addressed by your well-intentioned friend’s advice. Issues such as insurance contracts, associate doctor agreements, equipment breakdowns, lender requirements, and even the tax consequences of a transition can all serve to make things interesting.
Equally dangerous is the approach that some practice brokers take in convincing you to sell. A traditional sale may be the best route to your retirement – or it can be a costly one. Unfortunately, if their compensation is strictly based on commission from your sale, that’s the recommendation you are going to get.
Instead, a competent chiropractic transition consultant or chiropractic practice broker may better serve your needs.
A transition consultant is one who understands the entire transaction, the various types of transitions, contractual matters, the operational issues of running a chiropractic practice, and the need to have the relationships of the buyer, seller, staff, and patients intact after the deal is done. The transition consultant will help the chiropractor identify various aspects of his/her transition. Questions needing answers include the doctor’s financial ability to retire and their personal transition goals. For example, how long do they wish to stay on as an associate and/or remain available to aid in the transition process? What is the chiropractor’s preferred timetable? Are there any preliminary steps required to enhance the value of your chiropractic practice? Which method of transition has the greatest chance of successful completion?
Our services to help you sell a chiropractic practice are designed to do exactly that. We focus on your goals first and help you either find a buyer for your practice (broker route) or help you navigate the sale or transition with your existing buyer or associate (consultant route).
If a traditional sale is the best option for you, we can help sell your chiropractic practice. If you are uncertain if that is the best route, or if you would like to pursue one of the “non-traditional” options, we can assist you in reaching your goals.
Hopefully, you have found this small dose of reality helpful in considering your own exit strategy. If you are just getting started thinking about transitioning your practice, you may want to check out our FREE WEBINAR — Exit Essentials: 10 Factors That Affect the Value of Your Chiropractic Practice Sale or Transition