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Monday, June 26, 2017

Selling Your Practice: Valuation and Practical Advice

By Mark Crawford

Maybe the decision came easily, or perhaps it took months, or even years. Now it is behind you and congratulations are in order – you are selling your chiropractic practice.

Common reasons for selling a practice are impactful life events such as marriage or divorce, relocation, joining a group practice, changing careers, retirement or even failing in the practice. The last circumstance is nothing to be ashamed of:  A chiropractic practice can be a tough business to run, and business skills and patient care skills are two very different entities. Chiropractors must juggle many business tasks and manage the overhead.

“If you accept insurance, there seem to be constant changes, or at least yearly ones, in many of those contracts and policies,” says Charles A. McDonald, DC, director of chiropractic services for Cancer Treatment Centers of America in Goodyear, Ariz. “For example, a change in chiropractic benefits in an insurance plan in Arizona cut my personal income by literally $10,000 a month. And that was just one insurance company. The situation can be very volatile.” 

Dr. McDonald started thinking about selling his private practice when part-time work he had accepted at a hospital began to grow into a full-time commitment. “I started putting things in motion to give me the option of accepting a full-time position and selling my practice,” he says. He brought in another chiropractor to share the space and the overhead and who later purchased the practice. 

Selling a practice can be a stressful event. Most DCs are so focused on healing patients they don’t have the time for, or the interest in, learning about business valuation. How do you sell a practice? Is it time-consuming? Expensive? Are lawyers required? How do you find the right buyer? How do you determine a fair price? For some chiropractors, this process may seem so daunting it is simply easier and less stressful to put off the decision. The good news is that selling a practice is not as arduous as it may seem.

Determining Value

There are several ways to determine the value of a practice. One approach is compiling an accurate, detailed inventory of all equipment, tables, therapy units, radiology supplies, computers and printers, chairs, paper goods, supplements or products being sold, and any other physical assets. 

“It is an option to use either depreciated value or current market value when placing a value on the inventory; just be consistent,” says Georgia Nab, DC, and wellness chiropractor for Standard Process in Palmyra, Wis., who used this method when putting her practice in Kansas on the market before moving to Wisconsin.

When the inventory is complete, assign a monetary value to each item and if you own the building have a professional appraisal completed. The total of these amounts is the value of the practice. Provide an accurate count of all inactive and active accounts. Active patient files can influence the value or final purchase price of the practice. 

“I provided a three-year spreadsheet for potential buyers that showed exact revenue, expenses and profits,” indicates Dr. Nab. “I also provided a list of accounts receivable and any overdue accounts – this is a negotiable area of the sale of the practice and can influence the final price.”  

Another approach is calculating the value of a practice based on the income generated by the practice. Frank S. Lizzio, DC, and practice acquisition consultant in New York City, relies on the following general appraisal formula to determine practice value: total the last three months of income and multiply that by four to determine expected current annual gross income. “Then multiple this total by 50 to 60 percent to calculate the practice value, which includes the accounts receivable,” he says. 

Dr. McDonald relied on a practice management company to sell his business at 60 percent of the previous combined 12 months’ collections; variables that impacted the final price were accounts receivable and equipment. “Accounts receivable must be analyzed regarding their likelihood of being collected,” he states. “I was advised the number in a sale is only around 25 to 30 percent.”

Other factors to consider when negotiating the final price are rate of growth or expansion of the practice, gross to net ratio (i.e., percentage of gross income spent on office overhead), buyer pool, patient profile, time frame for practice transfer and goodwill.

Outstanding goodwill in the community can add significant value to the final purchase price. “Goodwill generally includes contacts with civic or political clubs, practitioner presence and office location, years in community, engaged and educated patients, attorney and other professional contacts, no office of professional discipline (OPD) or legal difficulties, and a diversified or concentrated patient base,” writes H. William Wolfson, DC, of Commack, N.Y., in an article in DC Practice Insights (November 2013).

Finding a Buyer

Potential buyers may be new DCs who are looking for a ready-made practice, DCs who want to expand into new markets or possibly health care groups that want to integrate chiropractic into their services.

Sellers can place ads in trade journals and magazines, on chiropractic college and chiropractic association websites, and find buyers via social media or through marketing networks.

“Buyers can mail letters of inquiry to established providers in desired practice areas of interest and ask if they are contemplating retiring in the near future or willing to offer a buy-in with transition period,” says Dr. Wolfson.

Dr. Nab did her own research to find a buyer. She obtained a mailing list of active chiropractors from the state of Kansas and sent out hundreds of letters with information about her practice, cost and other details. She also contacted many of the chiropractic colleges and put ads on their websites, advertising her practice.

Another option is hiring a broker or agent. Although they are experienced and can likely wrap up a sale more quickly and with less stress than a DC can, keep in mind the broker will take about 25 to 30 percent of the purchase price as a sales commission. “The client should also request a non-exclusive agreement that allows for self-purchase or sale of a practice,” says Dr. Wolfson. And make sure to have a nondisclosure contract available for potential buyers to sign before showing them the office or any financials.

Total costs should be in the $2,000 to $5,000 range, including legal fees. Although an attorney is not required, it is generally recommended to use one for nondisclosure agreements, non-compete agreements and handling the final paperwork of the sale. Dr. Lizzio recommends putting together a first rough draft of the parameters of the practice acquisition before incurring legal fees for any early negotiations. “When this is done, the buyer and seller can then seek the advice of an attorney to fine-tune the contract,” he states.

Parting Advice

Have a well-thought-out plan in place with well-defined objectives, not just regarding money but also stress management, peace of mind and accountability to the patients being left behind. “Also, don’t be in a hurry to sell if you can help it,” says Dr. McDonald. “Being in a rush hinders value because you have no leverage, and it would interfere with the smooth transition of doctors. This transition should be very important to the buyer as well, if he or she is acquiring the patients.” 

Dr. Lizzio maintains that most sellers do not have a clear exit strategy and have not done enough background work on the sale process to ensure the proper transference of practice assets in a timely fashion. “Although I have only been the buyer of a practice, my consulting experience in the buyer/seller arena has shown me that the seller needs a precise exit strategy, including timing, pricing, terms and a sound understanding of valuation in today’s volatile health care market,” he says.  

A word of caution: The value of your practice will probably seem low, so be prepared. “When you are personally involved in something, it has much more value to you than to anyone else,” says Dr. Nab. “When you build a practice from nothing into a solid and viable business, and then try to put a valuation on it, you often value it more than what it may be worth and more than what someone who is not emotionally involved would be willing to pay for it.”

“I hate to admit this, but the hardest part for me was having to realize and accept the fact that my practice wasn’t worth what I had imagined it should be worth,” adds Dr. McDonald. “I would have hoped for at least two times the annual collections, not 60 percent.”  

Most DCs believe their practice is worth more than it really is and “tend to remember the past best years,” adds Dr. Lizzio. “They are fond of using terms such as the ‘practice has great potential’ or ‘with a little harder work the buyer can double the practice.’ Although these statements may be true, the buyer is purchasing the ‘what is,’ not the ‘what was’ or the ‘what could be.’”

For Dr. Nab, the hardest part by far was saying goodbye to the clients she had known for 11 years.

“Many patients become like family, and leaving them can be very hard,” she says. “For others, as a doctor of chiropractic you are also their primary care physician and the only doctor they see. It has been nearly six years since I left Wichita and I still hear from some patients that I need to come back because they have not found anyone to fill my shoes. In short, the hardest part is feeling that you are losing some amazing relationships.”

Mark Crawford is a freelance writer.

 

 

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