As I mentioned last month, chiropractic practices generally sell for
less than the fair market value of a comparable small business, all
other things being equal. It’s largely due to supply and demand.
As I mentioned last month, chiropractic practices generally sell for less than the fair market value of a comparable small business, all other things being equal. It’s largely due to supply and demand. This begged the question: are there legitimate ways to increase the value of a chiropractic practice so that buyers would be willing to pay at least fair market value, (i.e., 25 to 30 per cent more than the historical averages for chiropractic practices)? I suggested a good place to start would be improving your Internet (local) presence, and then went on to talk about the DC refreshing his/her own approach, staffing issues and developing and maintaining good office systems. I’d now like to discuss other areas where DCs can focus efforts to improve the value of their practices, and then outline various methods that are employed to valuate a chiropractic practice.
OFFSETTING OVERHEAD
Have you ever thought of how little time, compared to other small businesses, chiropractic offices are open for business, and, furthermore, actually attending patients?
A straw poll on hours of operation from among our clients showed an average of between 22 and 27 hours a week that the practice was open and the DC was seeing patients. That means, for most of these people, the office is sitting idle for approximately 60 hours a week! A fully equipped chiropractic office can potentially sit idle up to almost three times as long as it is active.
I wonder how that 60 hours a week could be monetized? It seems a shame to see it empty all that time, generating no revenue. Yet, much of the office overhead is still there whether it’s busy or not.
Recently, I was talking to a group of Life University students who were apprehensive about going into practice because of the high cost of startup, yet found the idea of being (poorly) paid associates unattractive. It doesn’t tax one’s creativity to see there exists a potential for the new grads to lease space during the downtime of our offices, thus providing a win-win situation: the new grad has potential for building up a patient base without shelling out immediately upon graduation, while the DC already in that practice can monetize his/her downtime.
Furthermore, as a practice appraiser I can tell you a two- or three-doctor practice, all else being equal, holds much more value than that of a solo doc. The other DC should be an independent contractor (IC) or a sublessee (SL), not an employee. However, in order to mentor (and monitor) an IC or SL, I suggest you hold joint staff meetings in most cases – unless the IC really has his/her act together.
Some ICs are quite solitary, preferring exclusivity to “their” days and hours; others amicably mix it up. There are several variations on the theme that you and your ICs can work out.
As a profession, we seem to treat our offices as sanctified ground, preferring to have them unsullied, rather than monetize the downtime. But think about it. There are “greenhorns” out there looking for deals. These collaborations often lead to very convenient arrangements for locums and make your practice much more attractive to potential buyers, to say nothing of the passive income from your “tenant” they garner while you are still practising.
MARKETING
The last topic I wish to touch on, before moving to valuation methods, is marketing. Much information can be found on this topic, so I won’t be spending too much time on details of various techniques and approaches.
My experience as a coach has demonstrated that most of my clients know a lot more than they actually do. In fact, most of us know better than we do. We can delve into the psychology behind this some other time. But, the reality is most of us simply need to do more, rather than just know more. As one of my mentors was fond of telling me, “knowing the way is not going the way.”
There are many effective marketing techniques that require more attention than they do money. Not that I suggest you cut back on any proven marketing – far from it. But, if you have been successful with some strategies and tactics, ramp them up! This is not a time to try unproven marketing plans, however – repeat what has worked, especially if it has worked for you!
CHIROPRACTIC PRACTICE APPRAISAL
When?
- A chiropractor would want his/her practice appraised for:
- Practice sale or purchase
- Buy-sell agreements, partner buyout
- Taking on a partner
- Succession and estate planning
- Legal disputes and taxation
- Raising capital
- Marital dissolution
- Calculating personal net worth
How?
As I mentioned last time, to estimate the value of a chiropractic practice, you may use a number of valuation multiples derived from recent sales of similar practices to come up with a “value range” for your practice. These multiples are ratios that relate the actual selling prices to the practice’s financial performance. Usually, the following valuation multiples are used to value
a practice:
- Selling price to net annual sales
- Price to gross profit
- Price to net income
- Price to earning before interest and taxes (EBIT)
- Price to EBIT and earning before interest, taxes, depreciation and amortization (EBITDA)
- Price to total practice assets
- Price to owner’s equity.
A practice may be valuated based on:
- Sales of similar practices – This valuation gives you the valuation multiples for similar chiropractic practices. Each valuation multiple is based on an in-depth analysis of recent chiropractic practice activity, as well as the (chiropractic-sales) experience of the valuator.
- Practice earning power – The Multiple of Discretionary Earnings method is especially well suited for valuing chiropractic professional practices. This method provides a highly consistent way of calculating the practice value based on its earnings and a set of financial and operational performance factors.
- Practice assets – This includes hard assets (equipment, fixtures, etc.) and “goodwill.” Goodwill has been extensively defined in a previous issue of Canadian Chiropractor magazine, (Manning, Lloyd C., October 2008, page 16), but basically represents the assumption that the patients you had will return to see the DC who buys your practice depending upon the rapport you have built with these patients, the durability your practice has exhibited as well as aspects of its location.
OTHER PRACTICE VALUATION METHODS
Capitalized Excess Earnings method
A well-conducted chiropractic practice appraisal usually relies on several business valuation methods. Since chiropractic clinics can build up various levels of “goodwill”, the Capitalized Excess Earnings valuation method is a frequent single choice. It is an income-valuation approach that determines the value of a practice by looking at the current benefit of realizing a cash flow now rather than in the future, and is effective when that cash flow is very predictable.
Practice goodwill valuation in divorce cases
Practice goodwill valuation in divorce cases is typical in cases of marital dissolution in those jurisdictions that treat professional practice goodwill as part of the marital estate. Valuations may have to divide the goodwill into the personal (“celebrity”) and institutional parts, based on the case law in your jurisdiction regarding the distribution of
goodwill assets.
Direct capitalization methods
Direct capitalization methods – for example, the Multiple of Discretionary Earnings valuation method – are another good choice for the valuation of privately owned chiropractic practices. Such methods provide a highly consistent way of calculating the practice value based on its earnings and a set of financial and operational performance factors.
As you can see, valuating a practice really boils down to placing a value on the elusive, intangible term “goodwill” because putting a value on anything else, (hard assets, worth of similar practices, etc.) is relatively easy. This demonstrates how appraising a practice hinges on the experience and savvy of the valuator – anything else would be a sort
of guesswork.
This goodwill will, largely, be built up by you, any SLs you take on, and your staff over the years that your practice is open. Equally clear, then, should be the fact that every day you are in your office can make a difference for you, not just in the short term, but also when you’re ready to sell your practice and move on.
Dr. John Whitney graduated from CMCC in 1957 and practised in Guelph for 30 years. He has also been a practice management consultant and practice appraisal specialist for over 20 years. Dr. Whitney has trained over 5,000 new graduates to successfully enter practice in Canada and the U.S.
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