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Issue 9 - July2004

Buying your first practice?
Use this road map to find opportunities and avoid pitfalls
By Matthew A. Parker

Today’s recently licensed chiropractic professional is faced with several choices of career path: start a new office, work for someone else, buy into an existing practice as a partner or buy out an existing practice completely. You will find risks and rewards associated with each.

If you decide buying a practice is the way to go, you'll want to consider the same issues that loan underwriters think about.

Buying out an existing doctor’s practice offers many of the rewards associated with starting a practice, but with fewer drawbacks. If properly pursued, a doctor with some experience (lenders generally require a minimum of two years’ licensure and practical experience) can acquire an existing practice (large or small), experience instant cash flow (instead of the slow growth typical of a start-up) and improve on the typically low salaries paid to associate DCs, while avoiding the unknowns of finding a compatible business partner.

So, how do you buy a practice?

• Decide on a location. First you need to know where you want to be. The business environment or acceptance of the profession varies by state. Some areas have strong acceptance but a lot of competition. This sometimes means lower practice prices, which — if you are confident you can generate business in a competitive environment — may be an advantage.

Managed care and insurance reimbursement, personal injury and workers’ compensation issues also vary by state. The plans in some areas pay less, but may have strong demographics, resulting in more cash patients, which is usually a desirable type of office.

Research is key. A knowledgeable practice broker or consultant may provide advice, but the final decision is up to the doctor, so it pays to do some homework.

• Find out why the practice is available. Why do chiropractors sell their practices? The reasons vary: Many retire; some are unfortunately disabled and are not or soon no longer will be able to practice; others just want to relocate or get into other businesses.

If a doctor whose practice you are considering purchasing wants to get into another business, a huge caution flag should come up in front of you.

The buying doctor needs to be assured that the seller will not later renege, either deliberately or because their “other plans” did not work out. The buyer may find his seller opening up a new office nearby and nobody wants to have to enforce a non-compete agreement. So it is best to be confident that this scenario will not be the case.

• Examine the practice. After determining why the seller is leaving, examine the practice from a professional standpoint. Understand the modalities offered and become comfortable that you can continue them without significant conflicts.

The doctors’ own demographics can come into play, such as a man buying a woman’s practice, sexual orientation, regional personalities (when relocating) or even religious orientation. Though the parties involved may have no conflicts here, the patients may be a different story, so you cannot ignore this aspect.

Note: I do not recommend buying a practice with the intention of remaking it into your own image, unless you buy the practice at a deep discount, with little downside, or unless the changes you plan are for several years down the road. Completely remaking a practice from the onset can lead to disaster.

A critical issue is the buyer’s ability to match the seller’s production and collections. In practices reliant on insurance and managed care, find out if you can join these plans. For personal injury practices where attorney referrals and litigation cases are dominant, ask if the attorneys will continue the referrals and find out if any possible legal and/or ethical ramifications of those relationships exist.

Workers’ compensation practices present another issue to explore: Is the state likely to make large-scale changes that will affect the cash flow of such a practice? Finally, the relationship between patient visits and revenues collected should be examined to be sure the owner is not billing multiple companies for the same claims (usually resulting in lawsuits, bankruptcies and loan defaults).

So, after checking all the broker listings, publications and Web sites and you have found a suitable practice, how do you buy it? Before you call a professional appraiser, you may be able to ballpark the value yourself for initial discussions. How you do estimate value?

• Rule of thumb valuation. A rule of thumb is that most chiropractic practices sell for between 60 percent to 80 percent of gross revenues, without including accounts receivable (more when included).

Exceptions occur, such as when an associate DC buys the employer’s practice. In this case, the price tends to be higher due to lower patient attrition.

• Price-to-net cash flow. Since overhead matters, a price-to-net cash flow benchmark is two times net. Many sell for less than this, some for more, if value is boosted by other characteristics.

When you are ready to negotiate, getting an appraisal is wise. A number of professionals are available to evaluate practices. Many are practice brokers and consultants. They can be found in chiropractic publications and on Web sites.

With value established and a price negotiated, how do you finance the purchase?

Unless you have cash lying around or have backing from family or friends, the actual purchase involves debt financing (multi-million dollar purchases may be considered by venture capitalists, but this is rare).

• Seller financing. One option is to finance through the seller, if the seller is willing to hold the note. This could be a good option, as long as you are not worried about the seller looking over your shoulder to manage your business or about refinancing a balloon note in the near future.

Sellers are often willing to provide financing because of tax advantages. These tax advantages allow attractive terms, but a seller often requires a large down payment, a disadvantage to a new practitioner.

• Sale with lease-back.Another option is a combination of sale with a lease-back of equipment and a working capital loan, both provided by a leasing company. This type of financing is usually expensive and difficult to obtain. Some leasing companies have instituted “practice acquisition” loans into their product line, but because of past history of defaults by chiropractors, most have either eliminated or greatly curtailed chiropractic lending.

• Banks. Local banks may finance a purchase, usually requiring a 20 percent to 30 percent down payment and finance for a short term (about five years usually) or with a balloon note.

However, many banks have had the same experience of leasing companies and may avoid lending to a chiropractor with whom they are unfamiliar. Also, banks have collateral requirements that impair their ability to lend, even when willing.

• SBA loans.Currently one of the best options for a chiropractor to finance the purchase of a practice is an SBA 7(a) loan, guaranteed by the U.S. Small Business Administration. This type of loan has the some of the lowest rates and longest terms (10 years) of almost any program, resulting in the lowest payments, and has no prepayment penalty except for real estate loans not discussed here.

SBA Express loans also may be available, with a slightly higher rate and shorter term but usually with more limitations than 7(a).

Banks may offer the 7(a) program for other businesses, but the unique nature of chiropractic practices often gets in the way. Or the bank may not be sufficiently active in the program for the right kind of underwriting.

Preferred Lending Program lenders (PLP) can underwrite the file in-house and not get credit approval from the SBA, thus increasing chances of success and minimizing closing time. Certified, or CLP lenders, have their loans reviewed by local SBA district offices that may or may not be interested in making a chiropractic loan or one not fully supported by collateral — and all of these loans are under-collateralized.

What you need is an SBA PLP lender that accepts chiropractors and does not require a huge down payment. If you look in the right places, you can find financing with 10 percent down, plus financed working capital and closing costs, so you have cash in the bank after the down payment. The cash can come from savings, family gift or your own home equity (in most cases). Sometimes if a buyer already works in the practice, a bonus from the seller may also be used, again case by case.

And finally, look for a practice broker and a lender that both have a reliable history of working successfully with chiropractors. This will result in a much more pleasant buying experience. u

Matthew Parker is vice president-commercial finance for Coffman Capital Inc. located in Oldsmar, Fla. Coffman Capital offers practice financing to all types of physicians nationwide. He may be contacted at 877-661-8069 ext 103, or by e-mail at Coffman Capital’s website is

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