What is a fair purchase price?
By Deborah Green, Esq.

I want to buy a chiropractic practice. How do I determine a fair price?

The first thing you must do is hire an accountant who is familiar with healthcare practices. Have your accountant contact the seller’s accountant and get all relevant documentation.

Do not rely on verbal representations. If the seller tells you that the records are inaccurate because he does not report cash income, take that as a warning that the seller has no compunctions about committing fraud.

After you have obtained the appropriate records, apply a valuation method. Two of the many methods used for determining a fair price for the sale of a chiropractic practice are the income approach and the market approach.

The income approach either capitalizes cash flow or current earnings or discounts future earnings or cash flow to determine the present value of the anticipated future earnings of the practice. The income approach uses several different methods. Discuss the merits of each with your accountant.

The capitalized return method converts a current string of income into a standard of value. The capitalization rate is a divisor or a multiplier that is used to compute the present worth of a single-period benefit stream. The single-period benefit stream is the net earnings or net cash flow that the practice is expected to generate in the future.

The discounted future return method discounts a future stream of income to determine its present value. The discount rate is the rate of return (current income plus capital appreciation) you can expect to receive from your investment in the practice. The discount rate determines the factors used to determine the present value of multiple benefit periods.

The market approach assumes that the value of a practice can be determined by the sales price of similar practices in your community. For instance, if similar practices in your area sold for 125 percent of gross receipts or two times net earnings, such a formula would help place a value on your practice.

I have not named the cost approach as a viable method of placing a value on the practice. The cost approach places a value on the specific hard assets of the practice and does not address the practice’s earning ability. This approach generally should not be used in valuing a professional practice.

Deborah Green is admitted to practice law in New York and Florida. If you have any questions concerning legal healthcare issues, please e-mail her at healthattorney@aol.com or fax her at 954-971-3787.

DISCLAIMER This column is provided for educational purposes only. The accuracy or timeliness of the information presented is not warranted. The information presented is not as legal advice with respect to any matter and that no attorney-client relationship is hereby established.