What’s the value of a practice?
By Steven Conway, DC, DACBOH, JD, Esq.

How do I determine if I am paying the right price for a practice?

What’s a practice worth? That is a simple question, but the answer is not always as easy.

The actual value of a practice is a moving target mainly because of market conditions. Most practices start with similar baseline values, but a multitude of factors either enhance or subtract from the final value.

The good news is there are some basic guidelines that will get you in the ballpark.

PRACTICE VALUE

Several formulas are in use, and they tend to tally up a price fairly close to the final number.

A very basic method is to take the last 12 months of collections as the selling price. This would include everything except real estate. It gives a pretty good starting point.

A more inclusive method is to take 80 percent of the last 12 months of collections as the base value. Add only AR (accounts receivable) that are less than 120 days old at full value.

However, if the AR contains a high level of PI (personal injury) or WC (workers’ comp) accounts, this number will likely change, as the 120-day figure may not be realistic. Any long-term PI and WC receivables should have signed liens with an attorney to be considered valuable.

If you decide to use the 120-day figure at 100 percent, understand it represents all of the AR in the deal. The reason for using the less than 120-day figure is lenders dislike older AR amounts.

Equipment and real estate may or may not be included in the final valuation. To determine equipment value you need to use the FMV (fair market value). Work with a local real-estate professional to find the appraised value of the real estate to get your final asking price.

Local equipment dealers can be a good source for necessary information on equipment value.

One final thing to note on valuation is lenders dislike “blue sky.” Many lenders consider patient files as “blue sky,” or wishful thinking. They cannot easily place a value on them, since there is no guarantee patients will stay on with the buyer.

CASH FLOW

To evaluate proper cash flow, request and review at least three years and current year-to-date (YTD) P&L (profit and loss) statements on the practice you are considering purchasing.

You will also need to review the balance sheet. It is highly recommended you obtain the services of a certified public accountant (CPA) or other qualified financial advisor to assist you in evaluating the cash flow. The majority of chiropractic offices are on a cash basis, which makes the review easier, but a trained eye is invaluable in the financial evaluation of a practice.

One point a financial advisor may not review is the comparison of the financial numbers with the actual patient visits or fees. For example: A potential red flag that needs to be reviewed is a very high number for collections when the average weekly patient visit number is low.

The overall cash flow must be high enough to pay the normal monthly obligations, plus the cost of any loans in purchasing the practice.

One last factor to review is expenses the seller may be running through the business, such as car payments or health insurance. If these are items you will not utilize, you can put them back into the positive cash flow as an “add back” to show a more positive picture of the real cash flow available when you are running the practice.

MANAGED-CARE CONTRACTS

Managed-care contracts are often associated directly with the clinic corporation and not the individual DC, so when purchasing a clinic, you may need to purchase the stock in the corporation instead of simply buying the assets (stock purchase vs. an asset purchase). You must make sure the managed-care contracts will transfer or “convey” to the buyer.

ACCOUNTS RECEIVABLES

It is usually best to purchase the AR. The lender may not at first appreciate the value in the AR, but generally AR adds a great deal of continuity to the purchase.

This is because if the seller keeps the AR, he or she will continue to collect fees from the patients and will need access to clinic records until all account receivables are collected.

In an effort to collect the bill, the seller can confuse or even anger the patient, which can have a negative impact on the clinic and the new owner.

Purchasing the AR also gives needed cash flow to the buyer so he or she needs to borrow less operating capital.

FINANCING

Although several different types of financing are available, you will find they fall under two general categories: Owner financing (the seller takes back a mortgage) or cash buy-out (you pay cash or get a loan from a financial institution).

The better of the two, for the purchaser, is the cash buy-out.

To obtain a loan, you have several options available — personal funding, commercial lending institutions, or asking family or friends for a private loan. Most loans are a combination of these, due to a down payment in the case of commercial loans.

You will generally find it easier to obtain a loan if you have been out of school and practicing in a clinic setting for two years before buying a practice.

Local banks are often reluctant to provide funding, but if they do, they often use the U.S. Small Business Administration (SBA) to guarantee the loan.

A number of national lenders that have experience in healthcare industry lending are often more helpful than banks in funding a clinic sale. Because they have more experience in evaluating cash-flow businesses, such as chiropractic clinics, they are more likely to write the loan.

One last thing to mention is to not sweat the small stuff in evaluating a practice.

Don’t trip over pennies on your way to dollars. Paying a “little” too much to get what you really want can pay off in a big way if you are happy with the practice. And, in the long run, it will not make any difference in overall profitability.

Some buyers try to hold out to get the lowest dollar for the practice only to lose the practice and a great opportunity to another buyer who was not so concerned.

It is important to understand that a practice sale should be kept realistic and, when done so, can be a win-win for the buyer and seller. It takes honesty and good communication to make the deal really work out.

Steven Conway, DC, DACBOH, JD, Esq., is a partner in True North Chiropractic Consultants LLC, which provides guidance and ethical solutions to the barriers found in chiropractic practices. He can be contacted by e-mail at chirolaw@aol.com or through the Web site, truenorthchiropracticconsultants.com.

DISCLAIMER: This column is provided for educational purposes only. The accuracy or timeliness of the information presented is not warranted. The information is not presented as legal advice and no attorney-client relationship is established.