Chiropractic practice sales have been booming for years. While many of these purchases are from new owner-operators, investors are increasingly active, buying practices they will only manage, typically from afar.
The chiropractic market, once dominated by solo entrepreneurs and chiropractic-specific groups, is now seeing larger institutional buyers entering the space. This shift mirrors trends in the dental industry, where experts report 35% of practices have been bought and consolidated under corporate ownership. Projections suggest this will rise to 60-70% within the next five years.1
There are several different types of investors in the market for chiropractic in today’s market.
- Private equity (PE) firms typically focus on buying larger, mature clinic groups, as they need a significant profit to fund the leadership board they put into place to oversee the purchased businesses. They will almost always partner with the existing owner to ensure that they keep the chiropractic and regional knowledge in the company.
- Incubator programs, a type of private equity, train business executives to lead new ventures formed by acquiring existing businesses, with PE support in funding and mentorship. This model allows for acquiring smaller businesses by sharing the costs of advisory resources across multiple organizations.
- Venture capital (VC) firms are another newer player in chiropractic. VC firms are interested in being disruptors; they look for industries with foundational challenges and inefficiencies and focus on building a better model that can revolutionize the space. VC firms brought us Uber and Airbnb, and VC firms have taken an interest in healthcare overall, and now chiropractic.
- Family offices manage high-net-worth family wealth with a long-term focus, prioritizing stability and legacy over quick resale. Being acquired by a family office can mean avoiding some of the pressured growth timelines typical of PE and VC institutional buyers.
While these institutional buyers have different structures, their models remain similar. Typically, each group has a team of seasoned business executives who have built and expanded huge companies. They leverage their expertise to grow the practice, improve operations, reduce expenses and build a group by acquiring more practices. This process typically has the goal of selling the larger group of practices down the road at a much higher price point.
How institutional ownership will impact all chiropractic clinics
Institutional ownership is already beginning to impact DCs, and as investor presence grows, it will increasingly reshape the chiropractic industry. Based on outcomes in other industries, here are some of the major changes to expect:
- Associate availability. A focus on aggressive growth requires more DCs. This increased demand strains the associate labor market, pushing wages higher and making it difficult for independent clinics to compete for talent. This will be a key challenge in many doctors’ retirement strategies.
- Practice availability. Investor acquisitions reduce the practices available for purchase, limiting opportunities for DCs.
- Limited funding for DC buyers. Rising valuations will give selling DCs more options but may push acquisition costs beyond the reach of chiropractic buyers.
- Local competition. Investor-backed clinics have the capital to support strong marketing, staffing and operational efficiency — creating a more challenging environment for independently owned clinics.
- Patient expectations. As investor-owned clinics set new standards for aesthetics, technology and patient experience, patient expectations will shift, potentially making traditional practices seem outdated.
Significant shifts in corporate ownership are expected over the next three to seven years, during which time these trends will likely become more solidified.
How practice valuations differ for institutional buyers
When investors evaluate chiropractic practices for purchase, they use a different valuation model than owner-operator buyers. Owner-operators calculate practice value based on seller’s discretionary earnings (SDE), a byproduct of net profit that removes owner-specific benefits and adds them back to profit. This model reflects the income another DC could earn by operating the practice, making it suitable for individual buyers who plan to work directly in the practice as the seller has.
Investors must pay the seller or a replacement DC. This reduces clinic profit, so investors rely on a valuation method based on a profit called (earnings before interest, taxes, depreciation and amortization (EBITDA), which factors in the expense of hiring a replacement DC, offering a clearer picture of the practice’s profit as a passive investment.
While EBITDA results in a lower profit figure than SDE, investors apply a higher value to EBITDA because it’s more passive. For larger, highly profitable practices, this approach can result in a valuation that exceeds what an owner-operator might offer. However, this model typically doesn’t benefit smaller practices in the same way, limiting the value to investor buyers.
Challenges of selling to an institutional buyer
Selling a practice to an investor can be daunting for many DCs, as investor transactions are often complex and lengthy. Extensive data requirements can result in high legal and CPA costs for the selling doctor, and exhaustive sale cycles that can last significantly longer than a typical sale to an individual DC. The group’s corporate board has to approve everything, adding delays and complications. And many of these investors require the seller to retain partial ownership of the practice, reducing funds at closing. Even if the investor doesn’t want the seller to stay on in an ownership position, they will almost always want a transition of at least a year, in some cases up to five years. Either long-term model is a poor fit for the tired and retirement-ready doctor.
The challenges can continue after the sale closes. Institutional buyers are known to prioritize short-term profit and growth because profit is their reason for existing. While sales conversations will emphasize the DC stays in control of healthcare decisions, it’s not always straightforward as corporate ownership often introduces restrictions on patient care and staffing levels. If not managed carefully, this focus on growth and cost-cutting can create compromises in patient care and outcomes that can be devastating for the practice and the chiropractic profession as a whole. In other healthcare specialties, studies have shown that consolidation’s relentless pursuit of profit has driven up the cost of patient care while lowering its quality.2 Selling doctors should diligently interview and assess institutional buyers to minimize the chances of these post-sale problems.
Benefits of selling to an institutional buyer
While there can be challenges, selling to an institutional investor can also offer several advantages over selling to an individual doctor. Investors may offer higher valuations and provide opportunities for post-closing income. They often have access to large pools of private money, allowing sellers to avoid the complexities of the Small Business Administration financing system most DC buyers rely on. And institutional buyers are also more confident and less concerned about many details that keep a first-time DC buyer up at night.
Partnering with investors can also provide invaluable resources for growth and stability. Decades of declining insurance reimbursements and rising costs have created pressures some independent DCs don’t want to face alone. Corporate consolidation can take these worries off the doctor’s plate, spread these costs across locations and provide expert business support to help DCs meet rising consumer expectations and adapt to new revenue models. And growth from the investor’s efforts can dramatically increase the practice’s value, providing the seller with profit from their ownership position as well as proceeds from future sales.
Prepare your practice for an investor-funded exit
Getting your chiropractic practice ready for sale to an investor requires a strategic approach. DCs need a formal valuation to understand the EBITDA and practice value; do not rely on “rules of thumb,” which are only accurate for about 30% of practices. A highly accurate EBITDA and valuation are essential for a realistic understanding of the practice’s worth, and to help doctors evaluate opportunities.
Identifying and building transferable profit is not always straightforward, and most DCs will benefit greatly from partnering with a seasoned chiropractic practice broker who understands investor sales. They can help structure the practice for maximum appeal for a future sale, negotiate more competitive deal structures and advise on proven solutions for the inevitable sale challenges that arise.
Final thoughts
As institutional buyers continue to enter the chiropractic market, DCs will have both opportunities and challenges to consider. Whether the goal is to capitalize on sale opportunities or maintain independence, strategic planning is critical in this evolving market. Staying informed and prepared will help DCs navigate this new era of corporate interest and maximize success in a changing industry.
CRYSTAL MISENHEIMER, a leading expert in chiropractic practice sales, is the first and only chiropractic broker to earn the coveted Certified Business Intermediary (CBI) designation from the International Business Brokers Association (IBBA) and sets the gold standard in expertise, quality and service. A former clinic owner, she is uniquely qualified to provide comprehensive support on the complexities of clinic valuations and practice sales. Contact Misenheimer and her team at 888-508-9197, marketplace@progressivepracticesales.com or online at progressivepracticesales.com.
References
- McCleskey K. Halfway through the dental consolidation wave, here’s what entrepreneurs need to know. Dental Business. March 2024. https://www.drbicuspid.com/dental-business/dso/article/15667122/halfway-through-the-dental-consolidation-wave-heres-what-entrepreneurs-need-to-know. Accessed December 9, 2024.
- Infections and falls increased in private equity-owned hospitals. January 2024. NIH Research Matters. https://www.nih.gov/news-events/nih-research-matters/infections-falls-increased-private-equity-owned-hospitals. Accessed December 9, 2024.