When to start planning to sell your practice
HEY THERE, FELLOW CHIROPRACTORS! Let’s talk about something that often gets swept under the rug: your exit strategy. Have you ever stopped to think about when you should start planning to sell your practice? Is your practice more than just a lifestyle business (funding your lifestyle)? These questions may not be on the top of your mind, but trust me, failing to plan for your future can lead to failure when the time comes to transition out of your practice.
What’s my practice worth?
One of the crucial aspects of preparing for the sale of your practice is understanding its value. How much is your chiropractic practice worth? Well, chiropractic practices are typically valued based on their earnings before interest, taxes, depreciation and amortization (EBIDTA). On average, a well-managed chiropractic practice has an EBIDTA of around 30% of gross earnings. Understanding this average can give you a benchmark to evaluate your own financial performance.
When valuing your practice, it’s important to consider “add-backs.” Add-backs are expenses that can be adjusted or added back to the EBIDTA to provide a more accurate picture of the practice’s true earning potential. These expenses are nonrecurring and may not be necessary for the new owner to continue paying. For example, expenses like automobiles, travel and other non-essential items can be added back to EBIDTA. By making these adjustments, you can increase your EBIDTA and significantly impact the value of your practice.
Now, let’s talk about multiples. Whether your practice is purchased by an individual, an institution (such as a hospital) or a Private Equity Fund, you’ll be paid a multiple of your EBIDTA. A multiple is a factor applied to the EBIDTA to determine the overall value of the practice. Keep in mind multiples for multidisciplinary practices differ from those for chiropractic practices (they are higher). It’s crucial to understand the typical multiples in your specific field. Additionally, you’ll want a clear idea of your future role in the practice once it’s sold and the expected duration of those duties.
Owner financing: Proceed with caution
Owner financing may seem appealing, but it comes with significant risks. If the buyer defaults on payment, you might end up repossessing your practice two or three years down the line, and then having to rebuild it before attempting to sell it again. While owner financing may not be completely avoidable, especially since many new practitioners are burdened with student debt, approach it with caution and consider other options.
The sweat equity buyout: A promising solution
Now, let’s talk about a potentially better solution — the Sweat Equity Buyout (SEBO). This strategy addresses the financial challenges faced by both seasoned chiropractors and new graduates burdened with student loans.
The SEBO offers a win-win solution for both parties involved. Here’s how it works: The practice owner and purchaser enter into an agreement where the purchaser becomes an associate in the practice. The associate’s base salary covers living expenses and increased overhead expenses. Any additional income generated by the associate goes into a bonus pool. But here’s the twist — an escrow account is created, accumulating funds to finance the eventual purchase of the practice (typically over a five-year period). Should the buyer not fulfill the purchase agreement, they forfeit the escrowed funds to the owner.
Retiring in practice
Have you considered the possibility of retiring in your practice without owning it? After selling the practice, you can continue working a few mornings a week, seeing cash-based patients and providing vacation coverage for the new owner. This setup not only allows you to leverage your clinical experience and offer mentorship to the new owner, but also provides you with a well-deserved semi-retirement. You get the benefits of enjoying patient care without the stress of owning and managing the practice.
Fail to plan and you plan to fail
Waiting until a year or two before selling your practice can significantly decrease its value. To ensure a smoother and more lucrative transition, it’s important to plan ahead and take the necessary steps to enhance the value of your practice over time. Implement effective management systems, build a strong patient base and maintain solid financial records. By doing so, you’ll be setting yourself up for success when the time comes.
In conclusion, it’s absolutely vital to have a clear exit strategy in mind. Failing to plan for the future can have significant consequences when it comes time to transition out of your practice. So, don’t wait until it’s too late, or worse, let the conversation remain unspoken. Start strategizing now and pave the way for a successful exit from your practice when the time is right. Your future self will thank you for it!
MARK SANNA, DC, ACRB LEVEL II, FICC, is the CEO of Breakthrough Coaching. He is a board member of the Foundation for Chiropractic Progress (F4CP), a member of the Chiropractic Summit anda member of the Chiropractic Future Strategic Plan Leadership Committee. To learn more, visit mybreakthrough.com.