Buying a chiropractic clinic can be overwhelming, especially for first-time buyers and young associates. Chiropractic colleges often do not provide sufficient business training to buy and build a practice, leaving first-time buyers exposed to potential missteps.
If you’re ready to become a practice owner, here’s how to avoid the most common mistakes buyers make during the transaction process:
Pitfall No. 1: Buying too small
First-time buyers may see robust practices for sale and fear they’re too inexperienced to keep the business running smoothly, so they buy something small with the intent to grow. However, these buyers may spend months or even years learning how to market the practice and grow their patient base; hire and train staff; and become credentialed with insurance companies.
How to avoid this mistake: Buy a practice with as much cash flow as possible. Larger practices tend to have solid systems and staff in place, and greater cash flow enables owners to save more and pay down student debt faster.
Plus, sellers are often in the twilight of their careers and likely have not pushed for significant growth in recent years. With an existing structure in place and fresh energy, young doctors often have no problem maintaining and even growing large practices. “If you’re a young, energetic, hard-working doctor, you’re usually going to come in and be able to grow that practice,” says Kevin Misenheimer, a chiropractic practice broker with Progressive Practice Sales in Chattanooga, Tennessee.
Pitfall No. 2: Changing too much, too fast
First-time buyers have often long been waiting for the day they own their own practice. When the time comes, they may want to introduce different procedures and policies. “I see young doctors go in, and for whatever reason terminate most of the staff, or terminate this program or that policy and just almost turn the clinic on its head,” says Sam Reader, a practice management consultant who works with chiropractors nationwide. “That is a terrible mistake.” Buyers who reinvent the practice too rapidly often pay the price in attrition. There will be consequences to that.
How to avoid this mistake: The simplest way to avoid the risk is to buy a turnkey practice that aligns, at least somewhat, with your technique and vision. Otherwise, it’s a matter of checking the ego and spending a season or two adapting before making any major changes.
“Pick up where [the previous doctor] left off,” Mr. Reader says. “I don’t mind people going in and making little adjustments, improving things, but it’s not a matter of going in there and trying to reinvent everything.”
Pitfall No. 3: Overestimating financial readiness
A general rule of thumb for setting practice prices is 1.4 to 1.5 times the net income of a clinic. This means a practice netting $300,000 annually will likely sell for about $450,000. Because banks require a 10% down payment to secure a loan, a buyer in this scenario might target the $45,000 down payment as the bar for financial readiness. However, buyers often overlook the hidden costs associated with closing a transaction, such as closing costs and working capital, which can add up to thousands of dollars.
How to avoid this mistake: Buyers should target 12% of the asking price for their budget, according to Mr. Reader. That means a buyer with $45,000 is better budgeted for a $375,000 practice. Buyers should also assess their full financial picture, including their credit score. Mr. Reader recommends a credit score of at least 680 for buyers.
Pitfall No. 4: Buying when practice cash flow isn’t clear
Just like buyers, many sellers are new to the transaction process. They may not be familiar with how to organize financials, properly value their practice and negotiate a deal. Not all sellers, especially those with smaller practices, will use a broker. This can be problematic for buyers trying to secure a loan and can also set them up for failure down the line.
“Someone could actually fall into a situation where they buy something that they think is a good deal, only to find out that the cash flow isn’t what they thought it was going to be,” Mr. Misenheimer says.
How to avoid this mistake: Buyers should look at as many practice profiles as possible before jumping into the negotiation process to better understand typical spend on overhead, rent, payroll, taxes, insurance and everything in between. This familiarity will also make it easier to spot messy financials when a practice is for sale by owner. If a buyer can’t make heads or tails of cash flow, they can tap a broker for advice.
Pitfall No. 5: Not making the most of the transition
First-time buyers may miss critical steps in the transition process. Buyers know they need to meet their new patient base, but may overlook warm handoffs to referral sources and transfer of insurance credentials.
“If you’re credentialing from the ground up, that might be a nine month process to get on a good panel,” Mr. Misenheimer says. “But if you buy someone’s practice, you get the bill under their [National Provider Identifier] so you’re transferred over to the panel. That in and of itself is worth it to buy a practice sometimes.”
How to avoid this mistake: All aspects of the transition, including duration, insurance transfers, referral handoffs, and staff transitions, should be discussed in detail during the due diligence process. A three- to four-week transition period is recommended. Young doctors can benefit greatly from a seller who is vested in their success and willing to provide mentorship over a longer transition. “The older the doctor is, the more they really care,” Mr. Misenheimer says. “They’ve had patients grow up in their practice. They’re more than willing to train.”
Mr. Reader also advises the buyer to start treating patients from the first day of the transition, rather than allowing for the potential of a bad first impression. “I want patients to walk out that door thinking, ‘Wow, I like that person! I’m coming back.’”
Pitfall No. 6: Buying the corporation
Some transactions may include the legal structure associated with a practice. However, purchasing a practice’s corporation means the buyer may unknowingly assume liability for insurance board issues, Medicare fraud or other problems. These issues can be a risk to the future of the business, particularly when they are unknown.
How to avoid this mistake: Do not buy the corporation associated with a clinic, and instead set up a new legal structure. If the practice has a great name, buy it separately. Buyers can also limit legal risk by working with a seller using a reputable broker. “We do as much research as we can to make sure that anyone we represent doesn’t have an issue,” Mr. Misenheimer says.
[Image ideas: wrong way sign, spilled milk or ice cream dropped on the ground, ideas that connote “mistakes”]
Comments are closed for this article!