After years or even decades of hard work, selling a chiropractic practice may feel like a major emotional and financial decision. Plus, if it’s a doctor’s first time on the seller’s side of the negotiating table, the transaction process may appear complicated and stressful. Luckily with the proper planning, chiropractors can gracefully exit and move onto the next adventure.
Here are three ways to prepare for a sale:
1. Give yourself the luxury of time. If possible, start planning for the sale of your practice 3 to 5 years in advance. Enlist a broker, CPA or consultant to appraise the practice and organize the books to make the transfer smoother.
Kevin Misenheimer, a practice broker with Progressive Practice Sales in Chattanooga, Tennessee, advises clients to start this process as soon as possible. He says he is often approached by sellers who are burnt out and ready to exit in a matter of months. They may have beautiful practices and hundreds of thousands of dollars in annual collections, but their books are a mess. “If the books aren’t clean enough … I’m really not going to be able to get that person what their practice is probably truly worth,” he says.
In addition to organizing the books, chiropractors should also take a look at the name of their practice about three years before exiting. If their name is on the practice, it’s best to change it to something more neutral.
Put the practice on the market 12 to 18 months out from the ideal sale time. Typically it takes some time to find a qualified buyer, negotiate a contract and secure approval for a loan. Doctors should also expect to spend some time transitioning the practice to the new owner. Many younger doctors are looking for some mentorship and guidance during the handoff.
2. Know your worth. When it comes to practice valuation, experts say cash flow is king. A beautiful view from the waiting room, brand-new equipment and even sky-high collections will not significantly affect financial value alone. Practice valuation is based on net cash flow from the last complete fiscal year, or an average of the previous few years. Net cash flow is revenue after rent, staff salaries, utilities, marketing and other debts are paid. A simple rule of thumb to estimate practice value is 1.3 to 1.5 times net cash flow.
“The equipment, the furnishings, the leasehold improvements, they have intrinsic value to the buyer only,” says Sam Reader, a practice consultant serving chiropractors nationwide. “Whether you’ve got a quarter of a million dollars worth of state-of-the-art equipment or $40,000 of junk in a van down by the river on government cheese, it’s not going to change the value of the practice because value comes from the net cash flow. Period.” Equipment and other practice improvements should translate to greater net cash flow.
3. Maximize your value.
There’s more to maximizing value than restraint with new equipment purchases. Chiropractors who are planning for retirement and want to maximize practice value, should be careful not to slide into retirement with reduced hours. “Sellers get into trouble because they like to use the word potential,” Mr. Reader says. “Potential doesn’t sell.” Keep the patients coming and ratings high, as patient volume and practice reputation are major selling points.
Doctors should abstain from writing everything off on their expenses for a few years before they sell. Typically a lot of these expenses can be factored out as “add backs,” because they won’t factor into a buyer’s P&L. However, banks will challenge add backs, so it’s best to keep these to a minimum.
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