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How Much Is Your Practice Worth? Basics of Practice Valuation

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Whether for retirement planning, a sale, a future partnership or even a divorce, chiropractors will need a practice appraisal at some point in their careers. Practice valuation is best conducted by a consultant or broker who is well-versed in the nuances of the chiropractic industry. This ensures the valuation is fair and as accurate as possible.

A Simple Valuation Method
While an appraisal will include an in-depth look at tangible and intangible assets, experts have a simple way to gauge value for practice owners looking for a rough estimate. The simplest way to value a practice is to use a multiple of net cash flow. For a quick estimate, chiropractors can take a practice’s net cash flow — or the income after expenses like rent, utilities, insurance, staff salaries and other debts are taken out — from the last fiscal year, or an average of the last few years.

The appraiser will then go through to find “add backs,” which are discretionary expenses such as the owner’s salary, travel costs or meal expenses. These are added back to the profit line because they won’t be a factor in a potential buyer’s profit and loss statement. Add backs allow for a fuller picture of a practice’s true value.

Once net cash flow is established, it is then multiplied by a factor of 1.3 to 1.5 to find the total practice value. The multiplier is inversely determined by current interest rates. With interest rates in 2020 at a record low [LINK], the multiplier is currently about 1.45 to 1.5, according to broker estimates. This means a practice with $100,000 in annual net cash flow is valued at roughly $145,000.

“Net cash flow is even more important than the build out and the equipment and everything else that is in that practice,” says Kevin Misenheimer, a chiropractic clinic broker based in Chattanooga, Tennessee. “In fact, if somebody has a lot of really expensive equipment, but they don’t have a lot of cash flow, they’re going to get really hurt on what they can actually sell the practice for.”

Maximizing Value
Though it may seem smart to invest in new equipment or update your office before a valuation, due to the valuation formula that emphasizes net cash flow, it’s usually better to focus on ways to keep expenses low, especially if you plan to sell in the next few years.

“The year or two before you sell, go a little light,” says Sam Reader, a practice consultant who works with chiropractors nationwide. “Don’t be so aggressive on trying to expense everything through the business.” While most can be pulled out as add backs, sometimes the bank will challenge them and require receipts. It’s simpler to keep these out of the picture entirely.

Chiropractors can pay for a consultant or a coach to help them create a leaner, more efficient practice. Banks usually allow these costs to be added back to the profit line too. “I can certainly tell when a doctor has been coached. I’ll notice that the overhead is lower and there’s more efficiency in the office,” Mr. Reader says. “He who has the lower overhead is the winner in this game of sales and the value of your practice. It’s not he who collects the most.”

Other Considerations

Associates will also factor into practice value in the event of a sale. A buyer could see the associate as a major risk if they leave practice after the sale. In a smaller clinic, an associate may be treated as an add back in the valuation process. However, in a larger clinic with multiple associates, they will be seen as doctors subletting space. Sellers should be sure their associates are working under a contract, to get the best possible valuation.
Intangible assets, or goodwill, do also factor into valuations. Goodwill might include the age of the business, long-term employees, patient records, and practice location, among other factors. Again, due to the valuation formula, chiropractors are better off to think of goodwill as a selling point, rather than a major value driver in terms of dollars.

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