Brokers and consultants often price chiropractic practices using a simple net cash flow-based valuation method. While this estimate offers a good starting point for determining practice value, many buyers are still left wondering — is this practice worth the asking price?
Understanding the Ballpark Figure
Before evaluating whether a practice is a good investment, buyers should look at the basis of the valuation. A common ballpark valuation method is 1.3 to 1.5 times a practice’s net cash flow. The multiplier is based in part on current interest rates. In 2020, with interest rates at record lows [LINK], that multiplier is up near 1.5. This means a practice that cash flows $300,000 per year is worth roughly $450,000. This number can help buyers get a sense of what is in their budget — a typical down payment is about 10-12% of that asking price.
Buyers should also ask for a detailed picture of the practice’s financials, including the income statements and tax returns for at least the past three years. This will offer a clearer picture of what goes into net cash flow, including monthly gross income, overhead, staff salaries, rent, utilities and other costs. Using an independent accountant or attorney to review, buyers can confirm that the net cash flow is as advertised.
If everything checks out and the practice is in budget, how can a buyer determine if this is the one? What if another comparable practice is for sale down the street? Here are five questions buyers can ask to better evaluate the full value of a practice:
What is the selling chiropractor’s personality and practice style?
Buyers should evaluate the seller’s chiropractic philosophy, personality and the techniques and procedures offered. If the buyer and seller aren’t well-aligned, there’s a good chance the buyer will lose patients. “I would not recommend buying from somebody that has a much bigger personality than you do,” says Kevin Misenheimer, a broker with Progressive Practice Sales in Chattanooga, Tennessee. “I would not buy a practice from that person, not without a really long transition.”
What are the “intangible” benefits of this practice?
An essential part of valuation beyond the financials is the goodwill, or intangible assets, of a practice. These factors include location, practice maturity, reputation, referral sources, patient retention rates and more. How goodwill is factored into the price of a practice may vary, but buyers should be aware of the implications of these elements and know what is important to them. The one thing buyers should be wary of is “potential,” according to Sam Reader, a consultant who works with chiropractors around the U.S. “Sellers get into trouble because they like to use the word potential,” he says. Pay for the value of the practice today.
How does the practice compare to others?
It’s helpful to compare the practice to similarly sized or priced listings. Getting an idea of where the practice stands compared to peers on a local and national scale can provide an idea of the overall value.
What will the transition look like?
Buyers should negotiate the terms of the transition as part of the contract.
Young associates and new graduates may prefer a longer, more hands-on transition with an experienced seller and should confirm that the seller is willing and able to stay on for the duration of the transition.
Will staff stay?
Knowledgeable and experienced staff are a major asset to a practice and can help create continuity for patients after the seller exits. Patients can be just as attached to the support staff as they are to the chiropractor. If staff plan to leave with the seller — for example, if the office manager is a spouse — buyers should factor this into the practice value and budget time to train new staff during the transition.
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