Buying or selling a chiropractic practice is a reality that many chiropractors will face in the course of their careers, likely due to retirement, relocation or career advancement. It’s a complex and draining process best approached with a level head and a degree of empathy toward all parties involved. On a base level, a seller will be searching for a fair current market price and hopefully some profit for all equipment, furniture and real estate, as well as inventory compensation and the benefit of working under an established name that will continue to honor the sweat equity invested in building the practice up. The Foundation for Chiropractic Progress (F4CP) divulges some secrets of the trade in their article “Buying and Selling a Chiropractic Practice.”
As a buyer, it’s prudent to see buying a particular practice as a probable profitable investment, with standard procedure looking for a practice that can provide a fair salary with an additional 20-30% investment return. If, for example, $200,000 is invested in a practice, and the chiropractor sets salary at $50,000, then the practice should make an additional $40,000-60,000 annually before taxes to make it a worthwhile risk.
The basic formula for return on investment in this case is:
Gross income – All Expenses
Down Payment
Remember that return on investment (ROI) does not necessarily equal profit, because ROI refers to the money invested by the buyer, while profit designates the performance of the practice as it already stands.
There are number of items typically present in the best for-sale options, which are:
- Though not a hard and fast rule, from a buyer’s side, it is often a safer bet to look for a retiring doctor with a practice to sell versus a less established younger practitioner simply relocating.
- Seller financing should be available, ideally at 10% or less in interest.
- Look for a low down payment of 10% or even no down payment.
- Favorable, sustainable performance number
- A broker should be present to facilitate the transaction.
- Buyer and seller need to be compatible.
- The staff should exhibit professionalism and have a solid knowledge of the practice.
Getting Down to the Numbers
Most people don’t become chiropractors to become bogged down by financial statements and business negotiations, but it is important to conduct due diligence before signing on any dotted lines. The following considerations are all factors that a broker should go over, but it is good to have some base insight going in. The first seller document that will come up is the Profit & Loss (P&L) statement, yet it won’t be as useful directly as one might think. That’s because well-constructed P&Ls often for tax reasons show a business in the worst possible light. Instead, home in on some hard-line costs and provable figures.
- Monthly gross: Ask for a minimum of three years data with as much detail as possible, as it is a key indicator for future projections. Tax reports and IRS statements are also helpful. Ideally, the hope is to be able to cross check sources to verify the validity of the numbers. The federal income tax statements should be relied upon the most when examining a service business not collecting sales tax.
- Overhead: Overhead is usually referred to as fixed and variable expenses, with the doctor’s salary in addition. Compare to the national averages of the various top chiropractic organizations or the Hsaio report, which dictates an overhead spread as follows:
DC salary at 50%, Employee wages at 16%, Rent at 11%, Equipment and supplies at 12%, malpractice cost at 4%.
These records will help land on a true profit margin for the practice. Be aware of inflated overhead costs that include personal expenses and services intended to visibly shrink the profit margin for tax purposes. Once a seller’s personal expenses are removed, the profit margin is more normalized and authentic. The seller will have to cooperate and be honest to fully achieve this.
- Rent: The amount and the conditions should all be listed in the lease agreement. Cross-check the numbers with other documents where possible.
- Salaries and commissions: This comes into play for any employees, as the owner is to be treated as a different entity.
- Utilities, Insurance and Misc.: Verify these with company checks and year-end tax statements.
- Profit: Profit fluctuates, but to get a good idea, subtract the cost of goods from the monthly gross services to decide on gross profit. Then subtract all operating cost from the gross profit, which results in the net potential profit of the practice. The owner should provide the total income for the practice, which should not be difficult to obtain from a serious seller.
Here is a clear example from the F4CP:
Gross Annual Services- $200,000
Cost of Goods- $1,000
Gross Profit- $199,000
Rent- $14,400
Salaries- $65,000
Utilities, Insurance, Overhead- $10,000
Owner Salary- $40,000
Operating Cost- $129,400
Less Debt (10% note a month. 3 yr.)- $11,600
Total $141,000
Net Profit $58,000
Verifying Income
Establishing trust is going to be key to reach a deal that both parties feel confident about. Verifying income can be tricky, to say the least. As an exercise, pick a month at random from the appointment book and go through each entry to see if everything matches up. Who was seen, for what service, what amounts are paid and outstanding, as well as deposits matching appointment book income. It’s a common occurrence to see offices not report all income, effectively skimming cash payments. Obviously, that is tax evasion, but given its pervasiveness, the doctor may open up about it. Unfortunately, it will make it very difficult in this case to evaluate the practice, as the accounting and the owner’s claims won’t add up neatly.
Real Estate
The real estate, land and improvements will require separate evaluation from the practice.
Value of the property and equipment is assessed and assigned a cash value. Property encompasses the land value and the value of any improvements made. Like any other real estate, land value primarily comes from the tax-assessed value compared to land segments of similar size in similar locations and what they have sold for in the current market.
Improvement evaluation is more challenging to calculate. Often, this is looked at as a type of potential cash flow. How much could a seller obtain in rent through leasing, minus standard landlord expenses. Once that initial land improvements figure is determined, from there a broker estimates leasehold improvement, fixture and equipment value. A leasehold improvement is any building add-on not easily removed, like partitions, new wiring, bathroom facilities, etc. Fixtures are office-type goods included, like carpeting, shelving and counters. Equipment is any freestanding machinery or objects needed for practicing Chiropractic. Brokers will usually offer a value less than replacement value but exceeding resale value to make it a worthwhile exchange. Sellers often ask to envelop in the broker’s fee and a couple extra thousand dollars for negotiating purposes, which becomes the asking price.
Other Value Measurement Methods
ROI might not be the best determination style of value in all cases. Capitalized earnings are another way to size up a practice if ROI alone isn’t giving a clear enough picture. Projected earnings are also informative, though not commonly used as a sole method of practice evaluation. Then there is the elusive idea of intangible value, essential elements impossible to designate a definitive cash value to. Some intangibles to consider are:
- Training or mentorship willingness
- Operation smoothness
- Location, location, location
- Profit stability
- Time business has operated and/or owner has operated the business
- Loan terms
- Owner financing
- Reputation of the doctor and the practice
- Frequency of practice sale or turnover
- Staff quality
- Established business practices
- Transition time planned (two months minimum) and a well-thought-out transition protocol
- Openness toward introductions to all valuable contacts
Goodwill in the community is the sum of all the parts of a practice put together, the behind-the-scenes business operation and how all aspects of the practice are perceived from the outside. Don’t forget to think about how the site comes across aesthetically, as well as how the practice is known culturally and socially. If the seller’s personality, style and methods are similar to the buyer’s, then patients might be more likely to accept the new arrangement if they are comfortable with their current care.
Compatibility and Staff Preparedness
Breakthrough Coaching is a leader in chiropractic practice management, well-versed in trends related to practice transfers. The organization defines practice compatibility in a number of factors related to reinforcement of the standards of the known practice, such as philosophy, gender, personality and sexual orientation. For example, it’s uncommon that a male can successfully take over a female DC’s practice due to the ingrained needs of current patients. A fitting transitional paradigm must be created and adhered to, integrating a buyer into a seller’s practice and patients to ensure a high retention rate of patients.
The buyer must acknowledge that change is jarring for most people, so for a more seamless transition, the buyer should attempt to mirror the seller as much as possible for at least the first few months of operation. The goal is to avoid traumatizing the practice with too much newness all at once. It’s a tough reality for an eager buyer to accept, excited to make their mark and convinced they know what is best. The impulse is often to want to change everything, from the floor rugs to the techniques used the second the seller drives out of the parking lot. But don’t let hubris get the best of the situation. Trust must be earned with patients before sweeping changes are made.
The same can be true for the inherited staff, which can make or break the success of the practice going forward. Make sure to purchase a practice with a well-trained and professional staff because they are the guiding ship in the first few uncertain months. It’s often overlooked in practice sales, but these are the people that keep things afloat.
The Deal Matchmaker: The Broker
If nothing else is gleaned from this piece, please take away the wisdom of hiring an experienced broker for deals of this magnitude. A chiropractor can’t be expected to know all the ends and outs or have the expertise to construct a mutually beneficial deal, ferreting out any hidden truths and suggesting creative finance options. Also, that buffer shield between the buyer and seller is crucial, allowing for a higher chance of a favorable deal going through. Deals where buyer and seller attempt to negotiate without a broker fail to reach fruition 70% of the time, according to Breakthrough Coaching.
10% commission is a standard fee traditionally covered by the seller. Equal representation is also becoming more common, with the buyer and seller paying part of the broker’s fee as both are benefitting from the service. Regardless, it is money well spent for the peace of mind.
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