You've worked hard to build a business you're proud of. When it's time to pass the baton to the next doctor, there's a lot to think about. One of the most important, of course, is value. Determining an appropriate valuation for a chiropractic practice is a complex matter.
Posted in Examiner eNewsletter on Friday, November 12, 2021
Q. How do I value my practice when it comes time to retire?
A. Each practice is unique. But there are three sets of numbers you’ll want to start with:
- Three Years of Discretionary Earnings—Discretionary earnings is the income of the practice after overhead like rent, salaries and insurance—but before interest, taxes, depreciation—and other adjustments are taken. Its purpose is to show the owner’s available compensation outside of personal spending decisions and tax-saving strategies. Responsibility for these expenses would not transfer to a buyer. Understanding discretionary earnings gives potential buyers a level playing field to know how your practice compares to a similar practice.
- Trends in the Practice—Have you grown the practice, or maintained a steady level of patients? Have you lost patients? Is there a reasonable explanation for a downward trend (such as COVID)? In addition to understanding flow of patients, a buyer will want to see trends in receivables. In the last few years, attorneys and insurance payers have sometimes been slow to pay. Trends over three years can help explain these changes.
- Understand the Marketplace—The current marketplace will give you a feel for multiples other practices have achieved. Understand what multiples of discretionary income other sellers are seeing. There will be a range. This matters because it’s important to lenders. Unless you’re paying cash for your practice, your purchase must fall within your lender’s parameters.
Q. Is it easier to sell your practice to a family member?
A. Selling to a family member—especially a parent selling to their offspring—has unique challenges.
For starters, selling your business to a child creates a shift in the parent-child dynamic, essentially making you peers. As a parent, you’re no longer an authority figure and this could prove to be a difficult transition for both you and your child(ren). Even after the sale, you may want influence over how the practice is managed, but the business is no longer yours. Your son or daughter could either resent your desire to stay involved or end up relying on you too much to help the business succeed.
Your child(ren) may expect to inherit the practice without financial conditions, while you see the practice as a retirement fund. Either way, with family sales, it is very important to have a third party involved in the discussions before and during the sale to make sure expectations and boundaries are clearly defined. No one wants an uncomfortable experience during the holidays.
Q. Is there anything else I should think about?
A. Some other factors that will come into play include:
- Location—Are people moving into the area or moving away? Is the existing demographic aligned with the philosophies and techniques of the practice?
- Profitability—A tight profit margin is problematic because it indicates risk, and lenders will be concerned with the buyer’s ability to meet financial obligations.
- Transferability—If the practice was built on one doctor who uses a specific technique, only buyers who use that same technique would be able to take over the practice without losing patients. This potential misalignment (pun intended) could prove problematic for a buyer.
While it would be great if there was a magic formula to guide in setting a valuation for the business you’ve dedicated your career to, deciding the value of a practice is rarely that straightforward. It is always a good idea to seek professional counseling. Speak with your accountant, tax advisor and consider working with a broker to optimize the value you are able to see for your hard work.
For more information about retiring and the valuation of your practice, check out our webinar series, “Retirement Succession Planning" part 1 and “Retirement Succession Planning" part 2.