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Practice Putting

Are You Thinking of Selling your Chiropractic Practice?

By David G. Foster D.C.

You have built a practice, loved the patients and now you have decided to relocate, retire or sell a satellite office. You now must separate the emotional attachment you have with your practice and develop a rational calculated plan. What is your plan? Do you know the process that will bring back the greatest return with the least amount of effort? The following nine steps will give you insight of the tasks ahead.

Plan a Strategy

The process begins with developing a plan. Settle the major professional and personal issues as a starting point. Establish a timetable to coordinate all of the upcoming tasks needed to advance towards your next professional endeavor. As you write down these issues your new plan will start to become a reality.

Frequently the seller "tests the water" when selling their practice. They lack conviction to a plan and waste time and energy. Good energy is lost that may have been spent to further build a practice or search for a new opportunity. Many times a seller will go through the entire process negotiating up to the closing and then have reservations in the final moments. Be convicted to your plan. Set goals for sales price, time of transition and final departure.

Your vision should include your next endeavor. This sale may allow you to relocate, concentrate on a primary practice or start your retirement years. The sale of the present practice will give you the ability to reach for higher goals, new opportunities and a better lifestyle.

Gather Information on Your Practice

The value of your practice consists of two major parts. The tangible value, which includes hard assets such as equipment, lease and accounts receivables. This information is based on fact and can be generated through historical evaluation using basic accounting principles. The second part with possibly more value than tangible asset is the intangible value or goodwill. Goodwill, which is hard to see but strongly exists, is the aspect of your practice that you truly sell. This is where the value of the terms "potential" or "turnkey" holds their value. Generally, goodwill is the dollar value to the purchaser between tangible assets and the purchase price. It is the time and energy or "sweat equity" that you have put into your practice.

Tangible information is easy to gather and starts with the past three-year's federal tax returns. From this a base of factual information is gathered which must be presented and analyzed. The following categories represent an efficient overview of what should be derived from your practice for an accurate evaluation and presentation:

1. Gross service

2. Collections

3. Collection percentage

4. Patient visits per year and week

5. New patients

6. Case average

7. Per visit average in service and collection

8. Accounts receivable

An insightful tangible perspective is how the patient base is broken down by payment in percent. Dissect the gross income by source; major medical, Medicare, personal injury, workers compensation or cash. By evaluating these percentages one can interpret the personality of your practice. This is one of many important interpretations of statistical information that can be used to accentuate the strengths of your practice.

Equally as important is the presentation of goodwill; goodwill may be the greater value of the two. Some important variables that make up goodwill include: how long has the practice been in existence, new patients per month, patient retention and referral source.

Place a dollar value on your practice

Price your practice in accordance with a standard accounting equation. There are three classical approaches to determine a practice or business value, including asset approach, market approach or income approach.

The asset approach is used when a practice is not a "going concern". The goodwill has little or no value. Value lies in the office equipment, instruments, furnishings, leasehold improvements and supplies. The market approach is used when businesses are similar in nature and can be compared. Comparing one practice to another to determine the fair market value is difficult, if not impossible, due to the unique qualities inherent in each practice. For this reason the market approach is not often used.

The most applicable method for practice value determination is the income approach. This approach takes into consideration that the practice is an ongoing active office with a projected flow of gross income, expenses and net income. This relatively expected net income multiplied by a "capitalization of earnings rate" determines the fair market value of your practice. The capitalization of earnings rate is determined by taking into consideration all of the characteristics previously stated. The" fair market value" is the highest value an open market would bear for a typical practice given a willing seller, a willing buyer, and adequate time to market the practice.

The preceding evaluation methods are guides to value your practice and not hard and fast rules. When all is said and done the value is what somebody is willing to pay for it.

Develop a Sales Package on Your Practice

Compile all facets of the practice in one book for the prospective buyer. Include the statistical data as well as emotional "feel good" items. These items should be past promotional advertisements, past press releases, pictures of past office open house events ect. The prospective buyer will give a greater emotional value to your practice knowing that your past involvement has not been exclusively financially motivated.

When showing the prospective buyer your practice for the first time have them come during a busy hour where they can see patients, staff and doctor working in unison. Immediately after this experience, ideally after hours give a tour of the office and discuss your intention.

When a prospective buyer looks at your practice for the first time give them a sales package to review. Many times this sales tool will keep the buyer interested while searching for other practices. As they will compare each practice to yours possibly returning with a clearer view of your value.

Always have the prospective buyer sign a confidentially statement for your protection. As explained, goodwill has value and as more of your patients and staff know of your future plan that value of the practice will decrease.

Give the Office a Facelift

Give your office an inexpensive facelift. A clean and uncluttered office will give the appearance of stability. An inexpensive paint job or to have the carpet cleaned will allow the office to show better. Review your travel cards, office notes, patient files and financial statistics. The new buyer is looking for a "turnkey" practice with systems that are working and are proven effective.

Promoting the "FOR SALE" Practice

Animinity is of high importance. Getting the word out and being secretive about this fact is the difficult job of the "for sale by owner" doctor.

To obtain a consultant or broker to assist in the transaction may be an alternative that lessens your involvement and due to experience brings a higher overall return for the sale. As you contemplate using a practice broker for you're needs please read what long time Chiropractic practice management consultant Dr. Whitney states.

"The fact is that if the deal is being brokered it has an excellent chance of

being consummated and buyer and seller walking away happy. However

in the deals where buyers and sellers try to do it themselves, 70% fail to

consummate. When a broker is used, 95% of the deals close. That should

tell you something. It's like selling your own house. It's possible but…Perilous".

Each practice has its own pallet of unique characteristics.

There are many quality-marketing programs to fit each unique practice. National and state publications are common areas to advertise your practice for sale. Chiropractic colleges also have bulletin boards for the soon to graduate chiropractor. A growing advertising medium for chiropractic is the internet; many new sites have classified sections with "practice for sale".

Negotiation

Negotiation with a prospective buyer should always be presented in a friendly but unemotional posture. You're emotional attachment to the physical structure, patients, and past good times have little value in the negotiation process. Develop a checklist of issues with your lawyer prior to any negotiation. Have your counsel prep you before this process begins. When negotiating the issues with the buyer document and date the process noting all agreement and differences within each issue. The checklist should include purchase price, payment terms, protective covenant not to compete, accounts payable liability, accounts receivables, buyer/seller indemnification and plan of transition.

Your legal council will plug in these resolved topics into a standard contract and modify where needed. Attempt to keep both lawyers at bay during this process. Many times lawyers make matters worse before they make things better. This is how they justify their fee.

Legal and Financial Consultation

Work closely with an attorney and an accountant when reviewing all contracts. The cost of good advice is an investment to avoid future expense.

Usually the seller's attorney produces the "contract of sale" for the future transaction. It is best to keep all issues in this contract simply written to avoid any misunderstandings. Chiropractors are not lawyers, have your lawyer understand that concept. All legal issues can be presented in an uncomplicated manor and have equal value to a difficult to read contract.

As the seller one of your biggest concerns is your tax liability on the proceeds of the sale. This issue should be discussed fully with your accountant during the negotiation process.

Transition

Work out a sound transition period. During this time period the goodwill of the practice is transferred from the seller to the purchaser. This is where the purchaser receives the intangible value of the practice. By acknowledging this fact the seller can justify a high value if the transition period is generous.

Depending on how frequently your active patients are seen, a four to six week time period of transition should be sufficient. On the

First meeting your patients should be introduced to the purchaser by you and adjusted by you with the purchaser observing. On the second meeting the patient should be adjusted by the purchaser with you in the room explaining each case. The purchaser should perform all future adjustments with the seller decreasing his/her presents and involvement.

Develop a marketing plan for all inactive patients to be informed of the transaction. A direct mail or telemarketing campaign will regenerate interest in chiropractic in many inactive patients. Another positive promotion is to throw a bonvoyage party for the departing chiropractor at the end of the transition term. This shows the entire practice, staff and community that all is well.

These nine steps to selling a practice are a basic outline to be followed. There are many nuances of each and every transaction and obstacles are to be expected. But always keep focused on getting the deal done.

About the Author

About David Foster D.C.

Dr. Foster has practiced Chiropractic for the past 20 years and has co-owned 10 satellite practices. His undergraduate education includes a BS degree from Boston University with a major in finance and marketing prior to attending Life Chiropractic College. With his acquired knowledge and experience Dr. Foster has consulted the Chiropractic community for the past decade in appraisals, Buy-Sell and Associate agreements in addition to a wide variety of legal, financial and strategic issues related to the business of Chiropractic. For more information go to www.BackOfficeConsults.com or call 1-973-331-8249 or email Dave@BackOfficeConsults.com