Buying or selling a practice?

Being a chartered accountant who has been involved in the financial affairs of chiropractors for over 15 years I have clients ranging from employees working in a chiropractic clinic to multi-partner firms with several practices.

In the last few years I have become increasingly involved in practice valuations for both buyers and sellers. In the early days practice valuations were never much more than 'the average of the last 3 years profit multiplied by 3'.  But how much science is there in that? The answer is very little!

Why just the last three years? Has the profit been adjusted in any way to take account of costs specific to the seller (i.e. motor expenses, or courses and conferences)? And why multiply by 3? Why not 5, or 2? The answer to these questions lay in the fact that basically it was simple. So long as the buyer is willing to buy it at that price and the seller sells, who cares?

That approach is all well and good until such time as you choose to sell. You get the accounts made up to date, apply the magic formula, place the ad in Contact and 'hey presto' better pick up a few holiday brochures on the way back from the letter box! But sadly the first few people who make inquiries don't necessarily agree with the valuation.

'But why not?' you yell. The simple reason is that things have moved on. People need to justify the valuation to potential lenders, such as banks and other finance institutions. They want to ensure that when they come to sell it, then presuming the same criteria apply, they can get there money back.

So now we are finally at the nub of this article.

I am compiling data from my own client's experience that will allow me to build a mathematical model (based on regression analysis if you want to get all techy about it) that can prove scientifically a practice valuation. The idea is to feed data into the model (see below) including the selling/purchase price and then demonstrate mathematically why the input data is linked to the selling price. Then anybody who is considering buying or selling a practice can use this model to establish the price (or more accurately - the range of prices).

Some of factors I have considered are as follows:

PERFORMANCE

? Achieved - i.e. a review of the clinic's past results that will include, amongst other things:
? The nature of the income, i.e. Practice owner only, or with help from Associate/employee. It will also consider the sustainability of that income from the associate/employee.

? The number of new patients each week/month, and inparticular whether this is increasing or decreasing.

? Competition in the area and how historically it has affected performance.

? Achievable - i.e. consideration of the future income of the practice dependent upon, amongst other things;

? Competition that may arise or increase from a current source

? How the income will be generated i.e.
? Will the buyer be able to perform at the same level as the seller
? Will the associate (if any) stay/perform at the same level as in previous years

TENANCY

If the clinic being sold is freehold then tenancy is not an issue and the whole matter will have its own independent valuation rules.

However if the property is rented then the terms of the lease are paramount in a valuation exercise. Short leases will devalue the goodwill quite considerably.

Having established the terms the exercise is then split as follows:

? Position - the location of a practice is clearly very important. It must be visible to passers by, it must be in a nice location that is both convenient and has easy access. There must be adequate parking on location or nearby.

? Suitability of the building - it is important that the building is suitable for the purpose e.g. not too many stairs. There must be sufficient treatment rooms and facilities for changing. This is quite important if further growth is anticipated. The reception area must also be pleasant.

Conclusion

I would welcome readers comments on any of the above. In particular I am looking for feedback on what factors you consider are important in the purchase/sale of a practice. If you would like to assist me in this project please contact me for a questionnaire to get the brain juices flowing.

In addition I would very much appreciate data from your own experience of purchase/sale of a practice to help enhance the effectiveness of my model. This, of course will be treated in complete confidence, and can be provided anonymously if preferred. Please contact me for further information.

Mike Hutchinson ACA BA(Hons)

T: 01872 271655

E: mike@finance4chiropractors.com