Purchase and Sale - Fifth Post

The next issue which will be considered by the parties is the type of practice being carried on by the Vendor. Does the Vendor carry on a particular type of practice which may limit his or her marketability? For example, if the chiropractor practices acupuncture or is a naturopath or has some particular expertise, ie. a sports fellowship or predominantly deals with paediatrics or geriatrics, the marketplace with respect to a potential Purchaser may shrink. The more specialized the practice the less potential Purchasers that may be available to acquire the practice. The greater the marketability of the practice the greater its value. Inevitably, the Vendor and Purchaser must be compatible in terms of their practices.

While it will be difficult if not impossible for a practitioner to change his or her practice technique in the time available for a transition of a practice, it may be beneficial for a Vendor to bring to a practice another practitioner who is in a position to assist the practice for the purposes of making it more saleable. Such would be the case in the event that the chiropractor is also a naturopath and is only able to sell the practice to a chiropractor who does not have dual licensure. The Vendor could enter into an associateship agreement with a naturopath to assist a Purchaser is acquiring the practice and maintaining the clinic's ability to provide care outside of the knowledge of the Purchaser.

For the purposes of establishing a value to the practice, it will be necessary to ascertain the basis from which patients are derived. Are the patients referred to the clinic from a source which may not exist after closing (ie. a relative of the Vendor)? Do the new patients come from an internal referral source (ie. existing patients)? If such is the case, the goodwill is of more value than a source of patients which will disappear after closing.

What are the billing practices of the Vendor? The Purchaser will be stepping into the shoes of the Vendor so he or she must be prepared to assume the same billing procedures of the Vendor. This applies to issues concerning what the Vendor bills in terms of quantum together with any policies that might exist in terms of discounts to students, children and seniors, and any credit policies which the Vendor may have.

Any Purchaser who alters the policies concerning billings to patients, or for that matter any office issues including office hours, methods of practice or even the office design does so at his or her peril. Again, any change in the status quo is an invitation to disaster.


EW: In the previous article, some of the factors in determining the price were addressed. Since value ultimately results in a number, taking those factors into consideration, how is value established?

First, it is imperative that both vendor and purchaser have an understanding of what value really means. After quickly suggesting that it means the worth of something, an examination of some valuation concepts will provide greater clarity to the determination of value.

1. Value is determined as at a specific point in time. That point in time could be the date of sale or the date of an offer of purchase and sale. It could also be determined as of the date of death or separation, as in the case of a marital or partnership dispute. The distant past is irrelevant unless one is determining a value as of some previous date. I have encountered some vendors who have an inflated view of their practice=s value. They argue that one use a fixed formula based upon some average of previous years= activity (however that is measured). Meanwhile, they have allowed their practices to decline more recently. The old expression, "What have you done lately," really takes on importance in that situation. The future is uncertain even though one might have certain expectations. Therefore, a valuation would consider the current state of the practice, the profession, as well as the related health care industry and economic environment.

2. The vendor is selling the future. In any purchase and sale transaction, the purchaser and their advisors are assessing what to expect in the future. Past results are essentially used as a guide to help determine future results. This is why practice statistics and financial information are requested for a number of years. As stated above, the future is uncertain and it is the purchaser who assumes that risk. With that in mind, the higher the perceived risk of attrition or financial loss in the future, the lower the price.

3. Expected cash flow determines the price. Ultimately, it is the cash flow that the practice is expected to produce which determines the majority of the value. The remainder of the value is made up of tangible assets, such as equipment, furniture and leaseholds. In some cases, real estate sold as part of the transaction will influence the price. The other key component is the risk associated with obtaining that cash flow. The risk is evaluated by assessing a number of factors which were identified in the previous article. Because of their importance, I will restate them. They include, but are not limited to:

1. the location of the practice;
2. the right to practice at that location;
3. the type of practice;
4. the staff; including referral base;
5. the name of the practice;
6. the billings of the practice;
7. the intentions of the vendor after closing.

4. A higher value attributed to "tangible assets" will generally result in a higher price. What this implies is that two identical practices will be sold for different prices where one has more tangible assets than the other. Even though a chiropractic practice is not capital intensive, compared to other businesses, there is still a perception of reduced risk to the purchaser. This applies to a lender as well. Financial institutions are generally willing to lend more against tangible assets than goodwill. In fact, many transactions have been aborted because some banks refuse to lend against significant amounts of goodwill, while they are more lenient in situations where the tangible assets are in a higher proportion. Greater value attributable to tangible assets also means greater tax savings through accelerated depreciation.

5. The liquidity of a practice is a key determinant of value. This refers to the ease with which the practice can be sold. As in real estate, the greater the number of potential purchasers, the higher the price. Conversely, the greater the number of practices for sale, the lower the price. Unlike real estate, there are not many practices for sale at any given time. Nevertheless, from a vendor=s point of view, all things being equal, one would be inclined to offer a practice for sale when there are no other practices for sale in the area. "Special purchasers" who perceive an even greater benefit will be willing to pay more than the average purchaser. One example could involve a practice where the chiropractor also practices acupuncture and it comprises a significant portion of the revenue. A purchaser who is also able to practice acupuncture will more than likely see more value than one who does not practice acupuncture. A second example could involve an associate or partnership. The associate or partner may perceive greater value and thereby offer a higher price than a total stranger. However, the more personal the practice the harder it is to sell and the lower the price.