Purchase and Sale - Ninth Post

OTHER ISSUES

There are other approaches for the valuation of a practice, but they are generally used to confirm a value determined by another approach.

Other factors can enter into the valuation of a practice and make it more complicated. A major factor is the involvement of a corporation. With its inherent separation from the individual, income tax implications can enter into the calculation. Similarly, the allocation of the purchase price between tangible assets and goodwill can cause subtle or large changes in overall value.

Another factor is the effect of an associate or partnership arrangement. This may affect the ability to sell and, in the case of partnership, the income tax implications can affect the price.

The multi-disciplinary clinic brings its own issues. Will the potential purchaser be acquiring all aspects of the clinic? If so, there are different valuation issues for the other specialties.

Finally, consideration should be given to the potential for a "special purchaser" who perceives an even greater benefit and who may be willing to pay more than the average purchaser.

It should be evident to both potential purchasers and vendors that the value is a reflection of the practice as a whole. The illusion that a practice is worth a fixed percentage of historical revenue, regardless of the present circumstances, should give way to a clearer understanding of what factors really count in determining the value of a practice.


AMF:

The effort which is required to determine the value of a practice should take into consideration the fact that unlike real estate and commercial operations such as restaurants, and retail establishments the transfer of a professional practice involves to a very large extent the transfer of a practitioner's history as a doctor. The bottom line for any purchaser must be his or her ability to have earnings continue to be generated from the practice.

For a prospective vendor and/or purchaser the rumors, generalities, rules, policies, attitudes and guidelines involving the price to be paid for a practice abound in multitudes. "Everyone" has an opinion and "everyone" will provide guidance to a purchaser or vendor in terms of what he or she can expect to pay or receive from a sale of a practice. While it would be optimum to quote a textbook, study or economic principle that could be used as the guiding light for participants in a transfer of a professional practice relating solely to that of a chiropractor, alas, such does not exist to the knowledge of the writer.

If experience is any indicator of what transpires in the transfer of a chiropractic practice, (and having spent twenty-five years participating in the professional guidance of chiropractors) then generalities based upon experience may be the best indicator of what will result from the negotiations involving the establishment of the price relating to the transfer of a chiropractic practice. It is the experience of the writer that when all is said and done, and the experts have reviewed the practice to establish the sale price based upon billings, taking into account past revenues, receivables, equipment, leasehold improvements, etc., etc., etc., the parties ultimately will arrive at a value having regard to the billings. In the area of real estate acquisition it has been stated that the three most important factors in establishing the value of a property are location, location and location. In the area of practice valuations relating to chiropractic practices, the three most important factors are billings, billings and billings.

In addition, It is the experience of the writer that the parties must direct themselves to considering how revenue is generated from the practice. Obviously any general rule is subject to exception and should be adopted with careful consideration. No purchaser should be acquiring a practice for a "generally accepted" percentage of billings averaged over a number of years when the billings are decreasing.

However, just as important are the consideration which add to the discussion concerning the value of the practice in terms of the equipment, leasehold improvements and other assets. It is unlikely that a purchaser will be willing to acquire substantial equipment for a substantial price when such equipment does little to increase the billings of the practice. It is the position of the writer that historically, while a value is given to equipment and other assets, the value of the practice will be somewhere between 2/3 and 3/4 of a year's billings averaged over three years. From that starting point the value will go up or down depending on all of the factors which have been previously discussed including such matters as location, security of the lease, referral base, type of practice, turnover period, security of billings, name of practice, state of equipment, staff, financing by the vendor, etc.

For the purposes of establishing a value attributable to a chiropractic practice the golden rule can be enunciated in two words: "Status Quo" -- that being, "the more that can stay the same, the more the practice is worth!"