What Is My Practice Worth?
Q. & A. “SESSION OF THE MOST COMMONLY ASKED QUESTIONS IN SELLING A CLINIC”
Compliments of Sam Reader, S. G. Reader & Associates, Inc.
Q. What is the value of my practice?
A. The value of your practice is based on supply and demand. The smaller the supply, the greater the demand – therefore, greater the value. It just so happens that some areas have a greater demand than others. This may be due to quality of life such as weather, cost of living, etc…. One other factor has contributed to the demand side for higher value. The investor! In Arizona , as in many other states, you do not have to be a licensed doctor to own a clinic. Many of the so-called “Ma and Pa” investors have purchased these clinics at full cash value – with cash. This has created a dual-edge sword. On the one hand, it’s great for the seller. Cash in hand – full value, he’s out of there. On the other hand, the doctor coming in as a perspective buyer finds it difficult to compete with such deep pockets, particularly since funders have become more cautious in lending to Chiropractors. This all makes for an interesting and dynamic market, causing one to feel excited or frustrated – depending on what side you are on.
The bottom line is precedence from a sustained period of activity. Here it is: 12-18 months of net cash flow plus hard assets. Of late, there appears to be a slowdown of investors purchasing clinics, dropping the net cash flow value closer to 12 months as opposed to 18 months. Again, the drop results from less demand – more supply.
Q. How do you define net cash flow?
A. What’s left over after the bills are paid, excluding doctor’s salary and perks. Perks to the doctor might include pension plan, trips/vacations, which is usually tied into seminars, autos etc… any item considered personal and does not pertain to the direct overhead in sustaining the clinic.
For example: If the clinic collected $200k for the year and direct overhead (excluding doctor salary and perks) comes to $86k (43%), that would leave a balance of $114k. Therefore, patient files have a value of $114k.
Q. How do you figure hard assets?
A. Hard assets would include equipment, furnishings, receivables and (if possible) buildout.
Q. Buildout?
A. Yes. If the selling doctor has his own out-of-pocket expenses over $15k, it will be listed as an asset adding to the overall value to the practice. Although the seller may not be paid for out-of-pocket buildout, it provides adequate padding when negotiations begin.
Q. How do you value the receivables?
A. Rule of thumb is 15-25%, less 5 year history of collection ratio. If 5 year history is 80% and totally receivables are $125k, the receivables are valued between $85 and $75k. There are exceptions to this rule, particularly if there are years of “deadwood” (unpurged accounts) on the books. This is most often found in heavy P.I. practices. Proper due diligence would bear this out.
Q. Do I have to sell my receivables?
A. No. In fact, it is best to separate receivables from the practice evaluation. To include the receivables in the practice evaluation and sale of the practice only bogs down the negotiations and usually gives the buyer more leverage. It is best to negotiate the sell of the receivables after the sell of the clinic has been negotiated. Receivables can make for an easier and safer transition on cash flow for the new doctor.
Q. So how does all this add up to the value of my practice?
A. If the 12 month net cash flow equals $114k, equipment and furnishings equal $33k, you have a total of $147k. The asking price is $147k. This price does not include receivables. Buildout is a variable.
Q. Are there any other formulas to determine a value?
A. Yes. Collections-to-asking-price ration.
Example: $200k (collections) divided by $147 (asking price) = 1.36%
The collections-to-asking-price ration – regional average ration is between .92 -1.25%. This would mean the buyer purchasing the clinic at 1.36% has done very well, considering her purchased 11 points higher than the norm. The higher ratio benefits buyer; lower ratio benefits seller. The collections-to-asking-price ratio can be used as a tool to complement and/ or adjust the selling price of clinic.
Q. Can the H.M.O./P.P.O. groups I belong to affect my value?
A. Absolutely. If the buyer cannot get on the panel (groups) which provide revenue for the clinic, it will diminish net cash and patient file value.
Q. How do you adjust the patient files value?
A. Simple. Subtract total revenue provided by the P.P.O GROUPS FROM THE BOTTOM LINE. It is a bit more complicated than that because overhead (staffing) will also drop. The drop in overhead, however, is not significant enough to replace lost revenues from the P.P.O groups.
Q. How do I ensure that the buyer gets on these groups.
A. Of late, it has not been so difficult to transfer the groups over to the new doctor. Worse case scenario, some buyers will purchase the corporation. Seek professional counsel!!
Q. How long can it take to sell a practice?
A. Usually 3-9 months, on average, if asking full value in the more glamorous part of the region. Even faster, if doctor wants a fire sale.
Q. How long for transition?
A. There are varying opinions on this. It is usually between 2 weeks and 3 weeks. Some consultants feel longer is better to establish relationships of trust with buyers and patients. Some consultants feel shorter is better so the “pain and agony” of seller leaving is terminated quickly.
Q. Is seller paid during this transaction?
A. Usually not. However, for those buyers who request a larger transition period, compensations should be arranged.
Q. Am I selling my corporation?
A. Usually not, unless there is no way to transfer the new groups over to the new doctor. Clinics usually sell as “asset sale only”. This cuts down on liability from both parties. Seek professional counsel!
Q. If I sold the corporation, would that make it possible for buyer to get on to P.P.O. groups?
A. Yes. However, some P.P.O. groups register the doctor by name as well as by corporate I.D. number. These exceptions are worth seeking professional counsel.
Q. Should I tell my staff?
A. Depends on the staff. There is always an inherent risk they may find out. Be prepared for the outcome. In many situations, it is best staff should not know. Make sure purchase/sale agreement is signed, funding approved, before staff is informed.
Q. What about my landlord?
A. Same advice as staff. A contingency can be placed in the purchase/sale agreement for the comfort and safety of the buyers. The ultimate goal is to protect the seller from” tire kickers” upsetting security of staff/ landlord.
Q. Will the reason (motivation) I give to the buyer as to why I’m selling make a difference?
A. Absolutely. Buyers are extremely analytical – looking for any reason to second-guess and justify the seller’s motives. Having a weak (unclear) motive to sell has sent many a buyer walking.
Q. How about no-compete?
A. In most situations that I have seen, the no-compete clause is somewhere between 3-8 miles for a minimum of 5 years. Some buyers may request more. It depends on the state and precedence of a judge’s ruling.
Q. Will a professional practice evaluation help sell my practice?
A. Yes. The practice evaluation will:
1. Establish what is usual and customary, fair and equitable for your area.
2. Diminish liability between buyer and seller (make sure the consulting group doing the evaluation carries E&O insurance).
3. Create comfort zone, as well as diminishes liability for the funder.
Q. How important is the funder?
A. What do you think?
Q. Should I carry the buyer?
A. Highly risky – particularly if the clinic is being partially funded by the bank. In this case. The funder is in first position holding all assets, leaving you, the seller, with no collateral or security for recourse. If you are planning to carry, consider assets other than the clinic to protect your interest.
(Article donated to Arizona Association of Chiropractic, courtesy of S.G. Reader and Assoc., inc. published in the Journal)