How Does A Professional Appraise a Chiropractic Practice?

Well, we need to start with myth busting. There are no magic formulaes. Equations are used, but they vary with each individual appraisal. In fact the federal tax departments of both Canada and the USA specifically has ruled against using formulae as inherently inaccurate or deceptive.

A tally is made of all tangible and intangible values inherent within the practice. It’s rather uncomplicated to tally the tangibles; but, takes skill and experience to arrive at a Fair Market Value ( FMV) of the intangibles.  This factor, usually, but not always, constitutes the greatest portion (85%) of the final appraised price, (often called, simply, “goodwill”).

A Short List of Intangibles, there are approximately twenty other intangibles

  • Age of practice
  • Ratio of Gross/Net, dollars
  • Philosophy and type of practice
  • Strength of personnel
  • Management strength
  • Transition protocol
  • Collection ratio
  • Sources of Income
  • Market trends
  • Source of new patients
  • Gender difference
  • Prevailing economics
  • Prevailing psychographics
  • Established office procedures
  • Décor
  • Seller remaining as IC
  • Established Marketing Plan
  • Value of website

Part of the process of arriving at FMV involves recasting the financials; now, there are a number of formulae in this process. The objective is to adjust the practice’s annual historic (3 year) income statements. By making a number of adjustment or “Addbacks”, the true earning power will be revealed. This part of the appraisal requires the normalized Income and Expense statements, and the Balance Sheet from the previous three years.

In essence there are three different approaches to determine FMV:

Market Approach – Evaluate other sold chiropractic practices of equal value to the one in question and determine the dollar value by comparison. This sounds reasonable until you consider that it is almost impossible to compare, point for point, different practices.

Income Approach – Determine the net income of the practice and multiply that value by a multiplier. The multiplier is derived by numerous variables that represent the tangible and intangible characteristics of the practice. Again, this sounds rational until you consider the variations in character and performance of how that multiplier was generated.

Asset Approach – The appraisal is based solely on the fair market value of furniture, fixtures, and equipment (FF&E). This approach is only used when it is a liquidation (“fire-sale”), due to bankruptcy, sudden death, severe disability, or abrupt permanent departure of the owner. When the income has little relevance to the value of the practice, the market value of the assets will equal the practice value.  This could be used, but would constitute only one facet of a practice; there are so many other facets to a practice.

One could ask: “what about calculating all three approaches, and using the average”. We frequently choose this composite calculation; but again, prevailing circumstances must come into consideration.

If the methodology used for the appraisal and the Final Report do not pass the “sniff test”, and/or appropriateness of the methods used, when examined by a knowledgeable reviewer, (which are frequently called for) it will discredit the entire Report and Appraisal. (and eventually discredit the appraiser.)

This brings to light something that is rarely talked about.  But is not uncommon: the intentionally biased appraisal. Most things in life and business are open to skewing or corruption of principles. There are always going to be cynical appraisers who will knowingly disregard doing the “right thing”. You, the consumer, gets to choose who does your appraisal.

Knowingly using an inappropriate method to skew the final valuation of a practice is not considered fraudulent or illegal, but it is unethical and unprofessional. The vast majority of Professional Practice Appraisers will resist the temptation as our reputation demands it.

So, How Does One Choose An Appraiser?

The same way you would choose a chiropractor: plenty of experience (with chiropractic valuations), length of time in business, feedback from satisfied clients, general word of mouth, positive intuitive feeling when interacting with the appraiser.

In case you are of the mindset that your attorney, accountant, or even certified business appraiser is probably adequate to the task of valuating a chiropractic practice, you will be misinformed. It is not the same as appraising a dental practice, medical practice, dry cleaners, or a convenience store.

We have been doing chiropractic appraisals/valuations since 1982. We have ushered over 5000 new chiropractors into practice via our seminar series, many buying practices, as well as the converse . . . .  dealing with retiring doctors who are selling their practices. We are happy to talk with you about your needs, before you make a decision.