The ins and outs of buying a practice
By Anthony Lombardi
How do I buy an existing practice, how much should I pay, and what should I be aware of? These are questions I’ve received most from chiropractors and chiropractic students recently
The first thing you need to know is that the only practices you will find for sale in your price range will be practices that are failing or have negative patient growth. Successful practices rarely, if ever, go for sale because they generate passive income for whoever owns it.
Let’s take my practice for example. If I die, my wife will take over ownership of the practice, and all the therapists would work under their contracts. The clinic – which would then be owned by my wife and kids – would draw an income from the work the therapists do. The contract with my associates has a clause describing how the agreement changes if I die. So if I die, my family could draw about $5,000 per month from my practice to help with living expenses.
Following the above example, let’s now replace my death with my retirement. In this case, I don’t have to go to work and I can manage the practice indirectly and make $5,000 per month. The associate DC in this scenario who takes over for me will be seeing 130 patients per week and will be earning an average of 65 per cent of the patient fee for each patient. So they are very well taken care of, but they do not own the practice.
Successsful practices typically never sell because they generate too much passive income, and if they did sell, no one would likely be able to afford them.
How much should I pay?
I read one story where a new DC purchased a practice from a chiropractor who had been practicing for 13 years and was averaging 57 patient visits per week. The office she worked out of shared expenses with other practitioners who collectively owned the practice and paid rent to the owner of the building. Because the practice was in a negative growth stage, the office was only open part-time, so half the time the office was not staffed – meaning all phone calls, emails and requests for appointments went unanswered during that time. The young chiropractor secured a line of credit and bought the practice for $123,000, which did not include anything except the hope that the patients would continue to come to the clinic once the practice changed hands.
Conversely, I just met a new graduate who paid $28,000 for a practice that sees 42 patients per week and includes some equipment. The practice is open full time and he has 100 per cent control as the owner. The price paid for this practice is much more reasonable than the $123,000 paid in my first example.
Typically, at least 30 per cent of the patient files you “purchased” will go elsewhere. People look to buy an existing practice (myself, included back in 2002) because it appears to be the path of least resistance. There are many other factors that can become problematic when buying an exisiting practice. One is philosophy. What if the DC was a subluxation-based practice and you are functionally based or your focus is athletic injuries? It becomes difficult to change the routine of those patients as you are more likely to lose them to another chiropractor than convert them to your treatment approach. If the practice has existing practitioners, then you have the potential of butting heads with the established staff, as most people do not welcome any change in leadership.
Ask yourself: what if?
As we covered earlier, successful practices do not sell – so remember, the majority of practices for sale will be in declining or failing financial health. This is why the biggest thing you need to consider with DCs selling their business is: What if no one buys their practice? What will they do? If the DC does not have any potential buyers the practice will eventually close. This means the office patients will eventually look for another chiropractor for treatment. So, if you like the location of the practice but the asking price is too high, then do nothing but consider opening a practice nearby or rent a room at another local office, with the aspirations of attracting the patients from the defunct practice.
The best things in life are free.
One of my colleagues (George), recently found a retiring chiropractor who, after 40 years of practice, was literally closing his doors. He did not try to sell his practice because he did not want the headaches of transitioning the practice or his patients to another practitioner. He was finanacially well-off, so he decided to walk away and enjoy retirement. George met him, realized they had similar philosophies, and gained his support to step in and rent an office space on the same street to fill his void. George also met and hired the chiropractor’s receptionist who worked for him for 32 years. On the day the DC retired, George received permission to take over his office phone number he had used for 40 years. George never received any of the patient files but regardless, he was in business. His secretary was familiar with all the patients and whenever people dialed his number they knew they were calling the local chiropractor.
Tips to remember
If you decide to buy an existing practice, do your homework:
- Request to see the financial statements, as well as accountant-prepared end-of-year statements for the last 10 years. If they refuse, this is your first red flag.
- Insist on shadowing the DC in their current practice for a minimum of six months before you officially take over. This will allow you to see how the business mechanics run and how the existing patients are responding to the news that you are taking over.
- When you finally negotiate a price, structure the agreement where you pay the transfer fee in installments over the course of one year. This way if the selling DC does not live up to the terms of your agreement, you can motivate them to do so by withholding the fee – there is no more motivation for them once you pay them in full.
- Lastly, have your lawyer structure or review the contract, and make sure that you always have an “out” clause should the practice reveal itself as a lemon.
When I write my articles I try to speak to the business state of the majority of doctors in our profession, as the oversaturation is a big reason why practices are devalued and why successful practices won’t sell.
I spoke to a doctor who is a multiple practice owner in our profession who said: “The typical downside of having a successful practice that you would attempt to sell is that no bank is going to lend an indebted grad the money to do so. A practice billing out $800,000 to $1 million will have to be broken up over a period of a decade. Practices typically sell at a formula of 40 per cent of average annual gross.”
Any business making that much revenue or even half that would never sell at such a discounted price. It would not be reasonable for any business earning even $500,000 per year – every year – to sell the business for a one-time payment of $200,000. Likely, you would be hard-pressed to find a keen business mind who would take that much of a hit on selling a business which is that profitable.
I’ve spoken to associations and owners of multiple businesses in different industries and the sale of their businesses are not undervalued. For instance, pharmacy owners sell for three to five times their annual revenue, convenience store owners sell for three times their annual revenue, and the trend for electricians is to sell the ownership of the business over a period of five to 10 years – something I recommend in this article.
Dr. Anthony Lombardi, DC, is consultant to athletes in the NFL, CFL and NHL, and founder of the Hamilton Back Clinic in Hamilton, Ont. He teaches his fundamental EXSTORE Assessment System and conducts practice-building workshops to health professionals. Visit exstore.ca for information.