Appraisal of a Chiropractor Chiropratic Practice Valuation and Value

Article by Keith Borglum CHBC
(Certified Healthcare Business Consultant) at
Licensed Medical Practice Broker and Appraiser for over 25 years
Author of the book Medical Practice Valuation - Appraisal Guidelines and Workbook
Member of the Institute of Business Appraisers and the National Association of Certified Valuation Analysts
Former Member & Board of Directors of the National Association of Healthcare Consultants; former Marketing Committee Chairman & Membership Co-Chair of the National Association of Certified Healthcare Business Consultants
Medical Industry Expert to the business broker's valuation guidebook Business Reference Guide
Editorial Consultant to Medical Economics Magazine
Editor of the topics of Business Appraisal and Healthcare Marketing for the Open Directory Project proving content to Google and AOL
Faculty and author on medical practice valuation for state and national health care associations including the American Academy of Dermatology- just "Google" his name

How much is a chiropractic practice worth?

This is a simple question with a complex answer. ( I will provide a simple rule of thumb later in the article – but you should read the article first to understand the rule)

First -as an aside- I have been a chiropractic patient since 1964, when I had a skiing injury. I remember that when my back would go out of adjustment, and I couldn't stand, my parents would load me into the back of their station wagon and take me to the nearest chiropractor in the next town. I have been a believer -and patient- ever since. Much later, I helped create a state-wide network of board-certified, fellowship-trained, orthopaedic spine surgeons, whom I discovered all recommended chiropractors to appropriate patients

Most chiropractic practices are small. Most of the practices have only one or two doctors. The average partnership has 2 doctors and the typical chiropractic medical group had 3 chiropractors. Most chiropractic valuations are for purchase of a small practice, buy-in, pay-out, or divorce.

There are many books on the topic of valuation of healthcare professional practices, and a fair amount of debate. Usually in a buy/sell situation both parties are interested in "Fair Market Value", with both hypothetical parties having all the relevant facts, and under no duress to act.

If you accept Medicare, you have to comply with "Stark". Section 1877(h)(3) of the Social Security Act defines fair market value for purposes of Stark as the value in an arm’s-length transaction, consistent with general market value. The regulations (420 CFR 411.351) state “Fair market value means the value in arm’s-length transactions consistent with general market value. ‘General market value’ means the price that an asset would bring as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party; or the compensation that would be included in a service agreement as a result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition or at the time of the service agreement. Usually the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement" Source: Social Security Administration

A buyer might alternatively has a "strategic value interest" to pay more if under duress to act, for example if they MUST be in the seller's locale and it is the only option, or are without adequate funds to do a cold startup and compete.

According to the IRS Business Valuation Guidelines, the three generally accepted valuation approaches are the asset-based approach, the market approach and the income approach. An appraiser should consider all three approaches in valuing a particular chiropractic practice, even if one approach or more is ultimately used, or rejected. Professional judgment should be used to select the approaches used that best indicate the value of the practice.

IRS Revenue Ruling 59-60 states that earnings are preeminent for the valuation of operating companies. Earnings (or income) driven methods therefore are most important for the appraiser to consider. Most appraisers favor the income approach in valuing small, privately-held professional services businesses, as it best reflects the impact of profit or dividends rather than just gross collections.

There is some confusion surrounding using a word –or words– which represents the stream-of-returns on earnings –or income– used in the name of the "income method". These words have included the use of "earnings" (which excludes cash flow), "cash flow" (which excludes pure earnings), "discounted cash flow, returns, benefits, economic income", etc. In the end, it is "dividend paying capacity" which is encouraged in Revenue Ruling 59-60. Different income streams use different methods to determine value. I usually use normalized dividends after considering the equivalent market-rate compensation of the owner as if the owner were employed, and the remaining cash flow was available to shareholders or investors. This provides a perspective as if the owner were instead employed, and the balance was a return on investment to ownership. Another way to look at this is; the result is the income available to the owner on his/her investment in the practice, if the owner couldn't work, and had to hire an equivalent replacement licensed professional to see the patients. The appraiser must investigate all the "personal expenses" to find dividends, and to not underestimate the value of the practice. For example; if you deduct your health insurance, car, home computer, cell phone, or other expenses of personal value, if the appraiser doesn't add them back, the income and the value will be underestimated. Appraisal is 80% investigation and 20% calculation and reporting.

You then multiply the return on investment by a capitalization or "cap" rate. A cap rate includes the return needed to an investor to invest capital in equity, or the ownership of a business. The cap rate differs from an interest rate in that interest is a return on debt rather than equity.

To determine the cap rate, it is necessary to examine the rates of return on other investments competing for the investor's dollars, (in this case, qualified chiropractic practice purchasers) and determine what rate of return will be required for this investment. This rate is calculated by building-up rates of risk and return, from the lowest/safest (often 20 year Treasury bonds) to the risk-adjusted level of risk in the particular investment. The "high-risk" of small businesses requires high returns. Appraisers can quantify anticipated future changes in return by modifying revenue and cash flow assumptions appropriately; or, in the absence of adequate information about a proposed change (like future Medicare or WorkComp reimbursement levels), by modifying the risk premium when developing a discount/cap rate. I usually modify the risk for uncertainty, as it does not require as many specific guesses about variables in the future.

Goodwill value is not separately valued in this method, as it might be when taking other approaches to valuation. The income approach results in a value that includes all tangible and intangible assets, including that described as goodwill. It does not separately seek to break out goodwill value, but to include it. The underlying concept is that when using income of the business as the approach for valuation, that income results from the value of both tangibles and intangibles together.

Most chiropractor practice sales do not include the real estate, accounts receivable, debt or cash. Most are asset rather than entity sales, so that the buyer does not take on the historic malpractice liability of the entity (usually a corporation or LLC). Sometimes entities are purchased for the insurance-reimbursement contracts they hold.

Is there a "Rule of Thumb" for valuing chiropractic practices?
The most simple rule of thumb –with any legitimacy– is using a grossly simplified Income Approach, the primary approach per IRS Revenue Ruling 59-60. This approach looks at the return on investment (ie dividends) to the buyer after market-rate compensation of one working owner. Remember – the following is a rough estimation without considering the variables of the particular practice:
1) First add back to salary and profit all the economic benefits the current owner receives (like auto, life insurance, health insurance, etc), plus depreciation, Sec 179 expense, and interest. (this is where the many mistakes are made)
2) Subtract the cost of employing a substitute person for the owner, as if the owner were disabled and had to hire a replacement person. (misjudging market value here is one of the most common mistakes)
3)Multiply the remainder by 1.5x to 2x (ie a cap rate of 50-65% on pre-tax normalized dividends); 1.5x if dependant on insurance reimbursement, up to 2x if a cash-only practice.
The result is your answer of the approximate value excluding cash, AR and liabilities.

If you think the cap rate I identified is too high, consider that professions not having clinical risks or contractual disallowances -like law, accounting, architecture, engineering, etc- have cap rates of .25-.35%; and chiropractice is certainly riskier than them due to clinical liability risks and the impact of insurance company controls and Medicare and WorkComp changes!

You may hear from sellers or buyers that chiropractic practices sell -or sold- for lot more than that, which is true. There was a flurry of sale of practices in the 1990s-2000s wherein the buyers then later failed, and defaulted on their loans, because they paid too much money and business couldn't support the debt. My practice-purchase lenders tell me that many banks have quit lending -or now require much bigger down payments- to chiropractors because of that.

Obviously, there are many other details that impact the outcome.
Most appraisers will apply at least one or two other approaches, weigh the answers, then apply a "reality check" to the answer to determine if the purchase would pay for itself in no more than 5 years, after paying the owner a market rate salary.

Even though you can make a reasonable estimate of the value of your chiropractic practice using this article, you opinion will not fly with a buyer, their CPA or attorney to whom they will show the opinion, not will a bank accept it in order to give a buyer a loan to buy your practice. You spouse's attorney won't accept it for a divorce proceeding either. That's why you want a proper written appraisal, or 2nd opinion rebuttal, from an expert (like me!)

Here are a few good books on the topic:
Medical Practice Valuation Guidebook by Dietrich (now somewhat dated as to cap rates)
Valuing Small Businesses and Professional Practices by Shannon Pratt
and my book The Medical Practice Valuation Appraisal Guidelines and Workbook

Choosing a chiropractic Practice Appraiser
Chiropractic practice valuation is not a licensed activity in most states (with Florida probably being the most notable large exception), so competency varies considerably. I have seen some really ridiculous valuations of practices by general brokers who know nothing about chiropractic practice, or chiropractic consultants who know nothing about valuation.

Good reports generally contain background information and documentation so the protocols followed are clear, and data can be confirmed. This is actually required by the Uniform Standards of Professional Appraisal Practice, as approved by Congress, and used by the IRS, banks, many states and many courts; expected in valuations of practices accepting Medicare; and should be required of the appraiser you choose. The objectivity of an appraiser can often be determined by a close evaluation of his/her report, especially in comparison to other reports by the same appraiser.

You should demand to have the appraiser present the resources-used, the currency of his/her data bases, and the assumptions underlying the opinion. Many so-called appraisers appear to base their valuations on rumors and hearsay, with little-to-no substantiation of their opinions. I recently had a practice-broker tell me that the extraordinary value she placed on a practice with her "appraisal" was based on "that's what the seller wants, and I had to support it to get the listing" (!) This would be an ethics violation and loss of membership if that broker was a member of a professional appraisal association; which they weren't.

I have seen a very large practice priced millions of dollars above what could logically and financially be supported. Of course the practice never sold, to the detriment of the owners.

There are a few different professional associations, so the easiest way to find a chiropractic practice valuation specialist is to search for "chiropractic practice valuation" on your favorite search engine(s), then check the credentials of the appraiser to verify that they specialize in healthcare practices and belong to a professional appraisal association. Chiropractic will fall within their specialties. Most general business appraisers don't know about Medicare/insurance things like Stark, corporate practice of chiropractic prohibition laws, Medicare Fraud and Abuse, and Fee Splitting laws. Most chiropractic appraisers work nationally, as I do. You might ask an appraiser for a couple of banker-references to verify that they can get loans funded at their valuations.

Another issue often missed by amateurs, even though required by the IRS and USPAP, is the "Discount for Lack of Control" when buying 50% or less of the shares, but that is another topic too big for this article. If you are buying minority shares, and the seller's appraisal doesn't address that, contact me for a rebuttal report.

Value versus Price
An appraiser's opinion of value is like using the Kelly Blue Book for used cars; it's just an expert opinion. A particular buyer and a particular seller may logically agree on a price different from the value, just like for a used car. For example an ill or desperate seller may sell for a price below the market value, and a chain might pay more than fair market value because of strategic leverage they bring to the acquisition.

Beware -and reject- any appraiser who says "How much do you want me to appraise it for?". Every field has their charletans, and so does appraisal.

When you ask "What is my chiropractic practice worth?" a definitive answer may be elusive, but common sense, professional judgment and bonafide statistical analysis can result in a usable estimate.

PS: Consulting on practice sales - rather than valuation - IS a licensed activity in most states. You wouldn't go to an unlicensed "doctor"; don't go to an unlicensed "broker" or consultant!




Keith is one of the few consultants in America to be accepted as a member of all of the following; Certified by (and faculty for) the National Society of Certified Healthcare Business Consultants, Institute of Business Appraisers, National Association of Certified Valuators and Analysts, National Association of Healthcare Consultants, Society of Medical Dental Management Consultants, American Medical Association's ConsultantLink©, American Academy of Family Physician's Network of Consultants, American College of Physicians Consultant Network, American Academy of Ophthalmology's Executives' Consultant Network, American Academy of Dermatology Residents' Practice Management Faculty, AAAAI Practice Management Faculty, AAD Faculty, and Certified by the California Association of Business Brokers. Author Keith Borglum CHBC CBB is a national medical practice appraiser and licensed broker with Professional Management and Marketing, 3468 Piner Road, Santa Rosa California 95401.

Phone 1-707-546-4433 for consulting and appraisal information or email him.

You can find his full credentials here

Permission is granted to reprint or quote any portion of this article provided that the author, firm, phone and city are named and two copies of the quoting journal are immediately mailed to the author at 3468 Piner Road, Santa Rosa CA 95401.

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