Archive for July, 2010

Chiropractic clinics are usually classified under the SIC code 8041 and NAICS 62131. Chiropractic practices make up a sizable part of the large professional health practitioners service industry. In the US there are 38,796 private chiropractic clinics with one clinic for about 8,000 residents.

The industry sector generates a total of some $11.4B in annual revenues, and employs over 131,000 practitioners and support staff. Yet a typical chiropractic clinic is small business: generating around $295,000 in annual sales with an average staff of 3.

Successful chiropractic practices can be a source of highly stable earnings from the repeat business that arises out of an established and loyal patient base. Such cash cow established practices are a frequent acquisition target.

Recent selling prices of similar chiropractic practices give you a way to estimate the market value of your own practice or one you are interested in acquiring.

Practice valuation using multiples

To estimate the value of a chiropractic clinic, you can use a number of valuation multiples derived from recent sales of similar practices. These multiples are ratios that relate the actual selling prices to the practice financial performance. Usually, the following valuation multiples are used to value a practice:

  • Selling price to net annual sales
  • Price to gross profit
  • Price to net income
  • Price to EBIT and EBITDA
  • Price to total practice assets
  • Price to owners’ equity

Using a number of such valuation multiples for accurate practice valuation is a good approach. Each estimate may differ depending on how favorably your specific practice compares to its peers. The result can be a range of values. On the other hand, you can come up with an average of all the practice value estimates together.

Example: using valuation multiples to value a chiropractic clinic

To demonstrate the idea, consider a typical private chiropractic practice with the following financial details:

  • Annual net sales: $245,000
  • Gross profit: $239,000
  • Net income: $45,500
  • EBIT: $50,000
  • EBITDA: $62,000
  • Discretionary earnings (SDE): $110,000
  • Total practice assets valued at: $45,000

We next select a set of reasonable valuation multiples and apply them to the financial figures above. The practice value results are then:

Multiple Multiple value Business value
Price to net sales 0.94 $230,300
Price to gross profit 0.98 $234,220
Price to net income 6.90 $313,950
Price to EBIT 5.50 $275,000
Price to EBITDA 5.0 $310,000
Price to discretionary earnings 2.20 $242,000
Price to total assets 4.82 $216,900
Average Practice Value $260,339

Note that the results vary quite a bit. This depends on how our example practice compares to its peers for each financial performance parameter, e.g. practice annual sales receipts versus EBITDA.

Other practice valuation methods to consider

A well conducted chiropractic practice appraisal usually relies on several business valuation methods. Since chiropractic clinics can build up considerable practice goodwill, the Capitalized Excess Earnings valuation method is a frequent choice.

Practice goodwill valuation in divorce cases

This is typical in cases of marital dissolution in those jurisdictions that treat professional practice goodwill as part of the marital estate. You may have to divide the goodwill into the personal and institutional parts based on the case law in your jurisdiction regarding the distribution of goodwill assets.

Direct capitalization methods, e.g. the Multiple of Discretionary Earnings valuation method are another good choice for valuation of privately owned chiropractic practices. This method provides a highly consistent way of calculating the practice value based on its earnings and a set of financial and operational performance factors.

More on chiropractic practice appraisal

The good news is you have a number of methods and tools to figure out what your practice is worth.

Over the recent years we have compiled a wealth of resources on private business valuation and made them freely available to business people and professional advisors like yourself right on this website.

Determining the value of private businesses and professional practices has always been a challenge – both for business people and professionals.

Despite the existence of valuation standards and free data sources of comparable business sales some business people are unaware of these essential resources.

Business appraisal frequently involves judgment calls that are difficult to grasp even for the seasoned analyst. Often the explanation of the terms and methods used in a business appraisal lacks clarity leaving advisors and business people frustrated and confused.

By using the ValuAdder Resource Center you can now gain full understanding of the valuation fundamentals and find the information you need at your own pace. The Resource Center is organized to make this easy and efficient:

Business Valuation Glossary

Here you will find plenty of concise, clear definitions and explanations covering all aspects of business valuation.

Business Valuation Guide

See explanations of the valuation essentials along with examples of using a number of standard methods.

List of Authoritative References

Your will find references to the appraisal standards bodies, sources of business sales data, government resources and professional associations. Helps quickly locate the information you need for valuation engagements, business self-appraisal and effective use of valuation services.

Business Valuation Blog

Take advantage of practical business appraisal examples across a number of industries. There is extensive discussion of valuation techniques and suggestions on best practices that shed the much needed light on the complex appraisal process.

Created for both the business person and seasoned valuation professional, ValuAdder Resource Center is conceived as a go-to reference that:

  • Provides you with a thorough yet accessible coverage of the valuation process, accepted methodologies and situations that call for business appraisal.
  • Assists you in making the informed choices of which business valuation approaches and tools to use.
  • Helps you avoid the unnecessary expense of buying information that is otherwise freely available.

A simple answer: because it has a direct bearing on what the company is worth.

The easiest way to see this is to consider how the business value is determined using the well-known Discounted Cash Flow valuation method. The cost of capital is a major input here in the form of the discount rate.

The higher the discount rate the less the company is worth, given a business earnings forecast. In other words, the cost of capital indicates how risky the business is. Higher cost of capital indicates a business that is more risky. To be valuable, the company must generate higher earnings to compensate.

This is just another way of saying that a business investment value is about both the risk and return.