Chiropractic practice valuation
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.