How to create a chiropractic practice valuation? You hear this question a lot, especially when it comes to buying or selling a practice. First, some industry stats:
The US and Canadian governments classify chiropractic clinics under the SIC code 8041 and NAICS 62131 industrial classification codes. 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 practice owners enjoy highly stable earnings from the repeat business that arises out of an established and loyal patient base. Unsurprisingly, buyers are always looking for such established cash cows.
If you study recent selling prices of chiropractic practices, you can figure out the value of your own clinic or the one you are interested in buying.
Valuation using multiples
How to figure out the value of a chiropractic clinic? You can use a number of valuation multiples based on recent sales of similar practices. These multiples are ratios that relate the actual selling prices to the practice’s financial performance.
Here are the typical valuation multiples used to value a chiropractic clinic:
- Selling price to net annual sales
- Practice price to gross profit
- Clinic price to net income
- Price to EBIT, EBITDA or total practice assets
- Price to owners’ equity
Industry mavens use a number of such valuation multiples to nail down the clinic value. You get different numbers from each multiple depending on how well your practice compares to your peers. You can view your results as a range of values. On the other hand, you may decide on an average of all the 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
Next let’s pick a few valuation multiples and apply them to the financial figures above. The clinic value results are then:
|Multiple||Multiple value||Business value|
|Price to net sales||0.94||$230,300|
|Practice price to gross profit||0.98||$234,220|
|Price to net income||6.90||$313,950|
|Clinic price to EBIT||5.50||$275,000|
|Price to EBITDA||5.0||$310,000|
|Price to discretionary earnings||2.20||$242,000|
|Selling Price to total assets||4.82||$216,900|
|Average Practice Value||$260,339|
Note that the results vary widely. That’s because each result depends on how our example practice compares to its peers. For instance, where does the clinic fit in terms of its annual sales receipts or EBITDA?
Choosing the best valuation multiples
Wondering how to choose the best valuation multiple for your chiropractic practice? Then use the coefficient of variation as a helpful tool to pick the best one.
Other valuation methods to consider
A well run chiropractic practice appraisal usually taps several business valuation methods. Since chiropractic clinics can build up considerable practice goodwill, the Capitalized Excess Earnings valuation method is a common choice.
Practice goodwill valuation in divorce cases
This is typical in cases of divorce in those jurisdictions that treat professional practice goodwill as part of the marital estate. You may have to sort out what proportion of goodwill belongs to the chiropractor-owner as opposed to the clinic itself. To get this partitioning right, check on the case law in your jurisdiction that has handled the distribution of goodwill assets. And be sure to consult a knowledgeable lawyer.
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 is very easy to use and gives a way to calculate 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.