Q: I am looking at the possible purchase of an existing practice and need to know a "formula" for evaluating worth. Some incidentals about the office in question: This practice did pre-pay a percentage of patients, what do I need to know about that as far as my reimbursement or using that to leverage a lower price? Thanks! A: Thanks for the e-mail. First .. there are many questions you need to have answered prior to purchasing an established practice. First and foremost .. what are you buying? Is it the patient base .. old files .. paid for equipment .. lease agreements .. etc. Is the doctor leaving for a specific reason .. is it a distress sale as they are being sued .. physical health reasons .. going bankrupt .. a changing insurance acceptance climate .. office area is changing demographically .. etc. Has the staff been there for sometime .. will they stay or do they need to go. As important .. how have they acquired their patient base in the past and presently? Is it via HMO contracts and can you be assured in writing from the HMO that you can take over .. is it from advertising dollars that once you stop the practice drops dramatically .. is it from a specific industry or corporation that may be heading out of town and you are unaware of it. Also .. what percentage referred .. did they come from a form of regular internal and external marketing .. what and when .. gather the alliances and reference names and numbers and be sure they help during any transition so these places continue to refer. Also .. what are you buying .. how old is the equipment and how much is owed on the lease and can you re-negotiate any contract more favorable to you. As far as old patient files .. these are notoriously hard to reactivate and are usually worthless (although can be useful with creative marketing). Are you purchasing old accounts that is owed to the office .. if it concerns a patient directly .. they¼ll be hard to get paid on. If it is an insurance company it may be easier but you need to be careful and concerned about how much % you take on without some safeguards. By all means hire an attorney or accountant if the purchase price is substantial for you. Purchasing a practice.. even if financed to some degree by the seller .. takes more than a handshake and the money spent on professional advice will be well spent for sure. As far as „pre-pay¾ patients. There are a number of cash plans out there from UCAFF (unlimited care for a fixed fee) to reduced fees if paid in increments over the period of care. If you agree on the purchase price and care is still being rendered to these pre paid folks .. you must have some payment for services that are yet to be provided and already paid for. Calculate how much each visit would be dependent on what was paid and the potential and real number of visits. Usually at a rate of 5-6 visits a month (probably more in the beginning) and determine if money is still owed. In reality you are providing care for free unless you can agree on a price .. either a reduction on the purchase price or up front money that was already paid to the clinic for service yet to be provided should be considered. As far as a formula towards purchase .. it all depends. I am sending you via the next e- mail a formula that was provided to me by Dr. Pete Fernandez .. an established seminar provider and consultant. When someone e-mailed me asking for a formula I asked Dr. Pete¼s advice as he has a service that will do all the work for you and usually can purchase it cheaper than you can as they know the negotiating angles. Although the e- mail was sent in response to a specific question and office figures posed to me .. you can still gather the general idea. You can reach Dr. Fernandez if you want to learn of his services via e-mail at: susie@drfernandez.com By the way .. if you find value to my weekly e-mails and you know of other DC's with an e-mail address .. please have them contact me about my weekly e-mails or send me your chiropractic e-mail address list and I'll get these folks on board. This is how my list grows While I have your attention .. a mild commercial for my books: If you wish to purchase my Smart Start Book ($59.95) or my PI Workbook ($20) or Workshop Workbook ($20) or the PR and Marketing Book ($20) or a document disk for the Smart Start Book with the forms and letters and a complete narrative with ratings for Windows and Mac (please request which) ($15) .. you can do it on-line at http://www.chirostore.com/cgi-bin/netcat.pl?page=cat8.htm .. or call my office at 770- 491-3639 and order it directly. Also .. I am scheduling one day weekend seminar dates for my Marketing and Public Relations program. Information can be found on my webpage: http://www.mindspring.com/~chirosmart under Seminars. If interested in sponsoring a seminar call my office or e-mail your interest. Have a Great Day Dr. M Here is Dr. Pete¼s advice: Below is an e-mail answer to a question sent to me about purchasing an existing practice. The DC wishing my opinion sent me the figures recorded below. I asked Dr. Peter Fernandez, who has been a chiropractic consultant for many years and has a service assisting in the purchasing of practices to review the figures and offer us his opinion. Below is his answer .. if you are thinking of purchasing a practice review thgis carefully .. plug your own figures into this and make use of all or some of the information. If you desire professional assistance .. and if you feel it is necessary .. contact Dr. Fernandez at: susie@drfernandez.com A doctor should not consider buying any practice until he gets all the necessary firm, verifiable figures regarding the practice. I get nervous when a possible purchasing doctor guesses at the office overhead (I'll bet it is more than the estimated $6000 a month). And, he doesn't trust the selling doctor's collection figures of $196,480. He should be able to check the deposit slips, bank statements and tax forms to make sure of what he is buying. I am very leary of the Broker's Valuation of the practice. Any DC purchasing a practice should hire a Buyer's Representative (like myself, or someone else), a person who represents him/her in this type transaction. The Selling Broker's Valuation is: Yearly Income $196,480 X .63 = $123,782 Equipment Value = 19,552 Accounts Receivable $ 79,784 X .65 = 51,859 TOTAL = $195,193 My valuation from the figures supplied by the doctor: Goodwill: This practice supposedly has a net profit of over 50% (the doctor better double check these figures). Therefore, the goodwill of the practice needs to be determined by a net profit formula. The net profit formula from my book, "How To Buy and Sell a Practice," (modified in 1999) is three months net income X three. $10,000 a month X 3 = $30,000 X 3 = $90,000.00 Equipment: The value of the equipment and furnishings is probably around $15,000 if the equipment was purchased new 5 years ago, if older, reduce the price drastically. Accounts Receivable: This varies widely ... If this is a cash practice, the average account over 90 days old has a "$0" value, current AR's have a 50% value. If this practice is an insurance practice (let's assume that it is), the AR's should be broken down into categories that are collectible with an aging analysis to determine the value. But in this case, I'll value it at 45% of the accounts receivables. Thus: $79,784 X .45 = $ 35,902 The value of this practice is: = $ 90,000 Goodwill: = $ 15,000 Accounts Receivable: = $ 35,902 Miscellaneous Supplies: = $ 2,000 High Value to the Practice: = $146,902 I'd offer $120,000 and let the buyer negotiate upward. There are problems with the take-over of the practice. 1. There will be a new CA (patients are loyal to the old DC and CA.) If an established CA stays with the practice and boosts the new doctor, a successful transition may take place. However, in this case, the new CA doesn't have patient loyalty. And, the patients won't have any loyalty to the practice. Thus, the transaction will suffer. 2. While it's true that if you buy accounts receivables and can't collect them, you can write off the non-collectible accounts. It's not as easy as the broker states. The buyer first has to reasonably value each account (what the doctor thinks is reasonable and the IRS will probably think differently). When the doctor can't collect the accounts, the doctor can write them off. However, if he collects more than his valuation, he has to claim it as additional income. My advice...be careful! When someone wants to buy a practice, he should make it very easy for the seller to sell. Asking the seller to sell his practice, then separately sell his equipment, and then collect his own AR, will usually kill the sale. Buy the equipment and collect the AR yourself. Make it easy for the old doctor to sell. Don't collect the old doctor's AR for him for less than 40% to you. It's a real pain to collect someone elses money. No one will feel that they owe the new doctor anything. Now comes the question, should this doctor buy the practice? Assuming a $147,000 sale price, he'll have to come up with at least $20,000 down, then finance $127,000 over 15 years at 10% (or more). The monthly payment would be $1365. Therefore the overhead of this practice would grow to $7365 a month. My recommendations, if all the supplied figures are accurate and if the doctor feels he can effectively take care of the number of his patients, and the number of the departing doctor's patients without losing any (a big if), BUY THE PRACTICE. He'll end up with: His monthly income: $ 5,000 The departing doctor's monthly income: $ 16,000 Sub-total: $ 21,000 With an Overhead of: $ 7,365 Net Profit: $ 13,635 Not bad, a high net profit practice and he doesn't have to move. Hope this helps. Dr. Pete Fernandez P.S. Remember, this doc is earning $5000 a month. If he opens his own practice, his overhead will be at least $6000 a month, a loss of $1000 a month.