Q: Currently, I rent space in a practice for $1300/month, includes everything, except for marketing, which we usually split. I have been there for 2 1/2 months - I'm at 70 pts./week and collecting about $1500, (still waiting on Ins. Cks.). There is another DC in the office as well. He has a partner that is supposed to do marketing, but wants out. To make a long story short, they are down to 40-50 people per week, and that is after hitting at least 100 per week. The partner wants out, debt is starting to pile up, I continue to grow, the other side seems to be dying. So they want me to buy it. I've been using the equation 50% of total income for last year which is 40,000/2 = 20,000. They have current back bills of $12,000, and the other partner wants money back from his loans. They want me to pay 6,000 up front, and then monthly payments for the difference. They also have leases left on equipment, which I would be responsible. Operating costs would be about $4000. With that I will take over all equipment in office (copier, etc...). At the end of the leases I will be the owner of all equipment. The other DC could stay and we reverse roles he can be an associate or I just buy him out. I do want control of his files, if he stays let him "use" the files until he leaves. Financially $4000-1500(my current income) - 1500 (other DC) = owing 1000 per month. BUT I'm growing and have confidence. Any advice, and what is this practice worth. If the price - debt then it is worth zero. A: Thanks for the e-mail. Your question has many questions for me. First .. what are you actually buying? It seems the practice you wish to purchase is slacking off and the numbers may be misleading based on your calculation. Rather than using a yearly figure .. try the previous six months and see if the same amount comes up. If you figure the previous year based on a 12 month average and then the previous six months based on a 12 month average .. the degree of drop should be reflected easier and therefore your figures would be more reflective of the true nature of what you are purchasing. I hope this makes sense. Next .. I was unclear as to who is in the office. From what I gather .. besides you there is two other DC .. one owner and a partner. The partner¼s portion of the practice is slowing down and it is this DC that want¼s out .. is this true? Also .. from what I can gather the owner also want¼s out and therefore you are purchasing the entire practice leaving you the owner .. is this true? Although there is hope that when selling a business you gain a profit but to do so there must be a profit or hope thereof. You are purchasing a down trend and without your cash flow of purchase money the practice would still be on a down trend. Therefore pie in the sky requests for you to pay for student loans and past debts may be pie in the sky lets find a sucker to go for it. There are risks involved in any business .. although time and money was spent in making it work .. things happened and people bail out of business at a loss .. this may be the case and would be to your advantage. Your purchase price and all the extras involved seems unrealistic. So my solution. First .. what prevents you from finding location close to where you are now and open on your own and build upon your momentum? Further .. is the office you are in connected with any managed care insurance plans that would dry up if you left? Is the marketing .. advertising .. the main thrust to get new patients and if so .. would new patients dry up if the marketing funding wasn¼t there? These questions beg an answer so that you don¼t purchase fluff .. you need to be secure that the business remains a business without a stop to the flow. As far as what I would recommend towards a purchase price .. let me refer you to Dr. Pete Fernandez. He has a great book called Buying and Selling a Practice. Prior to making any final decisions I recommend you purchase the book .. it can¼t be too expensive. Call them at 1- 800-882-4476 and order the book .. quick read with loads of ideas and a calculation protocol. It will save you a bundle. If you wish professional broker assistance .. Dr. Pete has a program for that as well. Below my reply is a reply sent to me from Dr. Pete after requesting his feedback for another DC .. although the numbers may not apply to you .. the concept will make sense. I would recommend you purchase his book and go from there. Good Luck 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 .. reviewing the figures and offering the purchasing DC his opinion or brokering the purchase. You can contact him or purchase his book Buying and Selling a Practice by call 1-800-882-4476. Below is his answer .. if you are thinking of purchasing a practice review this 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.