When Do You Need An Appraisal?

There are a variety of reasons doctors need to professionally appraise their practice. These usually are motivated by another party wanting to confirm the dollar value put upon the practice. The other party might be a buyer, future partner, departing partner, creditor or divorcing spouse. This party always is a person or organization looking to validate the integrity of the practice.

What Is a Chiropractic Practice Appraisal?

A chiropractic practice appraisal is an in-depth examination of your practice. The appraisal process evaluates numerous factors that, in total, equal its value. This equation has two basic components that generate the practice value; these are classified as tangible assets and intangible assets. Tangible assets include all office and professional equipment, instruments, furnishings, leasehold improvements and supplies. Intangible assets include, but are not limited to, goodwill, patient files, transferability and telephone numbers.

The standard by which an appraisal is performed was developed by the Internal Revenue Service, as described below:

“Appraisals should be conducted in accordance with the provisions of the Internal Revenue Code of 1954. The regulations define ‘fair market value’ as follows: ‘The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, or both having reasonable knowledge of fact, not to be determined by a forced sale price.'”

Doctors commonly ask, “Is there an equation to determining the value of a practice?”

The answer is yes, but the factors that make up that equation vary in value for each individual practice.

There are three basic approaches to determining a practice or business value:

1. Market Approach – Evaluate other sold chiropractic practices of equal value to the one in question and determine the dollar value by comparison
2. Income Approach – Determine the net income of the practice and multiply that value by a “multiplier.” The multiplier is derived by numerous variables that represent the tangible and intangible characteristics of the practice
3. Asset Approach – When the income has little relevance to the value of the practice, the market value of the assets will equal the practice value

The tangible or factual components of the appraisal equation are uncomplicated enough to derive through statistical analysis. Retrieving this information from your practice-management program, checkbook and accounting software can be performed with relative ease.

The many factors contributing to the intangible or goodwill of a professional practice are not as clearly defined as tangible factors. The values attached to each factor are determined by opinion. 

The appraiser must set a value to each of the below practice characteristics to derive the goodwill:

• time the practice has been in operation;
• gross production in relationship to net income;
• philosophy and nature of practice;
• retention of employees or key personnel;
• extent of covenant not to compete;
• transferability;
• patient profile;
• location of practice;
• fee schedule;
• collection ratio;
• significant trends; and
• source of new patients.

The objective of the appraiser is to utilize one of the commonly recognized accounting methods stated above in determining the “market value” of a given practice, as defined by the IRS Code of 1954. 

When an appraisal is generated with these criteria, the appraised value can be justified against all opposition.

When a chiropractor is in a situation in which an appraisal is needed, they must acknowledge who will interpret the appraisal. The appraisal is not written for a chiropractor; it’s for the opposition. The opposition is rarely directly a chiropractor, but rather their counsel (i.e., an accountant, lawyer or financial backer).

The goal of the appraisal is to derive a value for the practice the appraiser can justify using common accounting principles accompanied with experience. Therefore, any and all inquires to the validity to the appraisal can be substantiated. The accountant, lawyer or financial backer might challenge the appraised value, but fail to demonstrate why it should be more or less.

How Do You Choose a Chiropractic Appraiser?

When determining who should perform an appraisal of your practice, you should determine who shall be scrutinizing the finished appraisal. Will the opposition be credentialing the appraiser and, therefore, the appraisal?

To obtain the most accurate market value for your practice, you should work with a firm or consultant active in the buy-and-sell transaction of chiropractic practices. This person will have a high level of experience and knowledge of the chiropractic market. Alternatively, the appraiser not active in the market may over- or underweigh the goodwill value and generate an inaccurate practice value.

Please be aware there are many national appraisal organizations that vary in membership and certification. Some allow the member to state they “are a member of the national organization” by only payment of dues. Others will certify their member with passing of a test after hours of education and practical application.

Be well-informed to your appraisal needs. 

The highly certifi ed appraiser might produce a very professional appraisal and be very expensive, but is unfamiliar with the uniqueness of the chiropractic practice and produce an inaccurate practice value. An active practice broker might be more accurate in the true value of a practice, cost less, but have fewer credentials according to the opposition. Choose wisely.

Read more: “Appraising the Bar“, published in Chiropractic Economics – August 24, 2015