extensive patient roster, all transferable to a buyer, or if you anticipate problems with the Canada Revenue Agency, the answer is “yes”. If you possess a small, declining practice, the cost may not produce the wanted benefi ts. Although a professional appraisal will provide a credible value es- timate, this does not guarantee you will sell your practice for the appraised value, or sell it at all. As appraisals can be expen- sive, it’s your call. If hiring a professional, be certain this person is qualifi ed to value professional practices. Not all are, includ- ing some who claim expertise. Check their credentials and references. There is a world of difference between appraising a chiro- practic clinic and a restaurant. THE MARKET COMPARISON APPROACH This approach estimates market value by comparing the subject with several other chiropractic practices that have recently sold, or are for sale, analyzing them and making price adjustments for differences in annual billings, operating profi t, tangible assets, goodwill, and other value contributors. This brings up two problems; first, accurately determining the prices obtained for sold practices, and second, determin- ing how that price was established, often an impossible task. Only professional prac- tice brokers and appraisers are privy to this information and only then, if they were involved in the sale, have a good clientele base, or can lean on other brokers and ap- praisers for reliable data. In my opinion, the concept of using the prices obtained by others as a benchmark for establishing your practice’s value is wishy-washy. There are too many contin- gencies and subjective motives. Frequently, attempting to make whole dollar or per- centage adjustments in an attempt to ration- alize the differences from one practice to another is guesswork. The advertisements for practices for sale offer little assistance. THE EXCESS EARNINGS METHOD The Excess Earnings Method estimates a value for the tangible assets, usually limited to the real estate (if owned), the furniture, fixtures and equipment, and adding there- to a value for the goodwill, which includes most everything else. GOODWILL DEFINED Other than the capital assets, and perhaps a leasehold advantage, all professional 18 • CANADIAN CHIROPRACTOR | OCTOBER 2008 practices, including chiropractic, have a measure of what we will classify as “good- will”. This includes patient lists. Although there are several defi nitions for this good- will, the best defi nition comes from an English law case when in 1910 Lord Eldon said, “Goodwill is nothing more than the probability that the same patrons will con- tinue to patronize the same shop.” This is all that goodwill really is. This is what you have to sell, the probability, not the certain- ty. Although there is substantial overlap, and some discussions could fi t into any, for this purpose, there are three distinct categories of goodwill. They are “Personal Goodwill”, “Goodwill of Establishment” and “ Goodwill of Location.” Personal Goodwill is exclusive to the practitioner. It was built up over the years by the dedication and perseverance of the individual professional. Goodwill of Estab- lishment, also known as Business Goodwill and Goodwill of Location lie with the prac- tice itself. The value of goodwill is predi- cated by its unencumbered transferability. If another cannot assume and capitalize on it, the goodwill portion of your practice has a value of zero dollars. PERSONAL GOODWILL Because it is not transferable, in any pro- fessional practice, there is no goodwill that can be considered as personal to the seller. Once you go out the door for the last time any goodwill built up because of your abil- ity, techniques, personality, or procedures, goes out as well. Earlier, we said you could not sell your expertise. However, a success- ful practice is largely a trust relationship between the chiropractor and his/her pa- tients, and that trust may be, in part, trans- ferable. You have substantial training and expertise. A fair assumption is that no one will buy you out unless he or she also has substantial chiropractic education, training and expertise, which ensures a measure of continuity. From this perspective it is the trust, not the individual, that has a modi- cum of transferability, hence value. In start- ing from scratch a chiropractor must build trust from the ground up, often a longer procedure. GOODWILL OF ESTABLISHMENT Goodwill of Establishment is a measure of durability. The longer the practice has been established, the more regular and devoted the patients and the greater the number expected to return, the greater its value. We are back to Lord Eldon, the probability that the same patients will come back no matter who is in charge. This suggests that patient fi les have a value in and of them- selves. However, to assign a specific value to a collection of historical records, many of which will be dated, contain names of cured patients, have died, relocated, or now treated by another, is little other than pure speculation. The measure of value is prob- able patient retention and the expectation of income to be gleaned from the files. Al- though formulas exist to calculate the value of past patient fi les, in my opinion, none are workable and as such no specific value should be attached to this intangible asset. GOODWILL OF LOCATION To value Goodwill of Location, your pro- fessional practice must be considered as a service business, which can be location- dependent or location-independent. A location- dependent business is one where its customers are within easy walking or driving distance. It cannot simply be moved across town without having to start fresh elsewhere. Location-independent would describe most professional practices and, many personal service businesses. As their clients and customers seek them out it is unimportant if these are located in this particular building, or on this avenue, or elsewhere. There is no goodwill of location. Is a chiropractic practice location-depen- dent or location-independent? It depends on the origination of the patient base and how many patients would be lost were that location no longer available. If very few, any value for the practice must be for rea- sons other than having a favourable loca- tion. The value that can be attributed to a location-dependent practice is based on the patients that this specifi c location attracts and the remaining term of the lease. If you have a busy, profi table, practice and there are ten years remaining on a low cost lease; if all are assumable, the practice is worth a lot of money. However, that value declines if there is a question of continuing in this location or the lessor has escape clauses that can almost overnight terminate your occupancy. If the lease term is short and the rent high, the location-dependency of the practice adds nothing. In short, value equals tangible assets plus goodwill. • Part 2 of this article will be a demonstration of how to calculate the going concern value of your chiropractic practice. www.canadianchiropractor.ca
Chiropractic + Naturopathic Doctor October 08: Page 18
