(Click here for Part 1)
When you buy a practice, you’re making an investment – you’re putting your money somewhere in anticipation of it multiplying. So just like stocks, mutual funds, or your savings account, you want the best return on your investment (ROI).
The simple formula for ROI is:
ROI = (benefits/costs) x 100
If you spend $10,000 (your “cost”) on stocks, and those stocks are worth $12000 at the end of the first year (benefit), that’s a 20% ROI.
My general rule of thumb is that I like purchased files, at a minimum, to pay for themselves in a year (100% ROI). That means after 12 months, the files are paid for, and starting to generate a true profit.
That’s just my number – you can use whatever makes sense to you. I’m just comfortable with that range. Unlike stocks or real estate, patient files may go stale a little sooner, and you can’t necessarily turn around and sell them again, so the ROI concepts are a little different. If a patient you’ve “bought” hasn’t come to see you in the first year (or much sooner), there’s a good chance they never will. So I like high rates of return.
From here, you can use two numbers:
- How much is an average patient worth to you in a year?
- In the practice for sale, how many patients have been seen in the last 12 months?
Let’s say you have an opportunity to buy a practice that has 500 files, 200 of which have been seen in the last 12 months. As a chiropractor, you might know the average file is worth $350 a year. (I’m making this up, but have a look at your numbers. Take your annual revenue and divide it by the number of live files that year for a rough estimate.)
200 files x $350 (your average) = $ 70,000 in annual revenue. Now just divide that figure by your desired ROI, and you’ll get the price you should be willing to pay for the files less than one year old.
For example, if you want to get back all the money you spent on files, plus make a healthy profit in a year – say a 150% ROI, you’d want to pay no more than $70,000/1.50, or roughly $47,000.
What about the fact that there are 500 files? My inclination is to ignore anything older than a year, but that’s affected by the market, your industry, how effective you are at marketing, and just how plain good of a CAM doctor you are.
Hi there,
I am in this boat, . . . looking to purchase a practice.
When you say that you like 100% return in 1 year . . . are you including a salary for yourself? . . . or just purely hard numbers. If you paid $10,000, you want to make $10,000 the next year . . . . even though it might take you 3 years to pay back the loan?!
Hi Dave,
I consider any salary that comes out as return. In a simple sense, it’s “profit”.
It’s not really a true picture of return, since you probably had to work all year in the practice to generate that money, but that’s why I like to get the money back in one year. To buy a practice, and be free and clear and making a decent income by year two always seems like a good investment to me.
Its good to buy practice in the sense that its an investment. But we should also understand that money is their but a Touch of Real Chiropractor is important and patient will always go back if we always offer quality service not just for investment, we are here not just to do business but to share our care to them.