Rule of Thumbs are a very common practice in the area of valuing businesses. Many times we hear clients ask us what the difference between our specialized chiropractic practice valuations and the “standard chiropractic practice valuation formulas” or rules of thumb that we hear about.
Rule of Thumbs are largely errant and inaccurate in all areas of life and it is a ridiculous phrase that should no longer be used when you realize it’s origins.
‘The Rule of Thumb’ refers to the British common law that allowed a man to beat his wife so long as the rod used was no thicker than his thumb. Yep …… let’s stop using that phrase.
Now let’s review the all-too-common rule of ‘50% of gross profits plus depreciated assets’ for simplicity sake and see how it fares on two different practices with the same passive and active income but different expenses and goodwill….
| Practice A | Practice B | |
| Annual Gross Income | $150,000 | $150,000 |
| Overhead % | 33% | 65% |
| Goodwill % | 96% | 85% |
| Amplifiers ($) *based on goodwill | $15,000 | $7000 |
| Passive Income | $18,000 | $18,000 |
| A/R (50%) | $2000 | $2000 |
These two scenarios are very similar practices except one has a much higher overhead and is a much less systematized practice.
Rule of thumb would indicate that these would be equal and worth approximately $85,000.
When we look at the two above practices, we found that practice A was worth $131,000 and practice B was worth approx $71,000. This is a difference of $60,000.
What would you spend on an appraisal to ensure you have the added $60,000 to your valuation?
One of the reasons these sort of inaccuracies exist is that most appraisers cannot fully understand the intangibles of a chiropractic practice because they are not chiropractors. There is a large difference in how docs run their practice and most people don’t realize how much that can influence the bottom line.
The bottom line is not how many people a practice sees or it’s revenue. The bottom line is REPRODUCIBLE PROFITABILITY!
What is the LIKELIHOOD that a different doc can walk off the street and REPRODUCE the profit that you have created?
That’s right… The objective of a chiropractic practice valuation is to find the reproducible profitability.
And a large part of the reproducibility is not hidden in numbers and formulas…
It is hidden in the late nights at the office, the referral sequences, the documentation of systems etc.
Intangibles are easily calculated but not by calculators and spreadsheets, and therefore we can not simply stand behind these archaic ‘rules of thumbs’.
Let’s not forget about assets either.
It is tough for someone outside the industry to calculate an office full of “furniture” and software. The last valuation that we “fixed” from an accounting firm had assets guessed at $400,000. After our calculations from suppliers and resources, we found the total to be $29,000.
So let’s put these rule of thumbs to rest and give the years of practice the due diligence that it deserves.
We analyzed the last 100+ practices we appraised and ran it through Pareto’s Principle to see what the 20% was that produced 80% of the value.
Click the link below to grab the free video training to learn the Top 5 Systems That Sell, so you can learn how to add a possible EXTRA $106,000 to your practice valuation …….. Like one of our clients did ……. before you sell it one day.
