800.676.9076
800.676.9076
Dr. Jennifer Davis shares her experience: Times are changing, today’s optometrist needs to be aware of how a new market force may impact the transition of their office.
In some ways, the marketplace for transitioning an optometric practice has never been better.
Over the last several years, the value for optometric practices has remained constant. All of the myriad challenges faced by optometry, such as managed care, big-box retailers, online providers, etc., have been priced into the marketplace. Since the recession in 2008, the financing and capital markets have responded well and provided the necessary capital to young doctors desiring to buy a practice.
Those two factors, along with the increase in baby boomers reaching retirement age, have made the transition marketplace extremely active. Any young optometrist desiring to be in private practice ownership will have no trouble locating a very good practice to buy and will find the capital necessary to finance the sale.
However, a new player has entered the marketplace and is affecting the sale of the traditional optometric office.
For many years, most optometric practices were sold in the classic conventional manner. As a doctor reached retirement age, he or she would start looking for a new or younger doctor wanting to be in private practice and start the negotiations to make the sale happen.
The traditional market to buy an optometric office was a young doctor, three to five years out of school—many of whom associated with the practice as an employed doctor before deciding to move forward with the purchase. This model is still alive and well, and many offices transition ownership in this way.
In the last five years, however, a new market force (often referred to as “consolidators or aggregators”) has entered the scene. Consolidators or aggregators are generally for-profit groups or large medical groups desiring to buy their way into the market in a particular region of the country. Many of the aggregators and consolidators are gaining access to venture capital markets, allowing these groups to fund acquisitions and gain a large footprint regionally.
From a strict business model standpoint, having consolidators or aggregators in the marketplace can be a good thing.
Undoubtedly, it has changed the supply and demand dynamic while perhaps also altering the traditional method for selling or buying a practice. Capitalism is built on this principle of supply and demand, and it operates in all markets, including optometry practices.
The ebb and flow between sellers and buyers is an active force of every marketplace. Today’s optometrist needs to be aware of how it may impact the transition of their office.
For the selling optometrist, having another demand-side “customer” is a positive trend. But, like any new force in the marketplace, there is a certain disruptive quality as both sellers and buyers adapt to this new market force.
A few important points should be kept in mind by the doctors entering this stage of their career if they are considering a complete sale of their office.
First, for a consolidator or aggregator, buying your practice is a business transaction and does not involve any emotional qualities as it may for the selling doctor. It is a good idea to stay focused on the terms and conditions of the deal and realize that it’s business and not personal.
Second, you may find that the purchase price offered for your practice is acceptable, but the offer for your continued employment after the sale is not what you had wanted. It is important to realize in these types of transactions that you cannot have it “both ways.”
Before entering the process, do some soul-searching so you are clear on what is most important to you. Stay focused on achieving those deal points. If long-term employment is the most important issue to you, negotiate those points first and realize you may have to concede some of the purchase price to get the deal done.
Finally, not all consolidators or aggregators are willing to cash the seller out at closing, as some may require you to carry some of the purchase price back through a promissory note.
If your retirement portfolio does not allow for that much risk, this type of a transition strategy may not be for you.
For many years, most optometrists who graduated from school in the mid-’60s or before have believed (and were taught) that their practice would be a substantial part of their retirement portfolio. As practice values have declined over the years and the cost of optometric education for young doctors has skyrocketed, selling a practice is not easy.
These two factors have collided at a time when most optometrists are planning on a return on the capital and asset investment of their practice to help fund or supplement their retirement.
The exit strategy is not complicated, but must be thought through and strategically planned in order to reduce stress while maximizing your return on investment. Determine the time frame for the transition out of the practice within a year or two. This will give you the time needed to plan your work and work your plan, as it is usually a very personal event for most optometrists.
The timing of the sale, and perhaps retirement, is something only each individual optometrist can answer for themselves. There are many factors that go into making this decision, not the least of which is how a doctor has planned for their retirement.
Once you have decided to leave your full-time-practice, implementing an exit strategy by bringing in an associate doctor to buy the office, or selling your practice outright or to a consolidator, should move forward.
For many doctors, their practice has been their life’s work. Transitioning to the next phase of life is both emotional and rewarding. With enough lead time and thoughtful planning, you can make your exit strategy work for you.
Ready to start planning your exit strategy? Learn more about our Transition Programs or contact Bill Nolan below.
Executive Vice President of Williams Group
Email Bill
Apple Eyecare PC was struggling with net profit and felt some of the growth could be improved if they got help with some job positions where they felt bottlenecked. Their management team included the owners and the office manager who envisioned changes in job responsibilities and procedural changes, but they seemed slow and hard to facilitate at times. They needed outside prospective and encouragement to make the changes they knew they needed.
The owners sat down in December to review the past year and plan for the new year. They agreed that they had a good year but not a great year and knew they could do better. While they could continue their current path, they envisioned a lot more for their practice.
The senior doctor, having used consultants twice before, felt confident that this was a great time to bring in more consultation to help make the changes necessary for greater growth in the new year. While there was some concern for payback on the consultation fees, they agreed to go forward with Williams Group as they were instrumental in the buy-in agreement of their second doctor a few years earlier.
Apple Eyecare PC had benefited from the services of consultants twice before, but they agreed, “No other consulting group taught them what Williams Group did. Providing us management tools and guidance to improve patient flow, profit, employee training, and role definition was invaluable.”
The doctors of Apple Eyecare PC noted, “By far, the best part of our consulting was the suggestions by Williams Group for the doctors’ delivery of professional skills in the lane and the evaluation of time management by the doctors in the patient delivery process. Also, our ability to track performance closer to real time has improved greatly; monthly production is consistently up and quite predictable; patient flow is smoother; patient experience is much better/more streamlined and they leave here better educated to make good decisions for their vision and eye health.”
Another positive Apple Eyecare is experiencing is that they are not slogging through minutiae. “The details are more and more running themselves or being run well by staff, and we [the doctors] are directing the bigger picture. This means personal time is more enjoyable, and there’s less concern about what’s happening back at the office.”
Overall, Apple Eyecare PC’s annual gross increased, and they have been able to raise wages and increase vacation time while still growing the practice. “We would not have been able to do this as easily if we had not made the changes suggested by Williams Group. While there was some resistance by the staff with some of the changes suggested, we were able to demonstrate the benefits of the changes and have adapted to the changes well over time. It was very helpful to have a consultant to encourage, redirect, and revisit the items under change as we slowed, sidetracked, or just needed encouragement to keep on the path. We feel we are headed for a brighter future!”
Learn more about our Transition programs.
Bill NolanExecutive Vice President of Williams Group, President of Practice Transitions
Email Bill
Most doctors go through a long process of deciding what to look for when buying a practice. Unfortunately, during their four years of professional education, there isn’t much covered on the business aspects of purchasing a practice or the realities of ownership. The answers to these concerns will ultimately be premised on one thing: the determination of what a practice is worth.
REALISTIC VALUATION
Over the last several years, the value of optometric practices has declined. Twenty-five years ago, a standard rule of thumb for evaluating practices would be some multiple of gross revenue. It was quite common to expect one year’s gross revenue—meaning that if I had a $600,000 practice, I would expect to sell it for nearly $600,000.
Over the last two decades, traditional valuation formulas no longer apply, and the real intrinsic value is closer to 50% or 60% of a year’s collected revenue. An optometric practice is like any business—it is worth a combination of only two things: assets and earnings. It might be helpful to have a common understanding of what optometric assets and earnings really represent. In the following few paragraphs, we’ll look at the commonly accepted formulas used to appraise an optometric practice.
DEFINING ASSETS
First, assets are either tangible or intangible. Tangible assets would include items such as ophthalmic equipment, computers, frame inventory, contact lens inventory, furnishings, and supplies. Some examples of intangible assets would be goodwill or a covenant not to compete. In my experience, the ophthalmic equipment—a large part of any optometric practice asset base—is the most difficult for which to determine value.
Hard tangible assets can be valued using one of three methodologies: book value, replacement value, or fair market value. An understanding of what these terms mean will help you get a better grasp of what these assets are worth.
VALUING EQUIPMENT
Because it is not traded regularly in a public marketplace, assessing equipment’s value is difficult. It is often advisable to bring in a third party to appraise ophthalmic equipment. There are many companies that specialize and deal in previously owned equipment, and they can provide this service for your practice.
If buyer and seller cannot mutually agree on the value of assets, it is advisable to hire an independent appraiser.
WHAT IS GOODWILL WORTH?
Once all tangible, physical assets—equipment, frames, contact lenses, etc.—are accounted for, some value needs to be put on the goodwill or “blue sky” of the practice.
Though often misunderstood, goodwill is the expectation of future earnings based on the management skill, know-how, and favorable reputation a business has with its customers or patient base. After an optometric practice is purchased, goodwill is generally transferred to the new doctor, and thus has a rightful place as an intangible asset.
There are many ways to look at the overall value of a practice. Typically, they are the net value of assets, capitalization of earnings, and percentage of revenue stream (though the last is useful mainly for checks and balances for the other two methods).
For example, if a $600,000 practice appraised for $275,000 and is still encumbered by $200,000 of debt, the value of the assets would be $75,000.
In many cases, when an associate doctor buys into an existing practice, he or she may do so through a combination of cash and acquired debt. For example, if I agree to a purchase price of $275,000 to buy a 50% interest, and the practice had $100,000 of outstanding debt, the terms of my buy-in would be $225,000 in cash and $50,000 in acquired debt.
The trick in this methodology is to determine the true net income of the business. Generally, the net income of the business is all dollars paid to or on behalf of the equity owners, including doctor salaries, allocation of income for things like automobiles, country club memberships, certain insurance policies, and funded retirement accounts. From this total earnings pool, an amount is subtracted that represents the optometric compensation. The balance is the true net earnings of the business. This dollar figure is divided by the capitalization rate to arrive at the overall value of the practice as an investment.
This multiple of revenue is helpful because many banks will not lend money for a practice purchase if the appraised value exceeds 70% to 75% of collected revenue. If a buyer pays more than these multiples as the appraised value, the practice will have a hard time with cash flow to provide an adequate salary for the optometrist and the debt service needed to buy out the practice.
OTHER ISSUES
As important as determining the intrinsic value is to this process, it is by no means the only issue to consider. When buying a dream practice, remember that an optometric practice is unlike anything else you will do in your financial life. There is a small market for potential buyers and sellers wishing to transfer ownership of a practice. Most are other optometrists, which by definition limits the liquidity of the marketplace. Occasionally, some other entity may buy a practice, but these are few and far between.
Location, demographics, and economic vitality of a community are important issues to address when buying your first practice. One additional factor often overlooked is where optometry has a strong presence and is supported by the state’s legislative practice act. There is no doubt that in certain regions of the country our profession has thrived and been a key player in the healthcare debate due to hard-fought battles and victories in state legislatures.
APPRAISING EYEWEAR INVENTORY
Frame and contact lens inventory is the easiest of the assets to appraise. Generally, these items will go into the appraisal at wholesale acquisition costs and be discounted for any obsolete or damaged merchandise. If the practice has a 600-frame inventory, it would typically be appraised at between $28,000 and $33,000, net of any adjustments for obsolete material. This process continues until all assets in the practice have an established value.
Another key component is the saturation levels of optometrists to populations. The American Optometric Association (AOA) reports a desirable level should be one O.D. for every 7,500 residents in a community. That means that if your target market has a level of saturation of one optometrist to a population of 4,000, you will be in a very competitive and difficult market for short-term growth. Due to the competition in this market, you should be sure to look for a strong and vibrant practice to purchase.
Intrinsic value, as well as location, optometrist/population ratios, demographics, etc., should all be analyzed and weighed. Applying the best of these important factors will increase the odds of successful practice ownership.
Need A Practice Evaluation? Contact us today to request a Free Consultation.
Bill NolanExecutive Vice President of Williams Group
Email Bill
John P. Brandt Jr., O.D. and his wife Karen, Practice Administrator, of Brandt Eyecare were embarking on an emotional journey to continue their 68-year-old practice in Lock Haven, Pennsylvania. John’s father, had opened the practice in this rural area when he first began his ophthalmology career and the last thing that the couple wanted to have to do was close this legacy practice. Neither of them were interested in having an ownership role overseeing staff and administration anymore so, they set their sights on a consulting group to help with transitioning the practice over to new folks, as then the two of them could solely do what they love…practice optometry.
In the mid 1990’s, the Williams Group had helped integrate Dr. Brandt Sr.’s ophthalmology practice with Dr. Brandt Jr.’s optometric practice and the changing trends in both specialties. When the time came to begin the natural transition toward retirement the Brandts turned to the Williams Group again for guidance after such a successful consulting experience. They were confident in this partnership once again. After a very emotional roller coaster with the expected ups and downs of selling a company that had been in their family for so long. The Brandts were able to sell their rural practice with the help of the Williams Group Transitions team.
“Transitioning our practice has been a daunting endeavor; however, the outcome is far better than our expectations. Williams Group provided us with excellent advice and tools to move this process forward. We are grateful not only for the professional guidance but also for the friendship that has developed throughout this process”, they noted.
Thomas Breen, Vice President of Practice Transitions, says it perfectly, “Negotiating the practice is the hardest part of any selling. It is both an art and a science. There is a lot of math involved; wrangling of numbers. Then the art of what both the buyer and the seller want comes into play. It takes time and patience.”
Karen states, “They helped us attain the goal of keeping our doors open and we are very grateful that the entity to do so is someone whom we respect and admire.”
The Brandt Eyecare practice was purchased by Nittany Eye Associates and will now be run under Dr. Michael Talone, Dr. Michael Cymbor and Tim Grattan. Nittany already has four other practices across the nation.
Learn more about our Transition programs.
Tom BreenVice President of Practice Transitions
Email Tom
Every small business owner knows that at some point they will want to divest their business interests and enjoy the fruits of their labor. Determining when to start the process of transitioning your practice is key. If you are considering a fractional buy-in with a valued associate doctor, several factors are vital to a successful transition.
Motivation: Most practice owners begin to think about an associate with ownership interest when either they, personally, or the business is at a crossroads. There may be a desire to add new services, to realize practice growth within their primary office, or there may be the opportunity to expand with a neighboring satellite practice. Some practitioners consider a fractional buy-in when faced with a full schedule that can’t be managed alone or when increasing demands of ownership responsibilities become too great. Other doctors simply have a desire to cut back on production and realize a return on capital.
Evaluation: When evaluating an associate for a fractional buy-in, consider what your associate has brought to the practice that would warrant a long-term ownership relationship. Perhaps, they have added a valued specialty service, created/updated standard of care protocols and trained staff, or added production to off-set patient demand, resulting in a more efficient schedule. Your associate may have brought a higher level of lens expertise, dispensary management or improved coding and billing to the practice. It may have been their understanding of business finances and key performance business metrics, or desire to build the practice through community involvement. Whatever the value-added process, policy or procedure, your choice in joint practice ownership is an important and far-reaching decision that will impact your business success and service to your community for years to come.
Preparation: So, how do I get started with the plans of joint ownership? There are so many aspects to consider. The unique structure of your strategic transition plan can be found in the answers to your questions. What percent of ownership do I offer my associate? What can my associate afford and still have enough cash flow to support a family? How do we determine a purchase price? How do we structure the purchase and the purchase agreements? Where do we go for financing? What are the steps to transition and how long does it take? How do we structure our compensation after the sale? What operating agreements do we need once we are joint owners? These and other questions must be addressed throughout the transition process and when properly addressed provide a road map that is clear, insightful and effective.
You’ve spent your professional career growing and managing a successful practice. Your fractional buy-in strategy is unique and must be carefully considered and strategically planned. For over three decades, Williams Group has been committed to offering professional services in a knowledgeable, ethical, and timely fashion to help you reduce the stress of ownership transfer. Our transitions team has extensive industry experience in all facets of the buying and selling process. From valuations to strategic buy/sell consulting to estate planning, Williams Group is the optometrist-recommended choice to navigate the next phase of practice ownership. Learn more about the programs we offer.
Vice President of Practice Transitions
Williams Group
Email Tammi
One thing that will help immensely in making your optometric practice more turnkey is having a strong patient base, a solid brand, and a clear marketing plan. Read on for my tips on developing these areas of your practice.
(more…)