Advanced planning is the key for the most successful practice transitions as well as realizing the highest return on investment on the sale.
This article was reviewed by Neil A. Pence, OD, FAAO, and Todd Peabody, OD, MBA, FAAO.
There are numerous factors to consider when preparing an optometric practice for sale.
Todd Peabody, OD, MBA, FAAO, and Neil A. Pence, OD, FAAO, covered the various ways to value a practice and the information needed to prepare for a sale at the American Academy of Optometry annual meeting in San Diego, California.
They also covered the actions that can be taken to maximize the value of the practice in advance of a sale, along with preparing mentally and emotionally for a sale.
“Adding an associate when the practice may have neared a peak in growth allows a renewed growth curve, increased cash flow, and likely the best method for a practice transition – benefiting both the previous and new owner, as well as the patients they serve,” said Pence, who is associate dean of clinical and patient care service at the Indiana University School of Optometry in Bloomington, Indiana.
Pence added that “in the final years of ownership, being very conscious of what actions can be taken to enhance the practice’s net income will have a positive impact on the final return realized from the sale of the practice.”
Plan early to achieve best possible sale, not just any sale
Everyone needs an exit strategy. Ideally, planning for the sale of your business should begin 3 to 5 years ahead of the expected sale date; less than that does not allow for adequate planning.
“Certainly, the hope is a practice owner will be benchmarking many aspects of their practice, monitoring key data and evaluating how that affects the financial side of things every year,” said Peabody, who is an associate dean of institutional advancement at the Indiana University School of Optometry.
Included in this is the ongoing value of the practice and planning for its continued health.
“That said, most will benefit from the outside expertise of accountants, lawyers, practice consultants, practice appraisals, etc. when executing a practice transition,” Peabody explained.
Make efforts to have as high a net as possible
“Some doctors may not have a good understanding of how practices are appraised, what the practice might be worth, the impact of the net income percentage, or how the net determines the cash available to fund a purchase thus affecting the purchase price,” Pence said.
The amount of money available to service the debt of the practice, plus allow a living wage for the buyer is determined by the amount of cash available in the practice, i.e., the net. The practice owner should aim to have as high a net as possible. This can be achieved by reducing expenses, especially the cost of goods along with personal items being charged to the practice.
Ways to reduce the cost of goods include the following: Evaluate the amounts paid for spectacle lenses, frames and contact lenses; compare prices from multiple suppliers; create a detailed plan specifying sources for each item and ensure that staff know to follow the plan when placing orders; and list the inventory on hand and plan to use it up or return the products if possible.
Personal expenses being charged to the office may include the following: A car lease, cell phone costs, entertainment and events that are not solely for marketing, and leisure and personal travel related to continuing education events. Every dollar of expenses saved transfers directly to the net.
Consider possible associates to transfer the office to
“Another misconception is the amount that adding a new associate may cost the practice. It is generally less than most think, and there are many ways to make it easier for the new associate to pay for themselves,” Pence said.
By bringing in an associate, the patient base and gross revenue are able to continue increasing. Net revenue will also increase rapidly, while overhead costs should remain constant.
Moreover, adding an associate allows the owner to ease into retirement. After a number of years, the associate may assume ownership and the previous owner becomes the associate. This ensures compatibility and promotes continuity and comfort for patients and staff.
Further, adding an associate may add specialties and technology advances to the practice, potentially expanding the patient base.
Investigate practice mergers, selling to private equity groups
Acquisition of practices by venture capital or private equity groups has been on the rise.
“There may be reasons or times when this is an attractive option, especially if the sale coincides with the owner wanting to retire within a few years,” Pence said. “Mid-career practitioners might find it less advantageous, as their return will generally be higher by maintaining ownership and continuing to reap the profits from the practice, and either expanding and exploring partnerships or selling closer to their expected retirement.”
Prepare yourself for life after the sale
Ideally the seller should have outside interests or specific activities they want to do in retirement. This could include volunteer work or other opportunities. Often, practice owners, especially solo practice owners, have not taken much vacation time and may not be “good” at time off.
Depression is common in retirement as there is a loss of routine, identity, and purpose.
“Practitioners should be aware of this possibility and should consider taking some time off before retiring officially in order to ‘practice’ being retired,” Peabody noted.