Are You Ready for a Transition?

For many years, most optometrists have believed 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.

An exit strategy doesn’t have to be overly complicated, but it must be strategically planned in order to reduce stress while maximizing your return on investment. The timing of the sale is something only each individual optometrist can answer for themselves, as there are many factors that go into making this decision, not the least of which is how a doctor has planned for their retirement. Since this is a very personal event, determine the time frame for the transition within a year or two of execution. This will give you the time needed to plan your work and work your plan.

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.

Key Considerations When Selling Your Practice (Part 1 of 2)

LOCATION   In today’s marketplace, the number one criterion a young doctor uses for determining whether he or she will buy a particular practice is its geographic location. Whenever I lecture at optometry schools, the overwhelming majority of students tell me that when they create their short list of practice opportunities, they do so by geographic location. Unfortunately for the seller, that is the one thing about your practice that is nearly impossible to change. So, knowing how to overcome objections is important.

REGION   Issues like demographics and the economic vitality of a community are critical considerations for potential buyers and should be considered by every seller when transitioning a practice.

Key Considerations When Selling Your Practice (Part 2 of 2)

BUYING POOL   There is, however, a small market for both potential buyers as well as sellers wishing to transfer ownership of a practice. The preponderance of the buyers and sellers today are other optometrists which, by definition, limits the liquidity the marketplace. Occasionally, some other entity such as a medical group or hospital group may buy a practice, but those purchases are few and far between.

OPTOMETRIC PRESENCE   A factor often overlooked when selling is whether optometry has a strong presence and is supported by the state’s legislative practice act. There is no doubt that in certain regions of our country the profession has thrived and been a key player in the healthcare delivery system. As a result, potential buyers look for practices to purchase in these areas.

When you might need help selling your practice

If you’ve tried to sell your practice with limited success, a professional brokerage company, especially one specializing in optometry, may be the best investment you can make.  An experienced broker will advise you on many things, including:

MAKING IMPROVEMENTS. Your broker will be able to aid you in determining if there are areas for improvement within the walls of your practice—from upgrading fixtures, paint, and some cosmetic issues to the overall appearance of your practice.

SHOW IT. It’s important to make key/necessary improvements and then to take, post and send images of the location.  It will be beneficial to have your images posted online and consider a video walk-through of the practice also.  Giving prospective buyers as full of a picture of the layout of your practice will help weed out serious buyers from everyone else.

MANAGING EMOTIONS. Perhaps the most important element of professional help is keeping the emotions of both buyer and seller in check. For most doctors, the practice is their life’s work, and transitioning out, even if the time is right, can create and engender several competing emotions. When emotions run high, people tend to make a quick decision. That’s a big reason why having a neutral third party is helpful.

UNDERSTANDING FINANCING. When banks look to finance the sale of your office for a new buyer, the primary concern and metric is the free cash flow available for the young doctor to pay himself or herself and service the debt incurred by the sale. Professional help in understanding the available free cash flow—and guiding a seller through good growth strategies to improve cash flow—will all help with the long-term strategy of transitioning a practice.

Partnerships – The Importance of Getting Legal Counsel

If you are heading down the path to partnership for the first time, here are some of the basics that will generally apply. If you are taking an associate from an employee to a partnership, you will, by definition, be selling some ownership interest in the office. It is this transfer of ownership that makes the seller and buyer partners in a legal sense. Depending on the tax and legal structure of the practice, you will either be selling a percentage of your assets (non-corporate) or stock (if the business is a corporation). If the practice is not currently a corporation, use an asset purchase agreement to sell part of the practice to your associate. If the practice is some form of a corporation (like C Corp or a Sub Chapter S), use a stock purchase agreement.

STOCK PURCHASE. If your practice is a corporation and has issued stock, then the transfer of ownership to the associate will be by the use of a stock purchase agreement. That agreement will outline the number of shares of stock to be sold, the purchase price for each share, and the method of payment, as well as other issues.

ASSET PURCHASE. If your practice is not a corporation, you will most likely use an asset purchase agreement to transfer some percentage of ownership in the assets of the business to your associate. When the transfer of ownership is complete, you have a partner.

Under no circumstances should anyone try to put these legally binding agreements together without legal counsel. They are worth their weight in gold to everyone involved.

Is it Time To Add an Associate?

To identify whether there is a need for a new optometrist to join your practice, begin by looking at your numbers. As you review your weekly and monthly statistics, do you see your patient base growing or shrinking?

Measure that base by comparing your practice's established and new patient exams this year versus last year. Use both the complete and intermediate exams to determine this.

As you review the numbers, ask yourself, “Am I seeing more new patients this year than last?” If the answer is no, and you are booked three or more weeks in advance, this is a good indicator that you should add a new associate to your practice.

Next, answer this set of questions:

■ Have you been in practice five to 10 years?
■ Are you booked weeks in advance and having difficulty fitting new patients in to your schedule in a timely manner?
■ Are you looking to improve your balance between family time and the practice?

When you can answer yes to the above questions, it’s probably time to explore the option of adding an associate.

The Value of Your Practice (Part 1 of 2)

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.

BOOK VALUE is simply the value of an asset carried on the books of the business. This value generally is acquisition costs net of accumulated depreciation. For example, if in 1990 you bought a slit lamp for $18,000 and its current accumulated depreciation is $12,000 on the company books, this asset would have a value of $6,000

REPLACEMENT VALUE is the cost of replacing that piece of equipment in today’s market. Using the slit lamp example, if the slit lamp (which was purchased in 1990 for $18,000) was destroyed in a fire and needed to be replaced, its replacement value may be closer to $22,000 or $23,000—the cost of replacing it brand new in today’s market

FAIR MARKET VALUE is the most subjective of the three accounting concepts, especially as it applies to ophthalmic equipment. It is nonetheless the concept that is most often applied to determining the value of hard tangible assets like equipment.

The Value of Your Practice (Part 2 of 2)

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).

NET VALUE OF ASSETS is a methodology that determines the net fair market value of the assets previously discussed, including goodwill. Net value of assets, of course, deducts any outstanding debt on the practice at the time of sale.

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.

CAPITALIZATION OF EARNINGS values the net earnings of a business as an investment. A cap rate is determined, which is an assumed return on investment for the buyer. Using this methodology, no specific value is determined for the assets, but rather the assets’ ability to produce income.

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.

PERCENTAGE REVENUE STREAM is used to determine some sense of value. Currently, good practices are appraising for between 50% to 65% of a year’s collected receipts. This means a $500,000 practice will appraise for between $250,000 and $300,000.

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.

Dissolution of your Partnership

Partners sometimes can’t make the arrangement work; therefore, all partnership or shareholders agreements have a section entitled “Dissolution or Withdrawing from the Partnership.” Several key provisions are critical to have if things go wrong, including the common triggering events (see sidebar). Here are some of key issues.

DEATH. Though most traumatic, it is the easiest from a legal and partnership standpoint. All good partnership or shareholders agreements should have a key man provision where the partners insure each other’s lives for the value of their ownership interest.

At death, the ownership interest of the deceased partner will usually transfer to his or her estate. If the buy/sell agreement or provision of the partnership or shareholders agreement is structured correctly, the estate will be required to sell the deceased partner’s interest or stock back to the partnership, and the life insurance will provide the cash to repurchase the interest or stock.

Without this provision, it can be difficult to ensure the orderly transfer of ownership. There are several tax provisions necessary to maximize the proceeds of life insurance contracts, so consult a tax professional/attorney when setting up these provisions.

DISABILITY. If a partner in a practice becomes temporarily or permanently disabled, it is important that your agreement covers issues such as what constitutes a long-term disability; whether or not long-term disability triggers an automatic buyout of your ownership interest; and the value of your interest should you become disabled.

RETIREMENT. This is good to include in the voluntary withdrawal or retirement section of your agreement should one of the partners retire. Many agreements will base a partner’s retirement value on a multiple of their revenue over the last three years. The valuation formula should be reviewed annually.

It is imperative that all legal and accounting issues be correctly addressed by your attorney and accountant.

Finding a New Associate

When selecting a new associate, consider the needs of the practice. You may, for example, be an optometrist who has specialized in vision therapy. If this is the case, the office may benefit from a more traditional optometrist to help increase dispensary and contact lens revenue.

Perhaps you are a practice that sees very little medical billing. In that case, you may consider bringing in a doctor whose focus is more medical, which would allow you to give your patients a more complete eyecare facility.

Ultimately you will be looking for an optometrist who can expand the value of your practice and who will bring more new business to your practice.

New Associate –Attracting New Patients

Now that you’ve hired a new associate, why is it so important to bring new patients into your practice? Here are three facts about established patients.

■ First, they have already referred their friends and family to your practice. So, they are now helping you to grow.
■ Second they do not spend as much money when in the office as they did as new patients.
■ Third, they move away or pass on, leaving you with a shrinking practice.

Your goal should always be to strive for 30 percent new patients in your office. If your practice is below 30 percent new patients and dropping, you have reached the mature stage of your practice.

A new associate can help you to bring in young families and begin to build a new patient base, changing from a mature stage to an introductory stage again. This will also help increase the market value of the practice, an important factor when you are considering selling or planning for retirement.

Break-Even Analysis When Hiring a New Associate

Now that you’ve hired a new associate, why is it so important to bring new patients into your practice? Here are three facts about established patients.

■ First, they have already referred their friends and family to your practice. So, they are now helping you to grow.
■ Second they do not spend as much money when in the office as they did as new patients.
■ Third, they move away or pass on, leaving you with a shrinking practice.

Your goal should always be to strive for 30 percent new patients in your office. If your practice is below 30 percent new patients and dropping, you have reached the mature stage of your practice.

A new associate can help you to bring in young families and begin to build a new patient base, changing from a mature stage to an introductory stage again. This will also help increase the market value of the practice, an important factor when you are considering selling or planning for retirement.

 

 

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Bill and the rest of the Williams Group team