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!”

 

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Bill Nolan

Executive Vice President of Williams Group, President of Practice Transitions
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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.

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.

  • 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.

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.

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 Nolan

Executive Vice President of Williams Group
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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.

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Tom Breen

Vice President of Practice Transitions
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A couple of years ago a good friend introduced me to Professor Jordan Peterson. Peterson was well renowned for his insight into human psychology. He distills down a life improvement truth into a simple statement that everyone has heard from a parent, or has said as a parent...clean up your room.

 The idea being that whatever it is that we are doing, we do it better if our room is properly organized.  In other words, we should organize the world around us so that we can operate efficiently within it.  

 Practice Management is properly cleaning up and organizing a room.  There is nothing more important for the success of a practice than to have it properly organized.  Everyone then benefits.    

 One of the often-neglected rooms that need to be cleaned and organized in your practice is the financial room.   A clean financial room represents an efficient cost-effective system that will give you, the business owner, the information you need to assess business performance and make the best decisions for your clinic and patients.   

 Your financial room consists of three distinct systems that ought to be aggregated into your financial management report. The systems are: Billing & Collections, Purchasing & Payments, and Payroll. Your practice management software provides reports for only one of these three – Billing and Collections.  

 I suggest that you think in this three-system framework to consider if any one of the three is blocking you from getting the information aggregated into a timely set of monthly financial management reports. An organized financial room ought to culminate in the three systems coming together into a financial management report that you can review within the first two weeks after month end. The following ought to be included in the financial management report: Balance Sheet, Profit & Loss and Cash flow statements.    

 A business owner needs their balance sheet to assess their cash and asset position relative to their current liability and long-term debt position.  The assessment can be as generic as, 'does what I'm looking at make me feel good?'  Do I have more assets than liabilities available to work with?  Life can be very challenging if our assets only equal our liabilities. We perform better if our assets exceed our liabilities by a reasonable margin.  This holds true with companies.   

 A business owner needs their profit and loss (P&L) statement to assess their operating net relative to other clinics in the profession.  The P&L measures how well you’re using the assets you have, allowing you to compare how you're performing relative to your peers.   To do so your P&L ought to be organized into six main categories to determine your operating income: Collected Receipts, Cost of Goods Sold, Staff HR, Occupancy, Overhead and Marketing. Each of these categories can be compared to national benchmarks to assess your clinic's performance relative to national averages. 

A business owner needs their cash flow statement to assess what amount of cash is: #1 is generated from clinic operations, #2 consumed from financing activities (debt service), #3 used in investing activities (equipment purchases, distributions).  Your cash flow statement will tell you if your clinic operations are generating sufficient cash to service debt and pay yourself and your taxes. The cash flow statement will give you a very clear understanding of where your cash is going. 

 From our client base, we have found that the most successful practices are those which have their financial room properly organized. 

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Brad Rourke

Chief Financial Officer
Williams Group
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