Four ways to increase your net before selling your optometry practice

Selling an optometry practice involves two major steps. The first is deciding it is time to sell the practice that you have spent your life building. The second step is executing a well-laid plan for getting maximum dollars for your life-long investment. When I coach buyers to successfully analyze an optometry practice, we look at the cash flow generated and the net dollars kept after expenses.  Buyers are keenly aware of the financial benefits of an optometry practice that keeps $0.40 for every dollar collected. If you desire to sell your practice and are currently keeping $0.26 for every dollar collected it is time to evaluate your practice. Consider implementing these four options for increasing your net dollars kept.

  1. Associate attentive in meetingDecrease expenses – There are many different strategies to decreasing expenses. One strategy I have seen other practices use successfully is using multiple labs. If a practice uses three different labs and does a line item expense comparison, they will notice that the lab prices vary between products. By highlighting the products that are least expensive between the three labs and then having your staff order the least expensive ones from the respective lab, the practice will find the decreasing cost of ophthalmic goods more profitable than one would expect.
  2. Increase volume of new patients – There are two ways to market–internal or external. The least expensive and usually most effective is internal marketing. Talk to your existing patients about the medical eye care that your practice offers. Visit with them during the exam about the latest development in contact lenses. They may not be a candidate but their friends might.
  3. Increase product sales – As optometrists we have no problem prescribing antibiotic infections for the eye, so why do we not prescribe specific anti-reflective coatings for computer fatigue? It amazes me how many optometrists feel like they are selling something when they say, “as part of your glasses prescription, I am adding (Prevencia or Recharge) to protect your eyes from the damaging blue light emitted from computer/tablet/phone screens.” By prescribing products  your patients need, you are helping them and increasing product sales at the same time.
  4. Increase fees – This is easy. Simply add $10 to the cost of each contact lens professional service. My business partner and I just bought a second practice and the Optos fee went from $20 (previous practice price) to $32 (our price). There has been minimal to no push back from patients. Do not be afraid to charge more.

Selling an optometry practice involves more than just posting a “for sale” ad on Optometry’s Career Center. A seller must intentionally prepare to market the practice by getting the books in order and making the practice net as attractive as possible. The above four options can increase the value of your practice immediately.

Selling an optometry practice? Start with this

Are you thinking about selling your practice? If you are an optometrist who owns a practice then you should be. You may not be planning to retire for 15 years, but you should still entertain the thought of selling, as many decisions you make now will impact your ability to sell later.

When optometrists are ready to sell, they are often stuck at where to start. One key document that you must have to set yourself apart from other sellers is an executive summary of your practice. An executive summary is a “teaser” for those who may be considering buying into a practice or buying a practice outright. An executive summary communicates enough information to pique a potential buyer’s interest without being so detailed it is passed over.

Screen Shot 2014-07-08 at 8.53.29 PMHere is a basic outline of an Optometric Practice Sale Executive Summary:

  1. Picture of office front or your website home page (assuming you have a dynamic optometry website)
  2. What is being sold (partial sale, outright sale, associate buy-in)
  3. Practice details
    1. Demographic details (this can be general percentages of practice patient make up)
    2. Insurance accepted
    3. Revenue per patient (total collections for the year divided by the number of full exams)
    4. Gross collections for past 3 years broken out for each respective year.
    5. Net/gross ratio
    6. What is special about the practice
    7. Relationship with physicians within the community
    8. Highlight that practice is the medical model (or a specialty contact lens practice, etc.)
    9. Equipment in use (buyers are looking for key pieces of equipment)
    10. EHR system (what system, following progression of meaningful use 1 & 2)
  4. Community details
    1. Churches
    2. Schools
    3. Driving distance to what attractions
  5. Purchase price
    1. Give the range of price
  6. Detail how you will help the buyer be successful if the buyer so desires

Remember, “curb appeal” sells houses, and the same goes for practices. Make your executive summary look nice and professional, and easily distributed by brochure/flyer and a printable .pdf.

Deciding to sell your optometry practice does not necessarily result in the sale of your practice. Those ODs who are intentionally planning for the sale of their practice and executing their plan are the ones who are finding satisfaction in selling their practice. Don’t make the mistake of 400-500 practices a year that close their doors without a buyer.

Asset or Stock Purchase: Optometry Practice Sale

To be a great CEO of your optometry practice it is imperative that you have the right individuals on your team.  The best leaders of optometry practices are surrounding themselves with people who collectively make everyone better.  The examples and education below comes from J.R. Armstrong, a CPA at May & Company, LLP, in Mississippi, who works with optometrists throughout the United States in the transitioning of their practices.

ASSET PURCHASE: Tax advantage buyer

  • The purchaser has the ability to depreciate the assets purchased, including the ability to take $179 on qualified assets. This is a huge immediate tax advantage to the purchaser.
  • Depending on the breakdown of the sales price, the seller may have to report ordinary income on any gain on the sale of assets subject to a maximum federal rate in excess of 40%. Sales price allocated to goodwill/patient list is taxed as capital gain to the seller, while amounts allocated to equipment are ordinary income.

STOCK PURCHASE: Tax advantage seller

  • The purchaser does not have the ability to deduct the purchase price. It becomes his stock basis in the practice, similar to if he were to purchase GM stock and later sell it; the stock basis would be used to calculate gain or loss on the sale at that point. There is no immediate benefit and no benefit until the eventual sale of the practice.
  • The seller receives capital gain treatment on the entire gain on the sale of his practice, the federal tax rate is generally 15% – 20%

Example:

  • Let’s assume Seller agrees to sell Practice for $250,000.
  • He has drawn nearly all the profits out of the company each year leaving Seller with a $10,000 stock basis in the company
  • He has taken accelerated depreciation on nearly all his equipment and has a tax basis of $15,000 in his equipment
  • Seller is in the 33% federal tax bracket, for a married couple that equates to income of approximately $225,000 – $400,000

Asset Purchase:

  • Seller and Purchaser agree to an allocation of $100,000 to goodwill and $150,000 to equipment
  • Seller recognizes $100,000 of capital gain on the sale of goodwill and $135,000 of ordinary income on the sale of equipment
  • Seller pays tax of $15,000 on the sale of goodwill and $44,550 on the sale of equipment for a total of $59,550
  • Purchaser gets to deduct $36,666.67 in depreciation and amortization on his return, resulting in a tax benefit of roughly $12,000 assuming he too is in the 33% bracket.

Stock Purchase:

  • Seller recognizes $240,000 of capital gain on the sale of his practice stock
  • Seller pays tax of $36,000 on this gain
  • Purchaser has a basis in the corporate stock of $250,000
  • Purchaser gets no tax benefit until he sells the practice

Difference:

  • In the asset purchase scenario, Seller pays $23,550 more in taxes than in the stock purchase scenario
  • In the asset purchase scenario, Purchaser gets a tax benefit of $12,000 each year for 5 years (the depreciable life of OD equipment) and $2,200 for the following 10 years (the amortizable life of goodwill is 15 years)
  • Over the entire 15-year life of goodwill and equipment cost recovery Purchaser gets a tax benefit of approximately $82,000 in an asset purchase situation.
  • When Purchaser eventually sells the practice, he has already recovered the his basis in the practice through depreciation, so he will now be faced with a gain on the sale.

There are many other non-tax items that must be considered with respect to this decision, but hopefully this indicates the major cash-flow differences with respect to each method of purchase. Additionally, the actual results of the taxes will differ depending on both Purchaser and Sellers personal situation; i.e. amount of itemized deductions, other income, spouse salary, children etc.

Also, definitely something to consider – when you purchase the stock of a company, you also purchase any “skeletons in the closet” i.e. potential employment liability claims, unknown tax issues, potential patient litigation. There are insurance policies to cover these claims, but it’s certainly worth keeping in the back of your mind.

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J.R. Armstrong is a CPA at May & Company, LLP.  He specializes in optometry practice accounting and is recommended by OptometryCEO.  He can be contacted through jarmstrong@maycpa.com.

What all buyers and sellers of optometry practices need to know

All sellers want to get top dollar for their optometry practice, but many of them are not.  One reason they are not getting 65 percent of gross or higher is because they have not taken the time to remove all their personal expenses from the income statement.

Owners of optometry practices can take advantage of many tax benefits. For example, many owners take family vacations during the week of Optometry’s Meeting, which allows them to write off the trip as continuing education, but also enjoy time with family. If the owner is not planning on selling the business in the near future this plan works well.

However, optometrists  planning to sell their practices in the next three years should take their personal expenses off the books. This not only cleans up the books for a sale, but reduces expenses and thus appropriately increases the bottom line. Here are four categories to consider as personal expenses.

  1. Club memberships – Memberships to health clubs and golf courses, as well as clubs for hunting, fishing, poker, etc. need to be discontinued or paid for personally.
  2. Car expenses – The owner may be claiming a vehicle as a business expense. Unless that vehicle goes with the purchase of the practice, all monthly payments, insurance payments, gas, and car services need to be considered personal expenses and removed.
  3. Spouse on payroll – All family members that will not be replaced at an equal or lesser expense need to be removed from the payroll.
  4. Travel – Sometimes convincing cases can be made for keeping travel expenses in the books, like in the scenario above. Some moderate travel-related business expenses are not unreasonable. However, sellers who complete most of their continuing education in expensive locales like Hawaii or Europe with family and friends probably need to clean some of those expenses up, especially if the amount exceeds usual and customary expenses for a weekend CE.

A seller who takes the initiative to clean the books in preparation for a sale will not only increase the value of the practice by showing a better bottom line, a seller will also demonstrate integrity and good faith. Sellers who lead in good faith are the ones most likely to close a deal.

When buying or selling, get a confidentiality agreement

Wine loosens lips. At dinner parties or family gatherings wine can cause people to relax and increase their enjoyment of the evening. That is, until your brother-in-law has a glass too many and tells everyone about his recent gambling adventure when he lost $1,000 at the craps table. The story might be amusing if you had not recently heard how their family was struggling to make ends meet. So your sister is embarrassed about her husband and your mother is quickly picking up the dishes and trying desperately to change the subject.

When you are in negotiations to buy or sell an optometry practice, the details of your deal may be one empty wine bottle away from becoming common knowledge at the next social gathering. You can assume the people with whom you are negotiating won’t talk, but what if they do? Insisting on a confidentiality agreement up front for all buy-sell negotiations communicates the importance of keeping lips sealed until the deal is done.

Here are seven key components of a confidentiality agreement.

  1. Confidentiality – It’s a given, but make sure you have it.
  2. Material exchange – When the buyer receives information about the seller, the documents exchanged are for informational purposes only.
  3. Limits on disclosure – The buyer and seller agree to take responsibility for any breach by respective advisors.
  4. Buyer can inform – This outlines who the buyer will inform such as employees, attorneys, accountants, consultants, and bankers.
  5. Destroying the evidence – Any documents distributed should have specific guidelines on how they will be destroyed or returned to the seller.
  6. Who talks to whom – This section designates the liaisons for communication between the buyer and seller.
  7. Length of confidentiality – Most agreements are between one or two years. Do not sign an agreement that does not have an end date.

I have worked with many buyers and sellers who ask if all of this is really necessary. I believe a signed confidentiality agreement is a must. Assuming the best in someone is a great principal to live by–until that individual cannot be trusted. If you are in the middle of a deal and learn you cannot trust the other party, you will regret not having a signed confidentiality agreement. A confidentiality agreement is ALWAYS good practice.

12 steps to buying an optometry practice

Many people do not advance in their careers because they are unable to execute ideas.

For example, many optometrists talk about buying a practice, but after 10-15 years of working for someone else they are still only talking about it, and no closer to buying than when they had the initial thought.

In “Getting things Done”  David Allen says action points should be specific. Accomplishing a task like “getting your tires changed” has specific steps. First, you find out when the tire places are open. Second, you research online or at the store to decide what type of tires you need. This method takes a simple “to do” item and breaks it in many parts so it actually gets done. This is the secret used by highly productive individuals.

The list below is an example of taking a big idea like buying an optometry practice and breaking it down to make your dream a reality.

  1. Compile a list of optometry practices (even ones not officially listed – FOR SALE)
  2. Contact the owners to communicate interest.
  3. Interested owners will submit an executive summary (overview of the practice)
  4. Sign a non-disclosure agreement
  5. Receive the confidential information memorandum (includes financials, employee information, assets, etc.)
  6. Submit an indication of interest (pre letter or intent, range of price offer, time frame for transitioning)
  7. Conduct management meetings (question-and-answer between Buyer and Seller discussing more specifics of the deal)
  8. Write a Letter of Intent (LOI)
  9. Perform due diligence (Seller discloses everything about the practice)
  10. Draft the purchase agreement (attorney drafts an agreement reflective of LOI)
  11. Show up for closing (bring documents to sign and payment)
  12. Deal with post-closing adjustments and integration

Closing a deal can seem like a daunting and drawn-out process. Some deals hit snags or a dead end and never get done, but it does not have to be this way. Many optometry practices are successfully changing hands. Taking the time to prepare in advance for each step will help ease the stress of making a deal work. More importantly, this will keep you and the seller focused on the initial goal:  transitioning the practice.

Reference:  Snow, Bill. Mergers and Acquisitions for Dummies. Indianapolis, Indiana: Wiley Publishing, Inc., 2011. Print.

Why you may NOT want to buy an optometry practice

One of the most difficult decisions new graduates must make is which type of practice setting to pursue. In theory, graduates may think working with other eye doctors would be a perfect fit. However, once they have worked with other eye doctors they realize they do not like playing in the sandbox with others. Until they experience the chaos of a multi-doctor practice, they will not truly know if it is a place where they can thrive or if they would be better off starting their own solo practice. Knowing yourself is the key to practice success.

Successful optometrists who START PRACTICES are typically

  • individuals who prefer to choose their staff members instead of inheriting them
  • good at networking and meeting new people
  • realistic in their view of an optometry practice in today’s highly competitive market
  • passionate about creating an environment that makes people feel good
  • individuals who value the rewards of delayed gratification

Successful optometrists who PURCHASE OR BUY INTO a practice typically

  • like the stability of an established patient base
  • would rather fit into the staff culture than recreate it
  • prefer to follow policies and guidelines already in place
  • are OK with letting others decide what practice equipment is purchased
  • sacrifice their needs and preferences of staff, management, and equipment for instantaneous cash-flow and immediate production

These days far fewer practices are starting from scratch because an increasing number of existing practices are available for sale. Optometrists from the Baby Boomer era are putting their practices on the market and retiring. With the number of ODs who will reach retirement age during the next five to ten years, one can only expect that the number of solo practices for sale will continue to grow.

You may find that you want to be in a partnership but haven’t found one that fits your lifestyle. One solution that has become a recent trend is two doctors partnering together to purchase a solo practice and then continuing to run it as a one-doctor practice with two part-time owners.

Whatever your needs, make sure you have assessed them carefully before jumping into a start-up or practice purchase.

 

3 first steps to taking the FEAR out of purchasing your first practice

Nightmares become even scarier when you realize you are paralyzed by fear and can’t run away from danger. Unfortunately, fear paralysis can also sidetrack your career if you are unable to make sound decisions while facing risks and the unknown.

As a new graduate who carries $125,000 or more in student debt and whose job outlook is short of promising, buying your first practice can strike fear at the core. Maybe you have been practicing for a while, but your current work situation has sent you home at night wishing you were the boss. Don’t let fear stand in the way of your dreams to buy your first practice. Instead, be encouraged. Even the most savvy risk-taking entreprenuers have to deal with fear.

There are a few steps you can take to take hold of your fear and prepare your mind for sound decision making. Fear is an emotion inside yourself. With intentional planning and a great strategy, you can successfully set your fears to rest as you prepare yourself for purchasing your first practice. To begin the process follow these initial steps . . .

  1. Practice preferences – Take the time to list all the expectations that you have in a place you want to live and a place that you want to practice. Decide if you want to practice   where you want to live or live where you want to practice. If you choose the latter you will have more options regarding a practice available to purchase. This potentially could limit your family options in schools, churches, and activities. The list should consist of patient demographics, size of staff, work hours, scope of practice (size of town/city will affect medical patient management), risk level by practice size, competition, EHR capability, managed care impact, and many others. The list will be a great asset when you are at risk of making rash decisions influenced too heavily by emotions. I recommend Evernote as my software of choice for doing this.
  2. Need to Know – This is the list of items that you “need to know” about the practice to make an informed purchase. You will want to know exam totals by doctor (last three years), yearly production by doctor, practice debt, age and type of equipment, patient demographics by percentage, patient demographics by zip code, staff demographics (age, length of employment, extent of training), insurance panels and percentage of revenue of each, daily schedules for past year, fee structure (services and hardware), dispensary capture rate, and actual expenditures by budget categories. This list is not all-inclusive but should be a good start on preparing you to assess a practice.
  3. Potential Practices – Start by pulling up a map of the area of the country that you would like to practice in based on #1 above.  Take a selected screenshot of the map (on a Mac it is Command+Shift+4 then select area) then mark potential places on the map (Skitch works great) from your advanced search done on Optometry’s Career Center – Search Opportunities. Many optometrists make the mistake of eliminating opportunities too fast. Keep open to the possibility of exploring options that you may not initially consider. There are golden opportunities within an hour or so of major metropolitan areas. Many small practices in rural America net so high that you could work three days of the week and spend four days with your family in the big city.

This may not be the most exciting part of purchasing a practice, but a quick decision laced with fear will lead to many more quick decisions that can result in business chaos. You can be very successful as CEO of your own practice. Those who have gone before you did not become successful by accident. They knew what they wanted, put aside their fears, and went after it.

 

4 reasons to buy an optometry practice NOW

Most of you like to shop.  For some it maybe clothes and for others it maybe handguns.  Everyone likes to see that their favorite items are on sale.  Research has shown that men and women differ slightly in this area.  For men, they know what they need (or want) and will purchase it whether it is on sale or not.  For women, they will buy something just because it is on sale whether they need it or not.  In today’s optometry practice market, men and women should both be purchasing practices.

 

Here are four reasons to buy an optometry practice now.

  1. Money is cheap – Interest rates remain at historically low levels.  The loan market is “tight” but as professionals we remain a great investment.  Check out one of the leader’s in loaning money to professionals.
  2. Buyer’s market – With the baby boomer generation hitting the end of their career in optometry, this has created a rush of practices that are for sale.  As this trend continues the number of sellers appears to outnumber the buyers creating a buyer’s market.  Also, the economy has impacted the value of practices over the past 5-10 years with many practices being sold between 55-65% of the last 3 year’s gross collected.
  3. Growth opportunities abound – Many of optometry’s best doctors have chosen to forego the opportunity to stimulate growth by incorporating the medical model of optometry practice.  New graduates are practicing with medicine in mind and with that comes an increased amount of diagnostic testing and thus growth throughout the practice.  It does continue to be important to not lose the roots of the refraction and a resulting pair of glasses, but a practice that has done only that is a large growth opportunity.
  4. Best ROI (return on investment) – Although the stock market has been hitting all-time highs, the days of greater than 10% growth per year are seemingly far and few between.  Also, CD rates are at all-time lows presenting us with minimal areas for good growth investments.  Ask your senior doctor where he/she has made the best ROI over the past 20 years and many of them will say the practice has been the biggest payoff.  Choosing to not buy a practice maybe passing up your best investment opportunity.

Whether you are a man who knows what he wants and seeks to “kill it and drag it in,” or you are a woman looking for the latest sale, now is the time for you to shop for your optometry practice.  There are many practices available that will fit your style and budget.  If there was ever been a time to buy it is now.

3 reasons to not finance the sale of your optometry practice

We all want to retire sooner than later.  Many of the decisions we make today will impact tomorrows retirement plans.  As optometrists we are provided a profession that rewards us nicely.  To best prepare for life after practice, you must consider your financial position post practice ownership.  Here are 3 reasons to “take the money and run.”

  1. Risk tolerance – With the transition of your practice you will lose the day-to-day control of operations.  This can directly impact the performance of the office
     and ability of the buyer to make their monthly payments.  Are you willing to take the risk on the buyer regarding their ability to manage an optometry business?  Many consider this a risk they are unwilling to take.  You can protect the downside of your risk if you do not finance the complete purchase and a commercial lender is involved.
  2. Remaining Connected – If you offer seller financing, this communicates to the buyer that you believe in the future of the practice.  As a buyer, I am more attracted to having a seller willing to finance because the seller remains as a consultant to the practice.  If you do not want to remain connected then do not finance the sale of the practice.
  3. Cost of missing other opportunities – Since you will be financing the sale of the practice, you will not receive all the money upfront.  This will limit the amount of capital that you have available for other investment opportunities.  Maybe you want to purchase commercial real estate as a part of your investment portfolio or pay off the balance of your home mortgage.  Visit with your financial advisor to determine where your greatest return on investment would be before deciding to finance the sale of your practice.

You do want to retire sooner than later.  Those optometrists that have a CPA and financial advisor are not the ones worried about deciding to finance or not finance the sale of their practice.  They know that a CPA and financial advisor who understand the tax implications and business of buying and selling optometry practices, are going to make all the difference in limiting your risk, freeing you from the practice, and putting your money into the right place for future growth.