Dreams give us something to shoot for, and keep us going when things are difficult.
Many of you dream about owning an optometry practice. You imagine yourself putting your name on the sign and people around town talking about you as though you are some superhero. Maybe your dream is being introduced at a cocktail party to all of your spouse’s friends and they ask what you do. You feel your chest puffing out as you proudly say, “My name vision.”
To further crystallize your dream about your profession in optometry, you should ask yourself an important question: Do I want to be an owner or investor in the practice? There is a big difference between the two.
Makes or delegates all the decisions
Not part of day-to-day operations
Works all day Saturday should an associate be ill
Can count on having weekends off
Requests his or her family to be flexible with schedule
Goes home at the same time every night
May go a day or two of the week not seeing the children
Will most likely see the children everyday if desires
Financially benefits the greatest from the risk and sacrifice.
Financial benefit has no upward limits
Makes up the difference should the bills exceed the production.
Protected from downside limits of losing only what was invested.
Double stress of clinical responsibilities and day-to-day operation responsibilities.
Don’t stop dreaming and working to realize your dreams. However, be prepared to count the cost and walk into your dreams with a strong sense of reality. If you are considering ownership, visit with owners who will give you the real-life truth about the benefits and sacrifices of ownership.
I was arrested once. Yes, I’m not to proud to say it. Although it was many years ago, I still remember the embarrassment of having the officer snap handcuffs on my wrists. Being handcuffed creates a real immediate problem and leaves a lasting impression. Handcuffs take away freedom, and freedom is the key to becoming who and what you want to be.
Debt is a lot like handcuffs that limit you from taking opportunities when they arise, opportunities that directly impact what your career in optometry will look like.
Debt handcuffs you in these three areas:
Buying an optometry practice – Many graduating optometrists want to buy a practice or be part of owning an optometry practice, but many are handcuffed to school loans that require a $3,000 or more monthly payment. With those large regular payments, many don’t feel they can put any extra towards the principal and pay off the loan early. Or, they would rather not live as poor college students while doing so. However, keeping your college loans around for 10 or more years gives you no margin to take advantage of great buying opportunities.
Investing to generate non-optometry related income – Most everyone dreams of someday being financially independent. If not having the money to retire, at least having the freedom to take time off to raise children or follow a personally fulfilling passion. Leveraging debt could allow this, but usually ends up handcuffing us much longer than we initially calculate. If you do not have debt 10 years out of optometry school, think about having the finances to purchase the building you practice optometry in.
Growing your optometry business – Whether you are in solo practice or part of a group, there will be a limit to how much you can realistically leverage for practice growth. Individual debt choices directly impact business decisions amongst partners. The partner (or partners) who are debt free may want to move ahead with practice acquisitions or bringing in an associate. Those partners may want to pay cash or acts as their own bankers, while the debt-handcuffed partner cannot get on board due to personal limitations.
Going back to my brush with the law: Fortunately, when we arrived at the police station, I was uncuffed and released. My two buddies, however, did get in trouble for underage drinking. I had been the designated driver so my record was cleared and my father did not kill me. The whole incident serves as a great reminder that during my life I want to keep my freedom.
Debt is unavoidable in getting an optometry degree, but the length of time that you choose to stay in debt is completely under your control. New grads are choosing to pay off loans of $220,000 and more in five to seven years and creating huge opportunities for themselves after debt. If you think this is unrealistic, start talking to those outside your social circle.
After a week of hanging out on the beach, my wife and I were in the rental car heading to the airport. We have been married long enough to remember the days when couples blamed each other when they got lost. Now, when the turn-by-turn instructions in our iPhone landed us in a neighborhood 15 minutes away from the airport, we were brought together as we both cursed Siri.
Taking the wrong exit for the airport is frustrating, but still can be corrected without too much trouble. Taking the wrong exit in your professional career requires a whole different level of redirection.
The best way to make sure you take the right exit in your career is to plan for it years in advance. Part of the preparation process is finding a potential new owner to mentor to be the next generation that takes your optometry practice to the next level. Many companies have successfully transitioned ownership, but not without the proper planning. The bigger the company, the longer the pre-ownership time required to successfully transition.
Here are 3 “leaving a legacy” tips to help the next generation succeed.
“Play house” – My boys like to pretend they are Daddy without the responsibilities of Daddy. This is the same for the owner-to-be. Before they boot up as the owner, they need to walk in the shoes of the owner with a full view of the responsibilities and the rewards. Neither you nor they want to just “start owning” only to find out six months later that ownership is not what they thought it would be. As an owner, plan meetings to include the owner-to-be and let them be a part of the process for a year. Let them process accounting statements and join a strategic growth planning meeting.
Be encouraging – The owner-to-be will most likely be overwhelmed with the responsibilities of ownership. They will most likely state, “I had no idea ownership required this.” As the owner optometrist, you will need to be by them to let them know that they can do it. Many young optometrists are scared to own because they have no idea how they can do it.
Discover their WHY – Ownership is usually driven by a passion for something. Those passions can be self serving, like having the title of “owner” for cocktail parties. Or, passions can be inspiring. I know individuals who seek to grow their business and create financial freedom to do good for others. Many individuals have used their success to make the world a better place. Does your owner-to-be have a bigger passion and purpose?
Whether you are just beginning to think about your exit strategy, or you are at the cusp of needing to retire, having a plan and initiating the dialogue with another prospective owner is huge. Begin thinking about how you are going to raise the next generation. It is a win-win for you and the next optometrist.
Having a family has taught me a lot about planning. As each new child is added, we as parents need to make adjustments. When my wife and I had our first child, we made plans to make sure we arrived at our destination on time and with all necessary items. As we added child number two and now child number three, it is apparent that poor planning–or lack of planning–leads to many undesired effects.
Owning an optometry practice is no different. Each day as the practice grows it comes closer to the day you will exit ownership. Those optometrists who do not properly plan and adapt their plan over time are the practice owners that never find a qualified buyer. Where are you in the process of selling your practice?
Sell when BUYER arrives – When opportunity knocks you should open the door. A friend of mine was considering selling his veterinary practice to an interested associate. However, my friend was only in his early 50s and not ready to retire, so he told his associate it was not time. To his dismay, the associate left the practice and started his own. My friend was surprised that he lost his best potential buyer because he, as the seller, was not ready when the buyer was ready. Always be ready.
Sell at end of career – This is a great option if you have associates in place to buy you out. In fact, if you let them start buying you out years in advance, when you are ready to retire they will make the last payment and you are FREE. This does not happen without careful planning. Planning your exit strategy now will afford you the opportunity to sell at the end of your career.
Never sell – Too frequently this is the case of those who own their own practices. Single optometrists work daily to meet the needs of their patients. Then the day arrives that they want to retire. They assume a “for sale” sign can be placed on the front door and someone will buy it, but 400 to 500 practices a year close their doors without a buyer.
Sell before a BUYER arrives – This is a theoretical approach about always being prepared to sell. Many optometrists do not think about selling their practices, which is unfortunate because they may end up in the “never sell” category above. Buyers are not always available, therefore it is important to keep your practice up to date and always assume that this year will be the year someone offers to purchase your practice. The future looks like it will be run by the BIG optometry groups that can manage all the healthcare and HIPAA changes that occur yearly. To remain small is to run the risk of never selling your practice.
Selling your practice does not have to be a negative milestone in your life. The most satisfied and successful optometrists are the ones who have strategically planned their exit. Exiting ownership does not necessarily mean exiting optometry. Consider the advantages of planning your exit strategy now, even if it’s 20 years before you actually exit ownership. It’s never too early to start.
Have you been thinking about retirement?
If you have graduated from optometry school and you currently own your practice, you should be. It’s never too early to begin the process of preparing your practice to sell. Many optometry practices do not sell for reasons that could have been prevented if the CEOs would have had the mindset that someday they would sell. If you plan to someday sell your optometry business, then avoid these four costly mistakes that have left many optometrists holding a business they cannot sell.
Aging Technology – Some optometry practices still use outdated technology like the GDx. You might have a chance of selling your GDx in the United Kingdom, but you won’t get anyone to buy it in the United States. The standard optometry practice should have some form of Optical Coherence Tomography (OCT) technology.
Paper Records – If you believe you will hold out on changing from paper to EMRs (Electronic Medical Records), then plan on holding out from selling your practice. Most of the optometrists who are in the market for buying a practice have not even performed an exam on paper. Also, as costs continue to mount for changing from paper to EMRs, the pool of investors who are interested in paper offices has shrunk. Investors do not want to spend thousands at the outset just to make the office current. If you remain on paper, the value of your practice is on the decline.
Single Owner Doctor – What would happen if you stepped out of the practice? Is the success of the practice dependent upon one individual? The optometry practices that can remain profitable independent of a sole doctor are practices that carry the most value for potential buyers. Hiring an associate OD can be a difficult decision due to the up-front costs, but not selling your practice can be much more costly.
Depending on vision benefit plans – If your practice cash flow is greater than 50 percent from vision benefit plans like VSP, Eyemed, & Superior, then selling your practice will be highly dependent upon the future of the segregation of vision and medical. As we move to an Accountable Care Organization (ACO) environment where fee for service becomes obsolete, practices must prepare for bundled payments and full capitation. To be profitable in this environment, the number of patients seen must increase as the reimbursements decrease. Optometry practices depending on “ramping up their schedules” can only ramp up so far until it starts costing the practice to see patients. Transitioning your practice to a medical model with complimentary vision benefits is a must for selling your practice.
Optometrists continue to make similar mistakes each generation. Building a practice that is salable is key to maximizing the potential profits of owning a practice. If doing this does not seem necessary nor desirable, it may be an indication that you are best fit for being an associate. If you currently own a practice, you will want to sell it someday. Making the above adjustments should be at the front of your list for working on the practice. An astute buyer will not pay much more than 55 percent of the last three years’ average gross collected, and many buyers will not even pay 55 percent. Take action now and build your optometry practice to sell.
The ease of selling a product is inversely proportional to the cost of the product. If a patient at your practice wants to buy a bottle of ophthalmic lens cleaner, no one is concerned whether the individual can pay for the $5 bottle. However, if a patient is buying three pairs of sunglasses with all the additions, some may be concerned about the patient’s ability to pay for the total bill.
Now let’s take that to extremes and look at a potential buyer of your optometry practice. Most optometrists who own a practice assume when they are ready to sell, a qualified buyer will come along and buy it. Think again. Buyers are having more and more difficulties putting together resources to purchase a practice, and the larger the practice the harder it is. And even if someone can buy the practice, will he or she be able to manage the financing for you to receive the payoff?
When you are ready to sell, ask yourself these three questions about any potential buyer.
Is his or her financing complete? – Many practice sales have dissolved due to the inability of the buyer to get financing. If a buyer can only come up with 80 percent of the financing, you may consider financing the remainder. Please do remember that if you do this the financing agency (i.e.- bank) will get paid in full before you do.
What is the buyer’s lifestyle? – Look at the history of the buyer and and his or her credit rating. Have loans been paid back? Has a school loan ever gone into default? Does his or her taste of vehicles, housing, and vacations indicate being highly leveraged? If so, you may consider clicking “next” on the buyers page.
What kinds of relationships does the buyer have outside of the practice? – This directly relates to an associate OD that you are considering going into partnership with to buy your practice out. A friend of mine once said, “The most common theme about an individual who has multiple divorces is that individual.” Before agreeing to financially “marry” a potential buyer, remember that the integrity of an individual outside of the office is directly related to integrity inside the office.
Many sellers are so excited at the prospect of selling their practice that they overlook various red flags in the process. This is why all optometrists looking to sell their stock in the corporation should begin the process at least three to five years prior to exiting. Don’t assume your practice will be sold and you will receive all your finances from the practice. Start early for the best chance of finding a reliable buyer.
Prior to placing a name on birth certificate, many parents spend countless nights and Google searches looking for a name that resonates with them and will ultimately define their next child. The importance of a name should not be underestimated, especially when naming an optometry practice.
Two types of people will read the above and come to different conclusions. An individual with a fixed mindset will say a name really doesn’t make much difference, so changing the practice name isn’t worth the effort. The individual with the fixed mindset will also continue to blame the economy and insurance companies for lack of growth.
In contrast, an individual with a growth mindset will see changing the optometry practice’s name as an opportunity to be relevant today while preparing for tomorrow. Growth mindset optometry CEOs know change is inevitable and change is occurring at a faster pace than ever. For more on fixed mindset versus growth mindset read Carol S. Dweck, Ph.D’s book, Mindset: The New Psychology of Success.
The best advice for growing a practice is starting with a new name. A good name defines location and relevance to what you do.
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.
Decrease 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.
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.
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.
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.
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.
Here is a basic outline of an Optometric Practice Sale Executive Summary:
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.
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.
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%
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
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.
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
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.
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 firstname.lastname@example.org.