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Aging Technology – Some optometry practices still use outdated technology like the GDx.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 email@example.com.
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.
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.
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.
Spouse on payroll – All family members that will not be replaced at an equal or lesser expense need to be removed from the payroll.
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.
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.
Confidentiality – It’s a given, but make sure you have it.
Material exchange – When the buyer receives information about the seller, the documents exchanged are for informational purposes only.
Limits on disclosure – The buyer and seller agree to take responsibility for any breach by respective advisors.
Buyer can inform – This outlines who the buyer will inform such as employees, attorneys, accountants, consultants, and bankers.
Destroying the evidence – Any documents distributed should have specific guidelines on how they will be destroyed or returned to the seller.
Who talks to whom – This section designates the liaisons for communication between the buyer and seller.
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.
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.
Interested owners will submit an executive summary (overview of the practice)
Sign a non-disclosure agreement
Receive the confidential information memorandum (includes financials, employee information, assets, etc.)
Submit an indication of interest (pre letter or intent, range of price offer, time frame for transitioning)
Conduct management meetings (question-and-answer between Buyer and Seller discussing more specifics of the deal)
Write a Letter of Intent (LOI)
Perform due diligence (Seller discloses everything about the practice)
Draft the purchase agreement (attorney drafts an agreement reflective of LOI)
Show up for closing (bring documents to sign and payment)
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.
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
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.