A theory is a supposition intended to explain something. The person who holds the theory gathers the facts or science to prove the theory true. Many optometrists looking to buy or sell a practice are looking for a valuation that is not only good in theory, but has been proven trustworthy in real-life situations.
OptometryCEO and others who have experienced practice transitions report that today’s optometry practices are transitioning with valuations of 55-65 percent of the last three years’ average gross collections. With this in mind, left brain optometrists are demanding a mathematical formula on which they can stake a claim.
Selling eye doctors would like to use a “formula based valuation” that proves their practice is worth more than what the market is bringing. Theoretically this is a great mental exercise, but it does not carry practical weight.
For those of you wanting to plug numbers into a formula, try the following popular one used to value practices throughout the country. It is one of many formulas used to value a practice.
62% of adjusted revenue
+frame inventory
+leveraged practice assets
+40% of appreciated equipment/furnishings
+65% of current accounts receivable
If you like the results of the formula above, consider it a starting point to list your practice. However, don’t be surprised if you have to sell for less than the full valuation price.
I understand that the above formula has been created to estimate the value of a given Optometric practice. Currently I am looking to appraise my practice and was wondering if your company appraised practices given the proper data? If you did appraise practices how much would this cost? Thank you for your time and efforts regarding this matter.
What do you mean by adjusted revenue? What would you be adjusting the revenue for? Thanks
Thank you for your comment. The adjusted revenue is basically your gross receipts. Agreed, the use of “adjusted” is confusing. You would subtract out any revenue not generated by normal practices of an optometry office. (ie – some owners run non-production based revenue through the office, or if you owned the building, and did not have a loan equivalent to a standard rental dollar amount then you would have to adjust the revenue based on a usual and customary rent for the area.) As you are aware, gross revenue is revenue minus cost of goods sold, which does not equal the “adjusted revenue” this formula refers to. Please know that this is not a formula that I recommend. I hope this helps.
Since you do not recommend this formula and from what I have gleaned from elsewhere you need to take more into consideration then the straight 55-65% (or at least consider other aspects to figure out if the practice should be valued more towards the 55% or 65%) Can you offer any insight on how you would begin to valuate a practice? I know there is no exact formula but in general what things do you consider. Say a buyer is looking at a stock purchase (poor for buyer), the practice has many locations (a lot of overhead), etc. Any help would be very appreciated.
You are absolutely correct in looking deeper into the purchase and nailing down a specific percentage. The 55-65% is what drives the range of sales and getting to the exact percentage is sometimes difficult. Here is what I would recommend looking at. What is the growth potential for practice? What is the cash flow (practice net) and make sure the net is calculated correctly to avoid an inflated net. I would spend more on a practice that is keeping 33% or more of the collections whereas a high gross practice that keeps 25% would be valued higher, I would tend to not pay as much percentage wise. I would also look at the patient demographics in regards to future revenues. How are you going to ensure continued success. Also, how is the seller going to communicate the sale to patients. The most successful transitions occurred when the buyer had the seller communicate to all his/her most recent patients and request they stay with the practice. This can be done in a number of ways. In my opinion, the biggest valuation piece is in net collections. Also, most practices do not sell for enough that a 10% spread is that much in the big picture. From 55-65% on a million dollar practice is only 100k, so I would encourage you not to get lost in the exact dollar value but to assess future stability (medical model practice) and future growth potential. I hope that helps in this short reply.
Can you help me evaluate the net collections? Since they are a c-corp their taxes have shown a negative over the past years (which I have been told is normal for this type of corporation). Also the balance sheets show negative or minimal income as their are many other areas where the profits may go (such as vehicles, travel, dues and subscriptions, etc.). After all of these the company shows minimal to no profit and owner’s salary is also very low compared to what one would expect with a high grossing practice.
I would recommend reading this post Do you calculate your practice net correctly? I would pay your CPA, or a CPA familiar with healthcare business, to review the c-corp accounting so you know exactly what you are getting.
I am wondering, as far as your statement above, gross revenue is revenue minus cost of goods sold, is that a general rule or just one used to value a business? The company I’m looking at took 65% of the ‘gross receipts and sales minus the returns and allowances’ which comes to a very different number then subtracting the cost of goods sold. I’m looking for a reference to refer to when discussing the valuation. If you could offer any advice I would appreciate it.
Gross revenues is the result of money paid by patients and insurance minus allowances for returns, refunds, etc. You maybe thinking of net profit which is gross revenues minus expenses, such as cost of goods. The company that took 65% of gross revenue minus returns and allowances would be 65% of net revenues. I would highly recommend that you have a CPA on your side to help you work through this. I hope this helps.
Great Article!!! As a 2008 grad, I’ve been actively seeking ownership opportunities. However, with the comment of the increasing retirees (baby-boomers) within 5-10 years, would this significantly adjust the practice valuations given that there will be an excess soon? Would it be advisable to stick out retail for a much cheaper practice with decent income? Thanks and, again, very well done!
The time is now and moving forward for the next 5-10 years. Practices are being valued very reasonably right now, especially if you can pick one up that has not converted to EHRs. Those practices are losing value the fastest so it is a buyers market on those. If you wait too long it will be very difficult to catch the practice up to standards in technology and most likely medical community care. I would strongly consider starting to look now with the idea of not being in a hurry gives you the greatest chance to find and negotiate. Best of luck to you. Let me know if you want some coaching through it.
How do you evaluate for retail or commercial practice?
A doctor wants to retire and sells his practice. He doesn’t know anything beside the records but want as much as a private practice. I’m just wondering if there’s a formula to calculate for retail/commercial practice.
Further correspondence regarding this through email as more details would be needed.
If I just want to sell my records. How much would records 3 years old and less be worth a piece?
Please email us directly at optometryceo@gmail.com for more discussion on this. Thank you.
I’m interested in buying into a practice in Israel optometry In Israel it is a bit different no medical model, do you know anybody that can help me evaluate. I sold my practice in Evanston Il after 28 and want to move Thanks
We do not have any references at this time for Israel.
I am confused about two of the terms in your formula above: “leveraged practice assets” and “appreciated equipment/furnishings”.
“Leveraged Practice Assets” sounds like equipment and the like which are under some sort of financing arrangement–lease, loan etc. I’m not seeing how the value of those things add to the valuation formula. It seems like they would decrease the value by the amount of the outstanding liability.
What does the word “appreciated” signify in “Appreciated equipment/furnishings”? Is that just another way of saying the fair market value of equipment and furnishings that are fully owned?
Thanks for the article and your help.
You did a great job defining what your questions are. The comment on “leveraged practice assets” is true. If there are liabilities to the company then that is typically subtracted from the valuation. This makes sense so the buyer does not pay twice for a liability, once in the purchase and once to repay the debt. The “appereciated” equipment is going to result in equipment that still has usuable value but the accountant has already depreciated over time. Hopefully that makes sense.You had questions but it appears you either researched them or knew them b/c your closing sentences in both comments correctly addressed your questions.