The Timeline of Selling Your Optometry Practice
February 28, 2020
Do you wonder how you will sell the optometry practice you’ve worked so hard to build? What is your time, money, energy, and sweat equity worth?
When I sat down on 20/20 Money to speak with Erik Ferjentsik, Founder and Principal of Visionary Practice Group, I specifically wanted to know the timeline for selling an optometry practice.
Pay attention if you are thinking, “Yes! This has been on my mind…someday, I’d like to sell my practice.”
Erik, like me, is married to an optometrist and has extensive experience in practice transition. After facilitating the purchase of his wife’s practice, her friends and peers soon started contacting him for help. He now specializes in providing optometrists transition consulting services. The following information is from a two-part podcast series we did together.
Practice Sale Timeline
The time to transition away from your practice can sneak up on you. You should start preparing at least three years before you plan to find a buyer for your optometry practice. The ideal selling timeline looks something like the following:
- Year 1-3: Prepare three years of well-organized financials to present to a bank and buyer
- A few weeks to a month: Appraisal period
- Year 4: Find and sell to an interested buyer
- Total: 4-5 years
Things that can affect the timeline
- Buyer termination clause at current practice
- Relicensing of the buyer in a new state
- Niche market with limited buyers
One thing that every OD that owns a practice needs to understand: you WILL leave your practice at some point. The question is: will it be on your terms or someone else’s terms? If it’s on someone else’s terms, chances are those terms are not going to be in your best interest. Optometrists are notorious for wanting to work into their later years, but as you age the risk is higher you may encounter health issues and disability. You don’t want to be stuck with an asset that becomes suddenly worthless (or at best worth the equipment in the practice) because you are unable to serve patients.
You may encounter a difference between how long you want to work and when you can work. I say, let’s plan for the best and prepare for the worst.
Optometrists need to think about their practice just like they would any stock or mutual fund on a personal balance sheet. We fully admit it feels different because of the emotional connection you have to your business. But you can help reduce the risk of your overall personal retirement plan by preparing in advance for the eventual sale of your practice.
Maintaining Value in Your Practice
An optometry practice is a single business, not a diversified portfolio. We’ve all heard the phrase “don’t put all your eggs into one basket.” If $500,000 to $1 million of your retirement is tied to your practice and you’re less able to do the job, as business dies down, it can become much more difficult to sell.
If you find yourself in a situation where you see declining revenues because you’ve been scaling back, find a fill-in optometrist to cover customary hours. An incoming buyer is going to be expected to work full-time. If the practice is currently performing under full-time, the bank can’t know if patient production exists to fill the missing hours. Don’t think of bringing on an associate as an expense. They are helping you keep value where it needs to be to find a qualified buyer.
If your hours are declining, that’s when banks start to drop off and don’t approve financing. Buyers also drop out, they may think there is a systemic issue with your business.
It’s harder to get patients back that decided to leave because of reduced hours, they may have already switched to another practice.
Practices that gross less than $600,000 are difficult to sell. Don’t make the mistake thinking that the buyers and banks will believe they can just fix it and bring the practice back to where it was.
If you’re operating full-time under $600,000 then you probably want to call a consulting group to help. The valuation of your business is not the problem, it’s the symptom. It’s most likely an issue with your pricing, scheduling, billing, coding, or collections.
That’s not hard to fix. Erik says it should probably take five hours of analysis and consultation to resolve and put together a game plan on how to increase the revenue and profitability of the practice. In the grand scheme of the lifetime of your practice, that’s a very inexpensive investment to avoid lifetime lost earnings.
Well Organized Financials
It’s never too early to start planning to ensure that you’re optimizing your business in the fundamentals. Before an appraisal, you’ll need three tax years of well organized financials for review.
Who Has The Financial Information?
It’s a common misconception that your accountant keeps all your necessary financial information on file. To avoid this, ask for electronic copies of everything including tax filings and updated P&Ls after adjustments.
Practice owners often believe their accountant has a comprehensive list of their assets. It’s just not true. For example, you may send detailed information and your accountant will simply list “equipment” in their records.
When a company like Erik’s appraises your practice, they’ll often see a long list of vague assets. Unfortunately, you’re going to have to go back and put together a comprehensive list not only for the appraisal but also for the closing.
How to keep a detailed asset list
Organize a simple document or excel file with six columns and the following labels:
- Item purchased
- Model number
- Date of purchase
- Cost of purchase — Both MSRP and discount price if you had one.
You’re inevitably going to have personal or discretionary expenses listed through the business that are not fundamental to operations. Anything personal, or discretionary, should have its own label so there is a really quick way to separate them.
A novice buyer may think net income on taxes means this is what they will make. You need to help them envision the potential and that there are additional owner benefits that are “added back” into the total number.
The adjustment of your net income is the most crucial part of the analysis; it’s what the buyers look at.
In your records, not only are you able to justifiably document expenses that are personal and can be attributed to a business expense, but you’re also able to add them back to the equation.
If a buyer can imagine making $50,000-$60,000 more than as a full-time employee, then the purchase makes sense to them.
If you have two different locations you should have two different sets of financials. They may be organized under one practice but you need to be able to separate the numbers from location A to B. When your financials are commingled a buyer has no way to separately evaluate the financial health of the entities you are trying to sell.
Erik recommends separate tax filings for each location, not just separate P&Ls. P&Ls don’t hold the weight or reliability of a tax filing.
Why you need to hire a broker…
You probably use a realtor for real estate transactions, why wouldn’t you use a broker to sell your practice? After all, you’re talking about selling one of the most important assets you’ve spent a lifetime building. Most people don’t think twice about hiring a real estate broker/agent to sell their house but yet will skimp and save on trying to not pay a fee to sell an asset that is (probably) worth multiples of their current house.
When we compare selling a practice to a house, the important component to remember is that real estate encompasses the sale of tangible assets. There are numerous free resources available to the novice buyer to assess value. Anyone can look up independent real estate comparisons, taxes, and sales histories.
But in the market of selling optometry practices, there is no public data. It’s a private market. You can’t go to a website or public authority and ask for sales histories or market comparisons. The sales are largely based on intangibles:
- What’s your online presence worth?
- How do you decide the value of patient records?
- Is your practice trusted in the community?
Because of this fact, it’s important that you get a detailed, comprehensive, and accurate understanding about your practice and what it is worth–qualitatively and quantitatively. Good brokers won’t take on overpriced cases or unreasonable sellers. When you obtain reputable representation, this tells everyone you have a qualified practice that a buyer can pursue with confidence.
When you pay for an appraisal, the sole purpose is not just to find a price for your practice. That’s one small component of the process.
The real value is that you now have an expert third party who understands your business, financials, and can articulate this to prospective buyers and banks. Your broker can address all the questions that are bound to come your way.
Goodwill encompasses all the intangibles: brand image, online reputation, patient records, history of the business, history of staff, and cash flows. The majority of value in your optometry practice will fall under goodwill.
Your practice and real estate are two distinct assets; they are evaluated separately. Some of the important real estate numbers to evaluate include:
- Fair market rent
- Market value
- Financing options
The buyer will look at the cost and mortgage then compare it to fair market rent. Usually, these are related in a way where there is no benefit to embellishing one or the other. In addition, they are using comps (comparisons) obtained from other properties of similar nature that are readily available to determine if the price is fair and reasonable.
Seller-Financed Real Estate
I can’t find a good reason for seller-financed real estate and neither can Erik. The juice isn’t worth the squeeze. If you’re tying yourself to the ongoing success of the buyer and they don’t do well as a business owner, they may find themselves in the position of not being able to service the debt that you financed. Why put yourself in that position if you don’t have to?
You don’t have a moral obligation to seller finance a buyer who can’t get traditional financing. When you consider current interest rates and the concentration risk, you would have a good portion of your assets tied up by one seller. If you do take that on, you accept the risk for minimal reward.
Now that you have your financials and appraisal in order, you are ready to find a buyer. It’s time to decide how you plan to sell your optometry practice.
Stock v. Asset Sale
In your typical retirement sale, you’ll most likely want an asset purchase transaction. But let’s go ahead and take a look at what each of these means and situations where they would apply.
Stock sale — A sale usually for a large group of stakeholders in a large firm where you’re not ending the tenure of one owner and beginning that of another. There is a pass-through of liabilities and the entity doesn’t change as registered with the IRS. This is common in multi-person law firms, it sometimes occurs in optometry practices that have multiple locations and doctors.
Asset sale — The sale of assets only. Practice assets are going to the buyer, none of the liabilities. There’s a clear division on the closing date between the owner’s and the buyer’s entity. This is the ideal structure for a transaction in the medical field. This sale limits any carryover risk for you the seller, and vice versa.
What About For Sale By Owner (FSBO)?
If you attempt to do FSBO and it doesn’t work out, which often happens, you will most likely get turned down by companies like Erik’s in many cases. Because you are dealing with an extremely small market of buyers, brokers need assurance that they have the entire market to work with.
If you’ve estranged buyers because you didn’t have information properly presented to them, you couldn’t articulate it appropriately, or they just felt uncomfortable negotiating directly with the owner, once they turn away it’s very difficult (if not impossible) to get them back. Similar to estranging patients, you never get a second chance to make a first impression.
After the Sale
As a seller, you need to be prepared to retire and look towards the next chapter of life. Having worked with many ODs that have gone through this transition, it’s as much of an emotional and personal issue as it is financial…sometimes even more. For some ODs, there can be a sense of identity that is lost when they sell their practice. I’ve known a number of ODs that have gone through their own grieving process in the process of selling, which is completely normal! However, once you make the commitment to sell and begin that process, there are a number of practical steps that need to be addressed.
A good consultant will help you draft a letter to your patients to ease the transition. Patient attrition rates after transactions that are well structured are virtually non-existent. Erik’s wife’s practice, as an example, lost only two families in the first year. But in that first year, just by going from retiring doctor not working late hours, to her the buyer, she superseded those two families.
Erik said he’s often seen increased production from owner to the buyer. Buyers shouldn’t worry about a drop-off in production and sellers shouldn’t either. If the transaction is supported, structured, and transitioned properly, everybody should come out for the better on the other side of the transition.
You may believe that it’s necessary to stay on to assist in the transition of your practice. You might envision working two days a week and then sunsetting into retirement. But it’s not necessary and usually not plausible from a financing perspective for the new buyer.
If your practice supports a full-time and part-time physician it’s a little different. The buyer will take on full-time hours and then you may be able to take the part-time hours. But if the practice only supports a 1 FTE schedule and patient demand, it may not be possible for the selling doctor to stay on board, despite both parties wanting that to be the case. Be prepared for that possibility.
There may come a time when you start realizing there’s a new chapter for you and that chapter is retirement. The sale of your practice should not be a forced situation. A successful optometry practice transition requires proactive planning; it doesn’t happen by accident.
As a practice owner, you should be happy with the sale of your optometry practice and get a plentiful amount for what you’ve built. In return, the buyer should be able to buy an asset with a predictable and sustainable stream of cash flow and profit margin. Done correctly, it’s a win-win-win for everyone involved.
Click below to listen to the full episodes of 20/20 Money with special guest Erik Ferjentsik.
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