Practice Worth
Wrapping Up Your Practice's Worth
In the last part of this series, learn how you can maximize your practice's selling price.
By John Rumpakis, O.D., F.A.A.O., Lake Oswego, Ore.

So now the time has come -- time to either sell your practice or to buy a practice. We've discussed many factors that can have an impact when you're considering this very important decision. Just to recap, the following factors can influence your practice's worth:

• the current state of the optometric workforce
• changes in the gender balance
• implications of the Gen-X characteristics
• influence of third-party insurers and various income statistics.

How you're affected

When consulting with doctors, I find that many of them think that marketplace conditions simply don't apply to them, and they place far too much faith in the mathematical valuations that we discussed last month. Sometimes, they simply rely on what their pride tells them the practice should sell for. When the reality hits that their practice isn't worth what they'd originally thought, it's often like a slap in the face. No one enjoys facing that reality, especially when you can do so many things to prepare and ensure that you get the maximum value for a practice. So, let's go back to cover some basics that are often forgotten.

Supply and demand

You're probably well aware of the relationship between supply and demand. If the supply is low and demand is high for a product, the product should have a higher market value. If the supply is high for a product and the demand is low, the product will typically command a lower price.

Unfortunately, while supply and demand is a well-understood concept, it's rarely applied in the mindset of both sellers and buyers of optometric practices.

A typical optometrist who's selling a practice looks back on some 20 to 30 years of work and sees a practice that has a steady gross income and fairly stable patient base. This seller anticipates that after his long career the sale of the practice will yield a good retirement income base. In fact, the doctor often relies on it. This seller may have also hired a practice consultant or broker to evaluate and determine the worth of the the practice.

The consultant or broker will typically perform some form of analytical assessment or valuation and help the seller set the "market price."

The typical buyer though, sees things quite differently. In today's market, buyers and sellers have dramatically changed. The supply of sellers is presently high, by some sources higher than it has ever been. Demand is low, and by some accounts lower than it has ever been.

Naturally, in this situation, the market value declines regardless of what the value may be on paper. More often than not, the intangible factors we discussed in part 3 of this series and emotions of both the buyer and seller tend to influence the selling price.

Why has the market shifted?

Three things have influenced the fluctuations in the market. Gender changes within the profession; lack of commitment within the risk/reward equation for the Gen-X practitioners, and the influence third-party insurers can exert within the practice.

• Gender changes. We're probably all aware of how the gender balance has changed within our profession. The potential pool of buyers from our once male-dominated profession has declined. This has nothing to do with the ability to earn money in our profession, or with becoming great practitioners, or even our abilities to efficiently run optometric practices. Simply, a significantly greater portion of female graduates don't see themselves as willing to take on the risk of purchasing a practice, knowing that their practice habits may be changing as they strive to raise families and balance their careers.
• Generation-X. One characteristic, albeit generalized, is that the people who fall into the Gen-X category are concerned about taking on the risk of owning a practice for what they perceive to be a minimal reward.
  They're often not willing to work long hours without any guarantee of practice growth. They realize that if they work within a commercial, military or private setting their earning abilities aren't much different than the statistical averages for self-employed optometrists -- and without the risk.
  The Gen-X practitioners' mindsets tend to be more focused on pure economics and quality of life. Less value is placed on loyalty and the burden of responsibility. This also has decreased the pool of potential buyers in the marketplace.
• Third-party insurers. Most of us have seen the number of self-paying patients decline, while the amount of patient revenues covered by third-party insurers has greatly increased.
  Needless to say, the decisions made by third-party insurers can have a huge impact on our practices. So, how does their mindset affect you as the average seller of an optometric practice? In several ways.
  • Managed care providers determine their participating physician list by geographic charac- teristics within their market. So, supply and demand play a role in determining where participating physicians will be located.
  • In today's marketplace, most managed care plans have closed panels. The new buyer can't just assume the previous doctor's position within the third-party contract because contract ownership doesn't automatically transfer.
  • The amount of revenue a practice generates is key in determining the value for the practice. If the revenue represented by third-party insurers were to disappear, a practice's value might decline from 25% to 50% (with all other things equal).
    Yet, the selling price is established with consideration to those revenues. The unknown variable of whether managed care contracts will stay intact after the sale of the practice adds another risk to purchasing a practice and again may act to reduce the pool of potential buyers and reduce the inherent value of the practice.

What it all means

Right now, it means that in the current environment it may be more difficult to sell an optometric practice.

The imbalance between supply and demand has created a marketplace that favors buyers. Many practitioners who have unsuccessfully prepared their practices for sale are now finding that the marketplace is unforgiving, and they're left with relatively few options.

By some accounts, the average selling price of a practice (based on equal gross and net revenues) today as compared to a practice in 1997 is about 20% less.

How can you prepare?

Just like selling a home, you can take many steps ahead of time to help increase your practice's value. Start preparing to sell your practice at least 3 to 5 years before you actually put the practice on the market, and focus on some key areas.

• Good revenues. As we've said, most valuation methods used today are driven by revenues or income, both gross and net. Unfortunately, most sellers are nearing the end of their careers and may have seen fewer patients over the last few years. Often, revenues have declined some 20% to 25% from the practice's peak earning capacity.
• Up-to-date equipment. Often, the seller hasn't placed a great deal of emphasis on keeping the practice current in instrumentation, technology, design or décor. In fact, in many respects the practice has become dated.
• Diverse patient base. It's often accepted that a practice's patient base characteristics often mirror the practitioner. So, as a practitioner ages, so does the patient base. But it doesn't have to be this way.
  The most successful practitioners have recognized the value of advancing their clinical skills and promoting the additional, updated services they provide. Staying ahead of current professional developments helps to attract new patients to the practice, helping to increase revenue.
• Seek buyer interest early. The greatest single step that you can take for maximizing the value of your practice is prospecting and cultivating prospective buyers 3 to 5 years before you want to sell. In other words, seek an associate with the intention of selling your practice to this person. Starting this process early has many advantages:
  • It provides time to ensure that your patients are happy with the new practitioner.
  • It allows potential philosophical differences between you and the associate to surface and get resolved.
  • It allows the staff to get comfortable with the new practitioner.
  • It enables the new practitioner to become a contracted provider for the third-party carriers in the practice.
  • It usually reinvigorates the practice, so that neither the practice's appearance nor its patient base become outdated, degrading the value of the entire practice.

Solo practice is shrinking

If practitioners aren't more proactive in promoting and maximizing their practices, I predict that we'll see a large-scale consolidation within our profession. Many of the practitioners who aren't successful in getting their "asking prices" might simply resort to closing their doors, liquidating their equipment and selling their patient records to a larger clinic.

So, who will benefit if this happens?

• For one, clinics will flourish because they'll draw from large pools of available professional labor as more people seek to be employed because this arrangement fits their economic and lifestyle demands.
• Managed care companies will make out well also. They'll have achieved the objective of controlling supply and demand of the care provided while reducing administrative costs because they'll have fewer individual sites to manage.
• A Patients may actually benefit also because a large clinic will provide them with more eyecare resources.

So who suffers? In the long run, only the stature of solo, private practice optometry whose value to our profession formed the single largest building block to our success.

This modality was our foundation, yet now it may better serve as a stepping-stone to the next phase of our professional existence. The move away from private, solo practice may be an evolution of sorts that's occurring because of a combination of market forces not encountered until recently.

The practice worth myth

The myth about what a practice is worth is no different today than 10 or 20 years ago; it will always exist.

The marketplace is blind to who is the seller and who is the buyer -- no matter who performed the practice valuation. One party will always believe that the practice is worth more, and the other party will always believe it's worth less.

The final arbiter is the marketplace. And one simple rule will always prevail: Something is worth whatever someone is willing to pay for it -- no more, no less. 

Dr. Rumpakis is chairman and CEO of Practice Resource Management, Inc. in Lake Oswego, Ore. He was previously in solo practice for 13 years. This paper was submitted in partial fulfillment of fellowship in the American Academy of Optometry. You can reach Dr. Rumpakis via e-mail at success@practiceresourcemgmt.com.