business advisor
No Nest Egg?
If you're like many older O.D.s and don't a have retirement plan, fret not.

When I ask my peers who are in their mid- to late-50s if they've started thinking about retirement, most reply that they haven't -- they enjoy practice too much to quit. That's a good thing, because from what I've seen, many retirement-age optometrists are behind on their planning.

Whether you're of retirement age or just starting your career, you'll want to consider the information here, so pay attention.

Higher net = higher value

According to conventional wisdom, you practice until you're ready to quit and then you either cash out or bring in an associate who can buy you out over time. The strategy sounds good, but it has a major flaw: The sale of an average-sized practice will rarely yield enough profit to fund a person's retirement. Here's why.

According to appraiser Marilee Blackwell, M.B.A., optometric practices -- not including any real estate -- generally appraise and sell for somewhere between 50% and 90% of one year's gross revenue for the practice. She says that the higher the net percentage, the higher the value of the practice.

PHOTO BY DAVID YOUNG-WOLFF

What's a practice worth?

Using data published in the American Optometric Association's (AOA's) 2002 economic survey, we see that the median optometrist (the mythical O.D. who's in the exact middle of the income scale) grosses $372,000 and nets $114,500, or about 30%.

If this optometrist sold his practice outright for 70% of gross income, that would equal $260,000 before taxes. How much tax he'll pay depends on how he structures the deal, but Ken Hicks, C.P.A., says that 20% of the total value is a safe assumption (that leaves him with $208,000 cash).

If this O.D. could get an annual return of 6%, which is high in today's market, then the proceeds of his practice would generate only $12,480 each year before taxes. Combine that with an expected $15,500 in social security benefits and you have about $28,000 each year to live on -- hardly enough to support a comfortable retirement for someone accustomed to living on a six-figure income.

Unfortunately, the same dilemma holds true for large practices. An $800,000 practice sold for 70% of gross equals $560,000. After you pay 20% of that in taxes, you're left with $448,000 cash -- a tidy sum to be sure. But a 6% return would only generate $27,000 each year before taxes.

It's not about the equity

Even if you haven't saved up a big retirement nest egg, another viable strategy is available: Keep working, only at a slower pace. According to the same AOA survey, net income for the median O.D. peaked during years 21 to 25 (presumably between ages 45 and 50) at $124,000 each year. From there, earnings declined gradually to $82,500 during years 36 and 40 (presumably ages 60 to 65). Even if your income declined to 50% of average ($57,250), it would far exceed the yearly amount produced by the principle sum realized from the sale of your practice.

For most O.D.s this means that the real financial value of your practice is as a cash producer, not an equity investment. Therefore, realize that the sale of your practice probably won't generate enough cash to completely finance a comfortable retirement.

Where are you in your career?

If you're early in your career, then start saving now. But if you're closer to retirement and don't already have the funds locked away, then you're either going to have to lower your standard of living or keep working for a while. 

MARILEE BLACKWELL, M.B.A., CONSULTS WITH OPTOMETRISTS NATIONWIDE ON PRACTICE VALUATIONS AND RETIREMENT ISSUES. REACH HER AT (800) 588-9636.