practice ownership
You Can Afford the Practice of Your Dreams
The book on how one optometrist got to the closing table for $750 or less... twice!
BY TIMOTHY MILBURN, O.D., Medina, Ohio

Does owning your own private practice seem like a dream that's out of reach? Considering the expense and risk of purchasing a practice, it's not surprising that a large percentage of new grads opt for commercial practice or employment.

Yet at age 31, I own two private practices with my wife, Dr. Annamarie Milburn. She is 30. We have one practice in Medina, Ohio and another in Wooster, Ohio. Let me assure you, if we can do it — you can, too!

At times, it was a struggle to get our businesses running as smoothly as they should. Everyday presents a new challenge, but the benefits of owning our practices are huge. The tax breaks, the freedom to work and vacation when we like, the equity that we will build in the businesses and the real estate, the ability to practice as we choose — these are just a few of the benefits.

In this article, I'll share how we made it to the closing table on a shoestring budget — twice in the first five years of our careers. We relied on creativity, determination, and a little bit of luck to structure the deals, which in no way stressed our personal finances. We did not incur costs above and beyond $750 until after we signed on the dotted line, and those costs were immediately repaid by our new practice. Hopefully, this story will spark ideas, inspire grads and motivate colleagues to find and purchase the practice of their dreams.

Finding our dream practices

Soon after graduation, at age 26, I stumbled on to our first practice opportunity — a senior doc who was ready to retire and willing to finance. I located this practice through a classified ad placed with the Ohio Optometric Association. The seller was semi-retired and working only one-and-a-half days per week. The practice was barely making any money, but the location was outstanding.

The practice was a small, but modern, well-equipped office located in an area with healthy growth. Annamarie and I decided to go against conventional wisdom. We bought a dying practice, but we did so in a calculated fashion. The price was right and the financing was in place. It was a classic diamond in the rough scenario.    

The new practice was on life-support, so we had no choice but to moonlight for another doctor while we attempted to turn things around. The new practice grew steadily and doubled in size after about four years. Still, the practice could not support two doctors full-time. We became impatient having to work part-time outside our practice. We decided last year that the next logical evolution for our practice was a satellite office.

We looked for a strong, healthy practice. With four years of business experience, we felt confident that we could handle a busier office this time around, but the search proved challenging. It's easy to find a dying practice. It's much tougher to find a doctor who is willing to part with a healthy, profitable private practice.

We searched for about six months and had no luck with classified ads, placement services or practice brokers. Our criteria were too specific: a busy, modern private practice within 45 minutes of our first location. It seemed we might have to wait years.

Finally, I tried a Hail Mary pass. During the first week of December 2004, I mailed a letter to every optometrist in Northeast Ohio asking if they might be ready to sell. Out of more than 200 inquiries, I received 13 replies. Three were contenders, but only one deserved serious attention. We signed a contract on February 15th, and took control of our second practice on April 1st, 2005.

If you think there are no practices for sale in your area, then I strongly recommend a mailing. State your intentions in a letter to every doctor within 30 miles of your home. Often times, a doctor may consider selling, but would never place a classified ad in a publication. Your letter may convert a hesitant seller into a new retiree!

Negotiating price

Once negotiations started in earnest, talk with the seller quickly turned to the most sensitive issue, price. The seller has poured his heart and soul into a practice and there is a lot of pride at stake. A seller could be greatly offended by a young doctor offering a low-ball price. Not to mention that many sellers expect the sale to fund a large chunk of their retirement.

On the other hand, sellers seldom consider the younger doctor's problems, such as the enormous debt burden that graduates face. The ensuing tug-of-war will usually determine a fair price. If not, you must be prepared to walk away. Do not get emotionally attached during the early stages of a negotiation.

Some words of advice: the purchase price is not the most important part of a deal. You must consider the big picture. Will the senior doc stay involved in the practice? Will the senior doc sign a work agreement? Will the non-compete clause be tough enough? Is the senior doc going to finance? How much are the down payment, monthly payments and rent? Can you purchase the building, or at least get a purchase option on the building?

Many of these questions are more important than whether the seller demands an extra $10,000 — $20,000. Here's why: An additional $20,000 might add $400 to your monthly payment, but if you walk away, you could lose $120,000 a year in potential net income! Sellers shouldn't get everything they want, but it might be wise to accept a higher purchase price if the seller makes concessions on issues such as rent, employment, and financing.

Before you negotiate, decide how much you can afford, or better, how much debt the practice can afford. Remember your new business (not your personal finances) will repay the loan and allow you to take a somewhat reduced salary during the loan payoff period. Two factors come in to play: the projected monthly net income of your new practice and your monthly payment on the practice loan. I used an amortization calculator that I found on the Internet to structure the terms of both of my deals — without help from a CPA or banker.

The first senior doc and I came to terms sitting at his kitchen table plugging numbers into his laptop computer. He agreed to finance 95% of the practice for less than $1,000 per month. The deal included a 15-year amortization schedule with a balloon payment after only five years. If the practice failed, I could handle a payment of $1,000 per month. Plus, I anticipated that the practice would grow enough within five years to allow me to make the balloon payment or, worst-case scenario, I could refinance the deal. The financing and interest rate favored the seller, but this was appropriate, considering that he took on the risk of a new graduate.

We agreed to a purchase price equal to 65% of the average gross income for the practice over the last three years. Some might argue that I paid too much, but the price exceeded the value of the equipment and inventory by only a few thousand dollars. This allowed a minimal payment to the seller for the patients' charts and the goodwill in the practice.

Even though this small practice was dying, we still had cash flow the very first month. We found this to be much easier than opening cold. We joked that we had decided to open "luke-warm." Maybe we could have saved some money by opening cold, but I believe it would have cost us money in the long run because there would have been almost no cash flow during the first month.

With the second seller, we agreed to a price equal to 57% of the average gross income over the last three years. The purchase price included his newly finished office space, all inventory and equipment and a GDx nerve fiber analyzer. The deal with the second seller also included an option to purchase the office condo, a favorable rent agreement, 20% seller financing, and a work agreement with the seller.

We got a better deal on the second practice because values have fallen over the past four years. Fewer and fewer grads purchase practices right out of school and this has a negative impact on current practice valuations. A smart buyer can name the price and have pick of the best practices available.

How we financed two practices

For many, borrowing hundreds of thousands of dollars may seem impossible or incredibly risky. At the time of our first purchase, we had combined student loan debt of more than $130,000, no money for a down payment, and no real business experience. To say that we didn't have a penny to our names would not be accurate. We had less than that! Our net worth was in the negative by almost $130,000. Worse, our credit scores were poor because, according to one bank, we had just barely begun to pay down the balance on the student loans. Prospects did not look good.

We started our careers at a huge financial disadvantage compared with our friends ... or so it seemed. We soon realized that loan debt was simply something to manage. We elected the 30-year plan to pay off our loans and that made all the difference. My payment, after consolidation, is $454 per month. Anna's is $380. When I was employed as an associate optometrist, I realized that it only took two days each month to cover my student loan payment. The more time I spent in the work force, the more comfortable I became with the idea that I could manage my finances and not allow my finances to manage me.

Managing anxiety was only the first hurdle. Next, I had to convince a bank to lend me even more money. Lenders get squeamish working with young optometrists who have existing practice debt (me), large student loans (me), and wish to purchase a practice with zero down (me). Despite these obstacles, we managed to buy both practices without a down payment.

We opened a credit line at a local bank to help fund the 5% down payment of the first practice. The Small Business Administration considered the second seller's 20% financing as a down payment. With our SBA loan approval in hand, we closed on our second practice. The SBA loan process was not as terrible as I had been warned, and I would strongly recommend it to anyone trying to fund a business loan.

 Always work with a lawyer, but on your terms

With both purchases, I relied very little on professional, expert advice. For the record, I would NEVER advise working without an attorney. It would be ideal to work with an attorney from start to finish. However, if cash is less plentiful, then I recommend working with an attorney, but on YOUR terms. This is an important concept. For example, when buying my first practice, my attorney warned against the seller's attorney writing the contract. It made me nervous until I learned that my attorney wanted over $2,600 to write the contract.

For $500 my attorney agreed to review and revise the seller's contract. It worked perfectly. I negotiated the basic concepts of the deal on my own, but I did not understand some of the more complex issues involved. I waited and consulted with my attorney just prior to signing and kept the legal fee to a minimum. If my attorney vetoed the deal, I would have walked away. Fortunately, Anna and I negotiated well and came to solid terms with the sellers. In both cases, my attorney reviewed the contracts before signing and suggested some essential changes. The sellers were agreeable to most reasonable changes.

For the second purchase, there was no need to reinvent the wheel. I took the contract from my first purchase and adapted it to fit the terms and conditions of the new sale. However, should the other party in your deal desire to write the contract, let them! Just be persistent in making changes that you desire. Regardless of the contract's author, insist that the final document be fair. Consult an attorney, but on your terms.

Using an accountant

For the first practice, I hired a CPA at the request of the bank that issued my credit line. The bank required a business plan and projections for the first two years. Initially, this seemed like a difficult task. How could I possibly predict the future? Finally, I sat down and set some reasonable business goals. Then, I calculated how many patients I would have to see and how many glasses or contact lenses I would have to sell to meet those goals. I handed these projections over to my accountant and he charged me $250 to type my business projections on his letterhead, sign his name, and mail it to the bank. The CPA did not check my numbers, offered no suggestions and he offered no advice on how to improve my business plan. He simply took my money and mailed my numbers to the bank.

I did not use an accountant for the second practice. I developed a business proposal including three-year projections, a budget, and a business plan. Near the end of my loan approval process, one of the loan officers confided that my failure to use a CPA had a negative impact on my loan approval process. Nevertheless, the loan was approved and I saved $250 by serving as my own accountant. I would NOT advise anyone to do his or her own business taxes, but this is different. At times, the services of a CPA are very important, but depending on the bank, it may not be necessary to use a CPA to prepare the loan application.

Diligence is due, look before you leap

A practice broker or a management consultant can be helpful in assessing the value of your future practice. It's important to not over-pay and it is also important to verify all of the statements and claims of the seller before you buy. Do your homework before spending a few hundred thousand dollars. The pros call this "due diligence."

For both purchases, I did my own due diligence and did not use a consultant. I requested: copies of the sellers' signed Schedule C tax returns from the last three years, a letter signed by the seller's CPA verifying the Schedule C returns, copies of the profit and loss statements, copies of the banks' records and cancelled checks for the last 24 months, and copies of optical laboratory statements.

Finding closure

The path to the closing table can be a minefield. Dealing with lawyers, negotiating with sellers, appraising the value of the practice, and applying for a loan can all be overwhelming. Play if safe — play it smart. Always keep your financial risk to a bare minimum until you sign at closing. Remember, some deals fall apart and never close. Don't be left holding the bag with a huge legal bill for a practice you can't buy.

In both cases, we made it to the closing table for no more than $750. For the first practice we owed a 5% down payment. We borrowed the money from a family member and refunded it days later when the bank funded our credit line. The bank would not fund the credit line until we closed on the sale. For the second practice, we owed a $1,250 closing fee to the bank for the SBA loan-processing fee. We signed over a check to pay those fees at the closing table and we took over the second practice the same day. Within 24 hours, we had recovered 100% of the closing costs with revenue generated from seeing patients in the new practice. But if either of these deals had collapsed at the last minute, our exposure would have been no more than $750.

Plan for the worst, expect the best

Before you borrow an enormous sum of money, it's smart to plan for a doomsday scenario. This eases anxiety. It's better to know whether you can handle loan payments if there is a big drop in business. What if the local economy plunges? What if patients leave the practice? What if ownership transition fails? Could you sustain a 35% downturn in the gross revenue? If your business plan could not withstand this type of stress, then I would pass on the deal.

Now that you've found your dream practice, negotiated the best price, found your financing, and planned for the worst — start expecting the best. Design a practical business plan that will set your new practice apart. Why would anyone come to you and trust you with their eye care? What will make your practice better or different than your competition? In our case it was technology. We offered digital photography as part of a routine exam and we quickly installed a state-of-the-art edger to offer fast, more convenient service. We also opened the office for Saturday and evening hours.

Use your past business experience to your advantage. What worked or did not work in your last job? Apply those experiences, and chances are, you'll find a wealth of business knowledge that you may be taking for granted.

As clinicians, we have demanding jobs. It's not easy to manage caring for patients and making sound clinical decisions, all while managing student loan debt and other personal obligations. Buying a practice might seem like a very intimidating prospect when added to your current responsibilities. But for me the experience has been liberating. Owning my own business has given me the freedom and ability to manage my professional life more easily.

If you are dreaming of private practice, it is possible to find the practice of your dreams. And yes, you can afford it. And yes, you can do it.

Dr. Timothy Milburn is a graduate of The Ohio State University College of Optometry. He is in group practice in Medina, Ohio and Wooster, Ohio with his wife, Dr. Annamarie Milburn. Visit his website at www.drsmilburn.com.