fix this practice

The Case of The Absentee Owner

Unfortunately, money can't fix management problems.

RICHARD S. KATTOUF, O.D., D.O.S.

Q Numerous consultants and contributors use the term "Exit Strategy" in professional journals. Can you simplify and make common sense out of the importance, timing and need for an exit strategy?

Dr. G.A. Hincabee
via e-mail

A: The importance of an exit strategy has changed in conjunction with the market for selling optometric practices. Twenty years ago, it was a seller's market. In the early ’80s, my consulting company would broker a practice and finalize a sale in three to six months. Optometry has been in a significant buyer's market since 2000. So, it's not uncommon for a practice to be on the market for one to three years before selling.

If you wait too long to create an exit strategy, the odds of disability, chronic illness or sudden death increase significantly. There is a new term in purchasing practices today: "the sellable value." In a buyer's market, many times the sellable value (what the seller accepts) is well below the appraised value.

Proper planning

One of the main reasons you chose independent practice was because of your ability to build a sizable equity. If you don't plan a proper exit strategy, your goodwill value (equity) significantly | decreases. A proper exit strategy follows:

► Start when you are in your 40s. Get your practice in sellable condition. Hire a consultant to maximize your efficiency, productivity and profitability. To have the highest goodwill value, you must show growth in your gross and net income. Many times, clients who implement these improvements double the size of their practices in a two-year period. In turn, their practice values skyrocket.

► Once the practice value has increased, hire an associate doctor who agrees to commence a buy-in after a two-year engagement period. Now that you've prepared to sell the practice, set the agreed value in the associate agreement. This makes the new O.D. comfortable, as you have slated the practice value, and he/she is not paying for his/her production.

► If you own a large practice that grosses more than $1 million annually, have multiple buyers in a planned sequence. Bring buyer number one into the practice for three to five years prior to bringing in buyer number two.

► Make sure your practice is incorporated. Have the buyer(s) (after the two-year engagement) purchase an agreed amount of stock in the practice. The stock purchase gives you the lowest exposure to capital gains tax.

► In the associate agreement specify exactly how much stock the new O.D. will purchase and at what rate. If you choose to maintain control until your retirement, you must stipulate this in the associate agreement.

► Consider the buy-in over a 15- to 20-year period.

► Establish a clause in the buy-sell agreement that states: In case of your death or disability, the buyer must purchase the remainder of the practice from your estate. This clause is crucial to protecting your estate from financial disaster.

Exit strategies require plans and controls. Yes, you're all doctors. But, realize that you're operating a professional clinic and retail optical. Every independent professional is a business person.

Good business sense equates to profit. Why put 30 years of your life into your practice without directly planning how to maximize your equity? OM