o.d. to o.d.

The Challenge of Selling Your Practice in Today's Economy

Some of the best advice I can give: Get ready to be the banker and then make your exit.

BY WALTER D. WEST, O.D., F.A.A.O.
Chief Optometric Editor

Perhaps everyone who ever started a practice cold or made an investment in owning a practice saw their investment as not only a means to generate income, but also as an opportunity to profit upon the sale of the practice. Many planned for the sale of their practice, or their share of the practice, as a means to fund their retirement either partially or entirely. With the average practice gross income in the neighborhood of $400,000 and sale prices based, to some degree, on a percentage of gross, many practitioners now realize that if they base their retirement solely on the sale of their practice, retirement is going to be pretty Spartan.

Hurdle one: collateral

Several hurdles present themselves to those interested in selling and buying a practice. One is the selling doctor's desire to be paid in full by the purchaser. It's a nice idea and if it happens, you've beaten the odds. In most instances, the burden this imposes on the purchaser ends up being a deal breaker.

Why? Because of one small detail that all bankers end up fussy about: collateral. When bankers begin to look at an optometric practice as collateral for a loan, the practice seems to always fall short. The reason for this shortfall is that most of the value of a practice is tied into the purchaser's ability to earn once they begin operating the practice.

Hurdle two: full salary

Another hurdle I see regularly is that the selling doctor not only asks for full payment, but once he has the cash, he wants an employment contract that provides for the same salary and benefits he had when he owned the practice. This is probably a function of the practice value being too small for retirement, so the seller needs to continue earning.

Whether the employment contract is for one, two or five years, the bottom line is this: Even if the purchaser is able to borrow the funds to pay for the practice in a lump payment, the purchaser isn't going to have enough cash flow on which to live, amortize the debt and pay the seller a salary for hanging around — not to mention the fact that there would never be enough patients for both doctors to see. As a result, the seller wouldn't be able to generate income at a level great enough to provide a return on the investment of salary for the seller.

In addition, the practice usually doesn't have enough of a facility or equipment to allow both practitioners to see patients in an efficient or profitable manner. The end result of any or all these hurdles is simple but sad. The practice doesn't sell and in many cases, the practice closes rather than ever being sold. In the last two years, for one reason or another, it's estimated that 1,000 practices have closed. That's 500 a year. And with the current state of our economy, it could get worse before it gets better.

Remove the hurdles

So how do you remove the hurdles, save your investment and facilitate the sale? First, prepare your practice for sale in advance. Next, be realistic about the value of your practice. Don't set the sale price on what you'd hoped it would be worth. Have your practice appraised by a consultant or business appraiser. Next, be the bank. Prepare for payment over time, and hold your practice as collateral. The practice is only worth its sale price to one person: you.

Finally, get real about the cash flow available in the practice. If you were making only one salary prior to the sale of the practice, there's nothing in selling the practice that would make two salaries available. OM