practice ownership

Is It Time To Own Your Own Practice?

Experts explain how current market conditions impact the road to practice ownership.

DIANE DONOFRIO ANGELUCCI Contributing Editor

Are recent economic reports dampening your dream of beginning or buying your own practice? Or do they present an opportunity? If you've developed the qualities of an owner — leadership skills, financial acumen, communication skills and the entrepreneurial spirit, to name a few — you may ask: Is now the time to start your journey as a practice owner?

Without a doubt, financial news through the last year has intimidated professionals in most business sectors. But even in a challenging economy, you can strengthen your odds for success by meticulously analyzing your options and carefully plotting your course of action.

"I've been doing management consulting for more than 20 years, and in my personal experience and in my clients' experiences, almost 100% of those who made the moves under tough economic times were very successful because no one else was making a move. Everyone else is playing turtle and pulling into their shell," says Richard Kattouf, O.D., D.O.S., president and founder of two management and consulting companies.

Opportunity and challenge

A volatile economy brings a mixed bag of opportunities and challenges. An index of 20 major metropolitan areas indicates that commercial property values have fallen some 16.6% since their peak, says Keith Merklin, vice president of commercial real estate, Matsco, a company that specializes in practice financing.

Depressed real estate values translate into bargains for buyers. "You're most likely to get good deals on real estate — whether it's leasing or buying," says Jerry Hayes, O.D., owner of Red Tray Optical and the AskDrHayes.com blog.

Low interest rates for real estate, practices, and equipment could sweeten the deals. "Rates are historically low," says Robert Schultz, chief executive officer, Vision One Credit Union, which lends to optometrists. He says many optometric loans are related to the prime rate, which dropped 5% through the last two years. However, "I don't agree that purchasing the practice real estate is always best for first-time buyers, regardless of the market," Schultz says. "The only time it makes sense is when the net cost of mortgage payments is equal to or less than market rent. Otherwise, there is usually not enough cash flow to meet practice acquisition plus mortgage debt service. In this situation, we recommend taking an option to purchase the real estate in the future. When practice cash flow ramps up, the real estate can be purchased."

Some experts report optometrists are having difficulty obtaining financing and banks are requiring more equity; however, Jeff Connon, manager, national programs, Matsco, says it's not difficult to obtain financing from direct lenders. "Providing that borrowers have a well-thought-out plan, some experience, and good credit, loans are readily available for start-up and practice acquisition financing," he says.

Even if loan money is plentiful, Dr. Hayes advises new practice owners to conserve their cash. In some cases, that might mean leasing equipment, instead of purchasing as a way to reduce the amount of a down payment. The same logic would apply to office space, he says.

Mr. Schultz says he hasn't seen discounted prices for practices. "Practice pricing is based on net cash flow, which has not significantly deteriorated," he says. "Our review of current practice-purchase transactions indicates doctors are seeing more patients to make up for reduced average patient revenue."

However, Dr. Kattouf believes it's a significant buyers' market when purchasing existing practices. "We have lots of practices for sale and very few buyers," he says. "That has nothing to do with the recession."

Gary Gerber, O.D., president of the Power Practice, agrees: "With most practices doing a little bit less business than they have in the past, if you can find a good practice, you're probably going to get it at a better price now than you would have last year or the year before," he says.

However, some doctors may have a hard time finding a practice in an area where they want to practice. Deflated retirement portfolios have forced some O.D.s to shelve retirement plans for the time being. "Doctors are going to be more dependent on practice income because they're going to see a decline in their retirement assets, such as 401Ks and real estate holdings," Dr. Hayes says.

A question of location

In looking for a practice, the first issue is to choose a location. If an affordable practice is not available in that area, you may want to consider a startup.

Drawn to Highlands Ranch, Colo., Dierdre Fogle, O.D., chose to establish a new practice there in 2006 rather than purchase an existing practice.

Wanting to practice in his hometown of Clio, Mich., Nicholas Belill, O.D., also began his own practice in 2006 in an area devastated by auto industry layoffs. To help boost his odds of success, he chose a high-traffic location, leased space in a new outdoor plaza and worked with an architectural firm specializing in eyecare. "I made sure from the beginning that I was going to have specialties that I offered to make myself stand out from the rest of the area," he says.

With senior optometrists keeping their practices longer, Dr. Gerber's consultants at the Power Practice are handling more startups now than before the recession. "The bonus you get with your own practice holds at any time — not just during a recession — and that's that it's your own practice," he says.

The key is planning

Depending on the market, there are pluses and minuses to purchasing a practice or establishing a new one, Dr. Gerber continues. "I think in the final analysis, if you're willing to put in the time and take some risk, it's very atypical not succeed and make a lot of money," he says. "If it's done correctly with a lot of thought and planning, I still believe, even now, the risk is relatively minimal."

Derek Hamilton, O.D., of Austin, Texas, preferred to have an established patient base rather than starting cold. "After many talks with my accountant, I realized that for maybe 20% more than I would have spent to start from scratch, I could purchase an existing practice and from day-one there would be cash flow," Dr. Hamilton says.

Gary W. Ware, president, Practice Consultants, generally dissuades optometrists from starting cold unless an area is dramatically underserved. "In most places, unless it's an underserved area, the only place you're going to get patients is by stealing them from another doctor, and that's just not easy. So, it could be two or three years before you even break even." However, he says, existing practices are producing cash flow, have patients and staff, hardware, a lease and business. "There are going to be things about the practice you, as the buyer, don't like. You don't have to fix it topractice morrow," he says.

Although he believes starting a new practice allows optometrists to establish their own procedures, Dr. Kattouf agrees the patient base in an existing practice is an advantage. As long as the buyer maintains vision service plans patients use, existing patients probably will be satisfied, Dr. Kattouf says.

How to get started

Whether you're acquiring a practice or starting fresh, experts offer a number of tips to help you get started:

1 PINPOINT YOUR LOCATION.

If searching for a practice for sale, check listings through state optometric associations, the American Optometric Association, optometric colleges and brokers.

When Dr. Hamilton couldn't find an available practice in Austin, Texas, he joined the local optometric society. "I made it my goal to meet as many of the doctors in the area as I could," he says. He approached some O.D.s to find out whether they were interested in selling. One eventually agreed, and Dr. Hamilton opened his practice this year.

In purchasing property, it's a buyer's market in most areas of the county, Dr. Kattouf says. One strategy, he continues, is to construct a building that includes several suites. "Before you put a shovel in the ground, find professionals or businesses that will sign a five-year lease for each of these suites that you're going to build," he says. "If you go to the bank with three five-year leases signed and you haven't even built the building yet, the bank will roll over like a puppy wanting its belly scratched. They have no problem lending you the money because the renters are going to pay your mortgage." The optometrist forms a limited liability corporation to own the property and collect rent from tenants. "So, now the doctor is making money from the optometric practice and making money from the real estate at the same time," he says. "That is a beautiful thing. In recessionary times you can buy the property at a lesser amount, and you can build the building at a lesser amount."

Mr. Ware also says it's a good time to acquire real estate, whether you're opening cold or purchasing practice. It makes it tougher financially, he says, but owners often make more money selling the real estate than the practice.

However, Dr. Hayes cautions O.D.s not to overshoot when buying property for their practices. "It's easy to get overly ambitious to buy more land than you need, to build more office space than you need. Then that expense can weigh down your net income," he says. The suggested range for occupancy cost (purchase, lease or rent, plus insurance, maintenance and taxes) is roughly 6% to 9% of collected gross revenues, Dr. Hayes says.

Before settling on a practice location, scrutinize economic conditions and the state of eye care in the area. Dr. Fogle and her former associate obtained extensive geographic information systems research, helping them determine which community needed an optometrist and the type of practice they should open. "With our location, we had such a high amount of foot traffic that we exceeded what our original estimates would be after the first year," she says.

2 LINE UP YOUR TEAM.

For this important step in your career, find experienced professionals to help you navigate the process and check with other O.D.s who retained their services.

For Dr. Hamilton, the practice appraiser was most important. "The appraiser uncovers a tremendous amount about the practice that you might not know," he says. For example, the appraiser helped him compare the practice with others that have similar production. She analyzed several variables and compared the results to national averages, and in this process, he learned that the practice's staffing costs were higher than the average for a mid-size practice; however, he also found that its gross production per employee hour was also higher than average.

His CPA helped him review the appraiser's report and financial statements from the practice, and his attorney reviewed contracts and evaluated financing options.

Dr. Fogle urges O.D.s to hire a practice consultant from the beginning. "The value of the consultant's advice far outweighs their fee, especially in a recession," she says. Depending on services offered, a consultant may be able to work with your real estate agent, bank, or landlord and in planning the practice.

Brokers also provide important services, Mr. Ware says, and the seller — rather than the buyer —pays for the service. If you're starting cold, you will need a good commercial real estate representative to find lease space or property to purchase.

3 KNOW YOUR NUMBERS.

If you're starting cold, know how much money you'll need for a startup, Dr. Kattouf says, adding that leasehold improvements, such as converting your space to an optometric office, office equipment, an inventory of frames and contact lenses, and furniture, can cost $150,000 to $175,000 or more. In addition, you will need approximately $50,000 to $75,000 for operating expenses, he says.

For an existing practice, examine a range of factors, says Marilee Blackwell, M.B.A., C.P.A., A.I.B.A., president, Blackwell Consulting. Important indicators, which an appraiser also should examine, include:

► the revenue history,

► profitability,

► cash flow,

► how the practice compares to norms for the industry,

► community demographics,

► insurance plans, and

► the percentage of revenue the plans comprise.

Ms. Blackwell cautions buyers to watch for red flags early, such as a seller who will not provide tax returns to a serious buyer or does not have good tax records and practice statistics, a seller unwilling to get an appraisal or provide information to an appraiser, a seller who is being sued or a seller who has been dropped by an insurance plan.

Thorough research will help you make solid decisions. "Just going through the process of getting an appraisal, doing the due diligence, you learn a whole lot about the practice," Ms. Blackwell says. "I've had many clients who have gone through the process and in the end decided it's just not a good deal for them. I think it's still a good time to buy a practice, and if you've got good credit and you're buying a practice that's managed to maintain its revenue, or even grown, during the recession, there's no reason not to buy a practice."

4 CONSIDER FINANCING OPTIONS.

Research financing options offered by a number of lenders, and, if you're buying a practice, you may want to see whether your seller is willing to offer financing.

The most important factor is not to get caught up just in the interest rate, but to work with a company that structures transactions to meet your needs, Connon says. "There are companies that offer very low interest rates. They'll put doctors starting a practice into a fixed amortized program where they'll have a $3,000, $4,000, or $5,000 payment 30 days into the loan with no patients in their practice, so even though the interest rate is lower, it's not a great deal. Working with a company that truly understands the dynamics of a start-up practice and will provide cash flow-based products to the doctor will dramatically improve the cash flow in their practice for the first few years."

Dr. Hamilton had difficulty obtaining financing. Furthermore, underwriting was a long process, he says, although underwriters were pleased that he planned to work outside the office two days a week as he transitioned into his new practice. In the end, he received approval from all three institutions where he applied, but he chose the local bank. "I really valued being able to sit across the table from the bank president and discuss terms and financing options," he says.

Beyond peaks and valleys

In any economic climate, it's important to make a decision you feel comfortable with and make the most of it if you choose to pursue a practice. "Don't let the current situation make you resistant to practice building strategies — such as putting together a rock solid marketing plan, hiring great staff people, building a great company philosophy and culture — that have worked through the years in good and bad economies," Dr. Gerber says. Although, the current recession provides challenges, it's certainly still viable to buy a practice or start your own. Optometrists need to be smarter, spend money wisely, and give the process more focus and thought, says Dr. Gerber.

Such planning pays off, especially in tough times. Retirees and employees from a major automotive corporation account for 30% of his practice, but Dr. Belill explains that his practice's gross revenues continue to grow each year. His total gross receipts increased 434% from 2006 (when he started cold) to 2008. "Even though all you hear about is that the unemployment rate in Michigan is an astounding 12%, keep in mind that means that 88% of people are still working," he says. "Most people have money. So it's our job to provide people with the best examination services possible and the best consultation experience possible to make eyecare a priority and something that they want to include in their budget." OM