PRACTICE TRANSITIONS

READY TO BUY OR SELL A PRACTICE?

EXPERTS SHARE COMMON BUY/SELL OBSTACLES AND PROVIDE TIPS ON HOW TO OVERCOME THEM

Key Opinion Leaders

PREPARING TO PASS ON or receive the keys to practice is a lot like riding a roller coaster: There are ups and downs that can be exciting and sometimes scary. Here, optometric consultants help make your “ride” a success by identifying the challenges associated with buying and selling a practice. These experts also provide tips for overcoming these obstacles. In addition, you can find other insights into practice transitions in several of our regular columns: “Marketing” (p.50), “Coding” (p.52), “By the Numbers” (p.55) and “The CEO Checklist” (p.64).

BUY SIDE

Challenge: Fear.

Gossip or negative comments from other “bad deals” and the industry itself often make buying a practice seem worse than it actually is. For first-time business owners, it’s OK to be nervous, but if it causes paralysis, then it’s not good.

Pro Tip: Being a business owner is about overcoming obstacles. Whether you operate a start-up, you’re a new or well-established owner, there will be challenges. A buyer needs to have the confidence and determination for solving business problems, such as finding employees. Often, it seems difficult to find a good employee at a reasonable salary. Focusing on the action and final goal rather than the attitude of “I can’t find good people” is a way of solving this business problem.

- Scott Daniels,
Practice Concepts, Newport Beach, Calif.

Challenge: Not having a “Buyer’s” mentality/failing to recognize lifestyle impact.

Pro Tip: Frankly, owning a business is not for everyone. It has certain challenges that not every young optometrist wants or has considered. However, owning your own business provides great rewards both professionally and financially, and it is certainly worth considering for the right person.

In terms of the second challenge, if you have mounting student loan debt both from your undergraduate and professional schools, along with the responsibilities of a young family, owning a practice may be impractical or unrealistic. To determine whether you can swing it, perform a reasoned look at the numbers.

- William J. Nolan,
Williams Group, Lincoln, Neb.

Challenge: Failing to see the opportunity.

As a practice appraiser, I see a lot of practices that have a wide range of net profits. While each practice is unique in its own way, regarding size, location, services and management style, there is absolutely one universal truth: The higher the net, the higher the value.

Pro Tip: Sometimes, a low net can turn into an opportunity for the buyer. For example, Dr. Red has a practice net of 33%. However, the practice’s costs of goods sold (COGS) expenses are at 38% of net receipts. The typical range for COGS is 24% to 34%. The buyer was confident he could lower the COGS with smart buying habits and better practice management. This information allows him to make an informed decision about purchasing the practice and negotiate a good price.

- John Scibal, O.D.,
McDaniel & Scibal Consulting, Moorehead City, N.C.

Challenge: Forgetting cash is king and the rent. Usually, the seller will retire the practice debt at closing from the sale price. But many sellers will also ask to take all the cash in the practice with them at closing.

In regard to rent, be aware that practice owners who also own the practice property often pay themselves above-market rents for tax purposes.

Pro Tip: Part of the purchase agreement should cover how specific assets and debts are handled. So, for the first challenge, ask the seller to leave an acceptable amount of cash in the practice — one to two month’s expected expenses is a useful rule of thumb. Otherwise, be sure to include some working capital or a line of credit in your purchase loan. Taking over a practice with bills to pay and no cash on hand is a tough start to ownership!

For the second challenge, if the practice owner also owns the practice property, you’ll need to negotiate a new lease if you plan to stay in the building. Get a commercial real estate broker to advise you on fair-market rent rate.

- Nathan Hayes,
Practice Finance Consultant for IDOC’s Prima Consulting, Norwalk, Conn.

Challenge: Failure to look beyond financial records. Consider this illustration: You identify a highly profitable optometric practice for sale. The tax returns and financial statements show consistently high revenue and continuous growth. An inspection of the equipment reveals new or mostly new instruments in good condition. Inventory is at reasonable levels, and employees have high morale. You are ready to buy. Before doing so, however, your practice management consultant recommends an inspection of the practice’s computerized practice management system to check for compatibility, operability and accuracy. Surprise! You discover an unusual number of claims for office visits with CPT 99215 (complex E/M code); far more than the typical 1% of established patient visits. Also, you find that every office visit is accompanied by two to three diagnostic tests; far more than the typical 1:1 ratio. In addition, you note that most claims use modifiers in ways that you have never seen before, particularly modifiers that increase payment. When you ask about some of these unusual items, the response is dismissive and glib. Further, you learn that this practice is currently under investigation by several Federal agencies, although no formal accusations have been made. The practice does not have a compliance plan.

Pro Tip: In the above example, the high revenue and profitability is likely overstated due to improper billing, and there is a high probability that a significant overpayment assessment and required refund is in the offing (due). If the aforementioned Federal agencies bring civil or criminal charges against the practice, other third party payers will shun the practice, and most of the patients will seek care elsewhere. The bottom line: Before you buy, get a formal inspection of the medical records and associated claims for reimbursement by a Certified Professional Medical Auditor with expertise in eye care.

- Kevin J. Corcoran, C.O.E., C.P.C., C.P.M.A.,
Corcoran Consulting Group, San Bernardino, Calif.

Challenge: Breeches in confidentiality/failure to understand employee personalities and skill sets.

Pro Tip: As both parties will have great access to each other’s personal financial status, as well as that of the business (patient records, etc.) being evaluated, agree to a certain level of confidentiality.

In regard to the second challenge, schedule an open discussion with staff to prevent future personnel issues, both legal and emotional. One of the biggest challenges I see is the “now it is your problem” mentality when it comes to staff.

- Scot Morris, O.D., F.A.A.O.,
Morris Education and Consulting, Conifer, Colo.

SELL SIDE

Challenge: Assuming new equipment will increase value. This does little to get you your asking price, unless it directly increases profitability.

Pro Tip: Focus on your practice’s net. The higher the net, the higher the value. It’s what is “left over” that adds value. The price the buyer pays must allow him to pay himself a salary, and he must have money leftover to pay the bank note. The bottom line: Have the highest net possible to maximize your practice value.

For example, two retiring O.D.s want to sell their practices: Dr. Green and Dr. Red live in the same community, with similar equipment and furnishings. They each have gross-collected receipts of $600,000. But Dr. Green enjoys a higher net than Dr. Red (33% vs. 25%). As a result, Dr. Green’s practice net available is $266,667 with a free net cash of $50,000.

- John Scibal, O.D.,
McDaniel & Scibal Consulting, Morehead City, N.C.

Challenge: Poor understanding of items needed to complete a sale.

Pro Tip: Among those items a seller must understand are: market value, pricing, timing of the sale process and how loans and leases can impact a sale, to name a few. To avoid these issues, have three years of financials, tax returns and practice statistic reports prepared to present to the potential buyer, and keep profit and loss (P&L) statements up to date every month. Also, select an advisor who can explain sale items, such as market value, timing, loans and leases, and who specializes in transitions and who works collaboratively. Choose someone who can help you objectively reach a win-win transaction. If the owner focuses on maintaining and growing the business vs. spending a lot of time with potential buyers or tire kickers, he or she will most likely have a higher sale price. Use professionals who are experienced and understand the nuances of sales.

- Scott Daniels,
Practice Concepts, Newport Beach, Calif.

Challenge: A laser focus on selling price. Most sellers tend to over emphasize or become fixated on the asking price because of a family history in the business or the blood, sweat and tears that went into it. However, often, it is the terms, conditions, financing and tax consequences that are more important.

Pro Tip: Put yourself in the buyer’s shoes, and realize that family history and your efforts to make the practice a success are not as important to a buyer as they are to you. Next, focus on the financial implications of the sale. Specifically, the allocation of purchase price will greatly affect the after-tax dollars, which the seller will receive from the proceeds of the sale. This allocation needs to be negotiated. Also, if a sale is conditioned on the seller’s employment after closing, both parties must balance the buyer’s need for cash flow to service debt with the seller’s desire for reasonable compensation as a doctor. Many transactions fail because the seller desires to stay either too long or wants too much compensation and, emotionally, it is often difficult to go from being a self-employed owner to an employee after the sale.

- William J. Nolan,
Williams Group, Lincoln, Neb.

Challenge: Failing to moderate income expectations when ownership transfers to the buyer.

Pro Tip: Expect typical wages for an employed O.D., if you’re staying on as an employee. The AOA’s 2014 Survey of Optometric Practice (the most recent) indicates that the median, self-reported income for employed O.D.s in private practice is between $100,000 and $120,000 per year.

- Nathan Hayes,
Practice Finance Consultant for IDOC’s Prima Consulting, Norwalk, Conn.

Challenge: Over-valuing one’s practice and failure to plan an exit strategy at the start. Sellers have unrealistic expectations and tend to use a legacy formula that is simply untrue. In the final analysis, a practice is worth what the buyer is willing to pay for it. Therefore, while you can retrospectively go back and say, “The last 20 practices sold for X% of last year’s gross,” you can’t make that assessment about any individual practice. Further, those who broker the practice and appraise it tend to overvalue it. Obviously, the broker has a huge financial interest in obtaining a listing to help sell a practice, and a common technique to do this is to give sellers over-the-top appraisals. The problem here is that those practices invariably are on the market for a very long time, or the seller gets frustrated and eventually lowers the price to fair market value.

In terms of the second challenge, practice owners who don’t plan their exit strategy before opening their practices end up selling their practices at a much lower price.

Pro Tip: To avoid the first challenge, have someone reputable, who has no horse in the race and a lot of experience in these types of transactions, as an objective, non-emotional third party observer.

In regard to the second challenge, practices usually sell for some multiple of net positive cash flow. So, smart sellers will build a practice that has in place transferable systems and processes that don’t hinge on the practice owner, such as everything from opening the office in the morning and turning off the alarm to locking the door at night, to ensure that cash flow stream is increasing and transferable at the time of sale. The best way to ensure your practice arrow’s net cash flow is pointing up is to plan way in advance to ensure that happens! The more years you can show trending up, even from year one, the more the practice will sell for.

- Gary Gerber, O.D.,
The Power Practice, Franklin Lakes, N.J.

Challenge: Failure to set tangible endpoints and not giving yourself enough time to successfully achieve them. The seller or buyer does not have a specific set of objectives and time frame in what they want to achieve by conducting the transaction.

Pro Tips: Set very specific goals and tangible endpoints for various elements of the transaction before you begin the process. Items to consider:

1. What are the price limits of the sale/purchase? In other words, what is the lower limit of the sale price if you are the seller, and what is the high limit of what you are willing to spend if you are the buyer.

2. What are you purchasing?

a. Are you buying existing shares of the practice, or are you buying the assets of the practice? Consider tax and liability ramifications of each scenario.

b. Does the professional skill set of the buyer complement or build upon the skill set of the seller? For example, a buyer may purchase a practice that specializes in specialty RGP and scleral lenses, yet he or she hasn’t fit one of those before. If a significant part of the revenue that the purchase price was based upon was derived from those services, prepare to take a huge income hit, or face a steep learning curve.

A successful practice sale/purchase takes time and a specific goal set for each the buyer and seller. A practice consultant like myself may have the education, experience and expertise to help you with any situation, but we can’t create more time or understand your goals if you can’t articulate them to us. Whether a buyer or a seller, planning properly for a defined goal is time well spent.

- John Rumpakis, O.D., M.B.A.
PRMI, Lake Oswego, Ore.

OM