Should you sell your practice to a private equity firm? That depends

You’ve decided to sell your practice. Dr. Low offers you $500,000. Dr. High offers $800,000. Seems like an easy decision, until you hear that Dr. Low wants you to leave when you hand him the keys, and Dr. High wants you to stay as an employee for five years and will pay you $600,000 now and the remaining $200,000 over five years. Also, your wages will be 75% of what they were. Dr. High says, “After all, I’m overpaying for the practice.” So, now what?

THE DIFFERENCE IN VALUES

The first question to ask before thinking about selling to Dr. High or Dr. Low is, “Why is there such a large disparity in their offers? Both doctors saw the same tax returns and profit and loss statements. How can their valuations be so far apart? Is there a catch?”

The answer is simple: The price is worth whatever the buyer is willing to pay. In this case, the practice is worth more to Dr. High, but only if you stay.

You next need to consider why it’s worth more to Dr. High. Apparently, he sees something in your practice worth paying for that Dr. Low doesn’t. If you were able to figure out what that thing was, and were willing to work another five years, then maybe you shouldn’t sell it in the first place! After all, if you replicated what Dr. High plans to do, and collected five years of income and then sold the practice, you might be ahead of the game.

The above decisions are being pondered by many more practice owners than ever before. While nearly every transaction is different, conceptually what you’re seeing above is how private equity firms are buying optometry practices. Using a similar strategy to Dr. High’s, they “overpay” for a practice. However, these firms didn’t achieve success by overpaying. Instead, what they paid was worth it — to them. Generally, the private equity business model is to buy businesses and sell them in about five years. To be able to do that profitably, they need to grow businesses while they own them. From their perspective, they see intrinsic value in the practices they buy and the potential to increase their bottom lines. And one way they do that is by keeping the selling doctor as an employee, usually, but not always, at a lower rate of pay than the previous owner was making.

ISSUES TO PONDER

Knowing this, is selling your practice to a private equity firm the right move? It may be if your retirement time frame is short and the terms of the deal are favorable. If you are willing to work on your practice yourself during the time you’d be required to stay, then it might not be the best choice.

Of course, there are other advantages/disadvantages to these arrangements. If you enjoy “doctoring” more than “managing,” the right buyer can alleviate most of the day-to-day management tasks. However, if your entrepreneurial DNA is strong and you relish the business management of your practice, that might be a disadvantage.

Of course, the tax consequences and timing of how and when you ultimately sell your practice can be significant. So, make sure you get trusted tax advice in evaluating any offers.

Is selling your practice to private equity the right thing for you? It may or may not be. Every situation is different. Just make sure to take that important step back when you get an offer and if it seems more than you expected, ask yourself why. OM

DR. GERBER is the president of the Power Practice, a company specializing in making optometrists more profitable. Learn more at www.powerpractice.com , or call Dr. Gerber at (888) 356-4447.