Finances

Anatomy of a Bad Deal: Practice Seller Beware

Nov. 29, 2017

By Mark Wright, OD, FCOVD, and Carole Burns, OD, FCOVD
Review of Optometric Business Professional Editor

Most ODs sell their practice one time, usually at the end of their career. Generally, a well-prepared seller does well. Conversely, a poorly prepared owner can all-too-easily be lured into a bad deal that works well for the buyer but poorly for the seller. Consider the following steps toward an optimal practice sale.

Know your net
The most important issue is to have a net income above 27 percent. The higher the net, the higher the value of the practice. Think about a practice as an engine that produces a net. How good is your engine at producing a high net? You are selling the practice as it is, not as you hope it could be someday if a bunch of changes are made. Make those changes now so that your practice value increases.

Know your gross
The second most important issue in selling a practice is the gross revenue.  The median gross revenue in the country is $700,000 per full-time equivalent doctor. How good is your engine at producing high gross revenue?  If you lag in this area, make changes today.

Prepare your financials
A common problem for the seller is lack of good financial records for the practice. It is important that the seller is able to produce accurate records for a buyer. The seller needs to demonstrate how cash flows through the practice. In the average practice, there are multiple streams of money that flow through the practice that must be managed effectively for the practice to succeed.

Be up-to-date
A parallel problem is that the seller has to make sure the practice is current with equipment and office systems in order to deliver up-to-date care. For example, if the practice is not HIPAA compliant, then the buyer will be forced to upgrade the practice.  That need decreases the value of the practice because it causes the buyer to go deeper into debt to fix this problem.

Formulate a retirement plan
Often, sellers do not have a viable retirement plan. A retirement plan should be instituted at the beginning of the doctor’s career. As any good entrepreneur knows, always start with the end in mind. Each year, progress toward the retirement end goal should be measured and your strategy should be adjusted to make sure you are on track to hit your retirement goals. Some doctors view the sale of their practice as their entire retirement plan. The sale of the practice will fund, on average, 2.5 years of your retirement, which you should forecast to be 20 years. The sale of the practice is a part of the retirement plan, but obviously it is not the entire retirement plan.

Some doctors are not really ready to retire completely. The doctor may still want to work a couple days per week.  If this is your goal and you want to do this in your practice, then make sure your practice will support more than one doctor. A good approach is to bring in an associate who wants to buy you out on a part time basis, then at retirement, the owner and the buyer can trade places. Because the practice supported a doctor-and-a-half, it will still support a doctor-and-a-half.

Locate a bona fide buyer
Finding the right buyer is often a problem for the seller. One of the things we do at the Practice Management Center (see below) is to have potential buyers financially prequalified so that we do not waste the time of either the seller or the buyer. When the buyer is financially prequalified, the seller is not wasting time talking to someone who is going to get turned down by a bank.

Set a fair price
Pricing the practice so that the sale is fair to both the seller and the buyer is another thing that the Practice Management Center does.  Since this may be the first and only time the seller is going through this process, we have seen cases where sellers have priced the practice too high and other cases where the seller priced the practice too low.  When one or both sides feel the practice is not fairly priced, the deal will eventually fall apart.  Getting the price right is key to a successful deal.

If you going to be a seller at some point in the future, then take this week to address the issues raised in this article.  As football coach Vince Lombardi put it, “The will to win is not nearly so important as the will to prepare to win.”[i]  Take this week to prepare.

[i] https://www.primegenesis.com/2010/11/popularity-of-lombardi-will-to-prepare-to-win-post/

 

 

 

 

 

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