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Sponsored Content<\/span><\/p>\n By Bob Schultz<\/strong> Which could put more money in your pocket, a Private-to-Private or Private Equity (PE) Sale? The answer may surprise you.<\/em><\/p>\n Nov. 3, 2021<\/strong><\/p>\n Too often practice sellers only compare the \u201cStated Sale Price\u201d when reviewing offers. How likely are sellers to receive the Stated Sale Price? This article will provide you a tool to analyze a broader range of factors to compare the \u201cTotal Expected Value\u201d of Private-to-Private optometric practice sales and Private Equity sales.<\/p>\n The examples expressed herein do not depict any specific PE company sales terms. Private sale examples are based on standard industry practice metrics and values for well-performing practices. The methodology is a means for you to make an objective comparison. Your outcome will vary based on your due diligence and input.<\/p>\n For PE sales, Total Expected Value includes the funding of the Net Sale Price plus the likely realization of any Holdback. For Private sales, Total Expected Value is the Stated Sale Price plus any earnings differential between holding the practice and a reduced wage that may be paid by PE for an employment term. This comparison should be based on the contractual terms, requirements and differences between the two sale types.<\/p>\n On the surface, PE sales appear more lucrative as they are based on Stated Sale Price (Table 1). Is it truly more lucrative to sell to PE? You need to analyze the factors. A $1,000,000 revenue practice is used as an example because you can scale it up or down to fit your practice size. If you have $2 million in revenue, just multiply the calculations in this example by two. Likewise, for $3 million gross collected revenue, multiply by three or for $700,000 in revenue, multiply by .7.<\/p>\n In this illustration, values are stated as a percentage of revenues for comparison purposes, although it is not a proper means of valuation.<\/p>\n Vision One Credit Union<\/a> is the only financial institution solely dedicated to independent optometric practices. It is all we do. Founded in 1951, by ODs for ODs, we are not for profit with an all OD, all volunteer Board.<\/p>\n Achieving optometric practice growth and value requires continuous investment and a long-term banking relationship. We take the time to know you, your goals and capabilities. Vision One Credit Union, because your team matters. You will appreciate the difference.<\/p>\n Our full banking services include: Practice Growth<\/strong> \u2013 Purchase or startup additional location(s), relocation, remodel, equipment loans.<\/p>\n Wealth Building<\/strong> – Commercial real estate, location consolidation (rollups). A full range of deposit services including interest checking, financial planning (with affiliate).<\/p>\n Time Savings and Convenience<\/strong> – We offer full-scope financial services needed by an optometric practice. As the only banking organization asked to present Management CE at major optometric events, we know the business of optometry.<\/p>\n (800) 327-2628 PE Sale – Assigning Probabilities to Determine Total Expected Valu<\/strong>e<\/strong><\/span> If a Holdback is used, what are the requirements for you to receive payment of the Holdback? Do you have to achieve practice performance targets? Is there a requirement that the PE company must be sold, perhaps at a certain price over the cost of their acquisitions? Are you contractually required to work in and manage the practice? Is there one or multiple requirements?<\/p>\n What is the probability of being paid all or a portion of the Holdback? This is an essential question to answer if you are going to assess the Total Expected Value of a PE sale. Do you have control over the means to satisfy the Holdback requirements? Do you have visibility into the condition of the company or know the market conditions required to achieve a needed sale price of the company?<\/p>\n If any of these requirements exist in your sale contract, and you have information and can measure these factors, then you can assess the probability of receiving your Holdback. If not, then you should use a lower probability and value of a Holdback in your Total Expected Value calculation.<\/p>\n How Buyers Can Find Value in Small Practices<\/span><\/a><\/p>\n Practice Finance 101 \u2013 Managing Working Capital (Cash in the Bank)<\/span><\/a><\/div>\n<\/div>\n \u00a0Calculating the Net Value of the Holdback (Holdback x Probability of Payment)<\/strong><\/span> Multiply the Holdback amount by the probability of payment to get the \u201cNet Value of the Holdback.” Then calculate the Total Expected Value of the PE Sale by adding the Net Sale Price (funded at close) and the Net Value of the Holdback. See Table 2. The values used are for example purposes, your results may vary.<\/p>\n Private-to-Private Sale – Assigning Probabilities to Determine Total Expected Value Earnings Differential<\/strong><\/span> For example, if a practice owner or owners are making $275,000 per year and compensation is reduced to an associate wage of $140,000 per year post sale it would result in an Earnings Differential loss of $135,000 per year (or gain if you kept the practice Private). Will you need to dip into the funds received from PE\u2019s initial payout to make personal ends meet as opposed to putting the funds in your retirement account? Check in your area for the details of what compensation level is being offered by PE.<\/p>\n This example of a $135,000 Earnings Differential is used in Table 3 below. If the mandatory employment period is three years, then 3 x $135,000 per year equals $405,000 \u201cAdditional Compensation\u201d you can earn by holding your practice and not selling to PE. If the mandatory employment period is five years, then the Additional Compensation is $675,000, etc. This should be a high-probability earn out as you remain in control of the practice as owner and an experienced manager.<\/p>\n Now calculate the Net Value of Additional Earnings and the Total Expected Value of a Private sale.<\/span><\/p>\n The key to this analysis is to assess the broader range of income sources and factors that impact payment to you for both sale types. The details of a PE sale matter as much or more than the Stated Sale Price. By assigning probabilities to the payouts for both Private and PE sales, you can calculate Total Expected Value. Be candid in your assessment, particularly regarding elements of payment you do and do not know or have control over. The other takeaway is the longer you hold Private, assuming standard operating margins, the more you should make. Consider these factors before you decide to exit ownership and your legacy is a commercial practice:<\/p>\n \u2022 Will the sale price complete your retirement fund if you do not receive your Holdback, particularly if you sell before turning 65? Try calculating Total Expected Value for your situation. Develop your own probabilities and values using the format from the tables above. If you have any questions about standard industry operating metrics or this methodology, please contact me at: BSchultz@VisionOne.org<\/strong><\/a>.<\/p>\n Since 1951 Vision One Credit Union has provided banking services exclusively to independent optometrists, helping ODs grow practices and find the best path forward. Contact us today at 916.363.4293. Because your team matters!<\/span><\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" Why selling to PE is often NOT the most profitable decision. <\/p>\n","protected":false},"author":99,"featured_media":47501,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[77],"tags":[1094,876,84,78,5412,966,1259,409,83,1180,771,276,2273,2957,3983,809,959,960,3982],"yoast_head":"\n
\nCEO, Vision One Credit Union<\/a><\/strong><\/p>\n![\"\"](\"https:\/\/www.reviewob.com\/wp-content\/uploads\/2021\/10\/11-3-21-bobdefinitiontableredo2.jpg\")
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\nValuing a Holdback<\/strong>
\nWill the PE sale require a Holdback of a portion of the Stated Sale Price which will reduce your sale proceeds upon closing? What percentage of the sale price will be held back 20%, 30%, 50%? The Net Sale Price only is paid at closing (see Table 2 for calculation).<\/p>\n\n
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\nOther Articles to Explore<\/h4>\n
The Only Number Needed to Determine Practice Performance<\/span><\/a><\/p>\n<\/div>\n
\nFor illustration purposes, we have chosen to use a 30% Holdback. Use the actual Holdback percentage quoted by PE or the prevailing Holdback percentage generally found in your market for practices with your revenue size. We used a 20% probability of receiving the Holdback based on the assumptions we made which included limited-to-no data available to us from PE companies, the unknowns of supply and demand for large practice groups and the lack of an established market. You should set your own probability based on your personal due diligence and knowledge.<\/p>\n![\"\"](\"https:\/\/www.reviewob.com\/wp-content\/uploads\/2021\/10\/11-3-21-bobchart2redo.jpg\")
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\n<\/strong><\/span>Private-to-Private sales are generally funded at one time, at closing based on a loan from a banking organization such as Vision One Credit Union. Private practice values are derived from a multiple of Free Cash Flow (also known as Ownership Premium, see article \u201cThe Only Number Needed to Determine Practice Performance\u201d<\/strong><\/a><\/em> for instructions on how to calculate Ownership Premium for your practice)<\/em>. A practice with standard industry operating metrics should achieve a value of 73% of revenue in the current market. Practices that perform above this level can achieve higher values; lower performance produces less value. This is known as \u201cEconomic Value.” Let\u2019s look at the value enhancements that may be available over and above the Sale Price.<\/p>\n
\nIf the PE company requires a seller to stay on and manage the practice, determine what your ongoing compensation will be. Will your compensation be set to an associate wage? Practice owners generally make more than associates. The difference between your compensation now, and the PE compensation may create an earnings differential that can be valued and added to the Total Expected Value of a Private sale. You may be working either way for some defined period depending on your contract, so you should put a value on it.<\/p>\n![\"\"](\"https:\/\/www.reviewob.com\/wp-content\/uploads\/2021\/10\/11-3-21-bobchart4.jpg\")
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\n\u2022 How do you feel about leaving your home market if needed to work as an associate or open another practice?
\n\u2022 Does the probability of additional earnings from holding your practice give you some assurance that you can make as much or more over time even if the Holdback is paid?
\n\u2022 How will your staff be impacted by a sale?<\/p>\n![\"\"](\"https:\/\/www.reviewob.com\/wp-content\/uploads\/2021\/07\/7-21-21-schultzphoto-150x150.jpeg\")
Bob Schultz <\/strong>is the CEO of Vision One Credit Union. <\/a><\/strong>To contact: BSchultz@visionone.org<\/strong><\/a><\/p>\n