CONTINUING EDUCATION, 1 CE Credit � $9.99, 1 Hour, General Knowledge, Level 1, Release date: October 2007, Expiration date: October 31, 2012

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PRACTICE MANAGEMENT

Selling Your Practice

As many of the baby-boomer, business-owning optometrists, ophthalmologists, and opticians face the likely end of the first careers, the concept of practice valuation is something most, if not all, will deal with at some point. 

Whether it is for estate planning and tax purposes, selling to another OD looking to expand, an associate wanting to buy in to the practice, divorce litigation, or selling to a new OD fresh out of school.

In this first article on the subject we will examine the options available to business owners wanting to sell in the next couple of years, and in the second article next month we will take a look at the ways to improve the value of your practice for sale five or more years down the road.

First, let's take a quick look at the eye care industry form the perspective of independent practitioners. According to a 2013 Review of Optometric Business by Vision Source, independent eye care professionals (optometrists, ophthalmologists, and opticians) have been slowly increasing their market share in the last few years. Here are the numbers:

INDEPENDENT ECP MARKET SHARE

Category 2008 2009 2010 2011 2012
Eye Exams 65.10% 67% 67.30% 67.50% 68%
Eyewear Sales 47.10% 49% 49.90% 50.50% 51%
Contact Lens Sales 55% 56% 56% 57% 57%
Total Primary Eye Care 50.90% 51.60% 52.70% 53.60% 53.70%

Want some more good news? In a Jobson Research study conducted for VSP on patient loyalty, independents fared extremely well as the numbers below show:

Patient Assessments of Independent and Corporate Eye Care Professional

% of extremely satisfied Independent ECP

Chain Store ECP

Overall patient satisfaction with eye exam 58% 45%
Likelihood of returning to same practice next time 71% 53%
Likelihood to recommend ECP to friend or relative 61% 39%

According to David Greene, a broker at Medical Practice Brokers, LLC in Colorado, at any given time there are about 15,000 private eye care practices in the US. While the number of independent practices has been slowly shrinking, this translates to plenty of opportunities for the buying/selling of practices, whether you are a new graduate wanting to strike out on your own or a baby-boomer pondering retirement.

Let's say you're that gracefully ageing optometrists with his own practice (sounds better than baby-boomer, doesn't it). How do you even go about placing a value on your practice? Be careful here. According Vincent Brinly of the Practice Valuation Group in Washington, DC, it is natural for a doctor selling his practice to place a higher value on it than what the numbers call for. You've spent most of your working life building the practice into what it is today, and it just makes sense that your efforts show up in the valuation. What many doctors find, though, is that working hard does not pay off nearly as well as working smart.

There are many professionals in the marketplace that can help you place a value on your practice. A CPA can help you place a value on the physical components such as equipment, inventory, and building and land if you own it; but a CPA generally does not have the knowledge of the eye care industry to value the intangibles, such as a well-trained staff, a high-end patient base, and medical referrals. This is where an appraiser within the eye care industry can serve you better.

Let's take a look at the different asset valuation methods and how they can affect your practice value:

  1. Income Method - this utilizes the excess income produced by the asset � a capitalization rate based the estimated long-term return on investment. The return is based on the type of asset and the returns in the marketplace for a similar risk factor.

  2. Market Method - the asset's value is determined by the selling price of similar asset's in your marketplace. This method is mostly used in real estate and would not be good for other assets.

  3. Cost Method - the replacement cost of an asset less depreciation.

  4. Actual Cash Value - the most valuable method for eye care practices. It takes the replacement cost of an asset and multiplies it by a pre-determined factor, which compares the remaining useful life of an asset with the total useful life of that asset. Translation � take care of your equipment! This method rewards practitioners who take care of their assets.

To get started with any of these methods, you first need to establish the value of your assets:

Categorizing Assets

The simple way to categorize assets is to rank them in terms of the ease of valuing. In a typical practice they would rank something like this:

  1. Real Estate � any land and buildings should be appraised by a professional real estate appraiser

  2. Tangible Property � in an eye care practice, this would include any equipment, inventory (lenses, frames, contact lenses, etc.), and any other assets used to generate income.

  3. Goodwill � simply defined, it is the value in a business over and above the easily identifiable business assets. It reflects the synergy between the assets in the business used to produce income. In a well-run practice, the whole is greater than the sum of its parts.

Now, let's start plugging some of these numbers in to the widely accepted formula used in valuing eye care practices:

The Valuation Formula

This formula was originally developed for the veterinary field, but is widely used for eye care practices because of the similarity of issues facing valuation:

OV = T + WC + I + C (Ex � (S + R (T + WC ))) �L

Before you hit the panic button, let's simplify the formula in language you can understand, starting with the meanings of the abbreviations:

OV � the value of the optical practice.

T � the fair market value of tangible assets, including equipment, real estate, and inventory.

WC � the working capital needed to operate the business; capital of $10,000-$30,000 for accounts receivable, cash for operations, deposits, and the money needed to operate the business.

I � any further investment in the business above the working capital.

C � the capitalization rate, based on the risk of the business. It can range from 1 to 5 and it is based on overall risk and business goodwill. Here is where the intangibles you can offer a buyer come into play: will the seller stay to assist in the transition, is the staff well-trained and able to operate on their own to a great extent, any community outreach programs the seller has established, whether or not the medical records are computerized, the established referral programs, the average value per patient on an annual basis, the overall growth curve, and all those everyday functions that separate successful practices from the ones just getting by.

Ex � expected excess earnings. Take an average of the past three years to get to this number.

S � fair market value return on the owner's time (how much did they take in salary) as a total of the compensation package.

R � long-term expected return on investment.

L � long-term liabilities such as leases, etc.

Once the formula is understood and accepted by both buyer and seller, there is room for negotiation, usually on the capitalization rate. Obviously, the risk to the buyer would be significantly less in a practice located in a desirable area, with well-trained staff and a high-end inventory; than with a practice with an ageing, Medicare-based patient base in a run-down area with the doctor only in the practice three days a week.

Next month we'll take a look on improvements you can make in your practice which will pay off if you plan to sell some years down the road.

Cliff Capriola, Practice Management Consultant

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