Tag: exit strategy

Insiders’ Revelations: Your practice has untapped potential and hidden revenue – exploit it!

Buying-Selling A Practice, Practice

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We were talking to a potential client the other day who said that he did not think his business was worth much. He never imagined that he’d sell it for a profit. We asked what his annual sales are, what his net income is and whether he had thought about establishing a transition plan. He said that his kids had planned to take over the business, but instead moved on to other professions in technology and software and felt that his “old-fashioned” business system wasn’t right for them.

We inquired further. I asked whether he had a loyal, repeat client list. We asked if he had a continuing revenue stream. We asked if he had ever thought of selling to his employees. Perhaps one of his competitors might be interested?

He was stubborn and proud. He paid nothing for the company because he started it on a bootstrap budget more than 50 years ago. He never borrowed from the bank throughout his career. He sacrificed on food, cars, the house he lived in and never overspent, living well within his means. His business was founded on sweat equity.

As we conversed, he began to reveal more and more, especially after we asked about his client list. He proudly confirmed that he had a very vibrant list: a steady, loyal clientele that had served him well for many years. We asked again about his annual revenue, which he was reluctant to reveal. We respected his reluctance to disclose his financials; as we are brokers, he must have thought we were just trying to get a business listing.

We talked more about his industry and where it was in terms of growth or decline. Eventually he related that he’s in a high-growth industry, something he knew all along yet had never exploited to its full potential. He admitted that he did not want to buy the equipment, hire more staff and move toward computerization to upgrade to the necessary technology— namely, do the things that would allow him to face his new competitors. He readily acknowledged that, while his long-term clients remained loyal to him, lately some had concerns about his slow delivery and service. They never complained about his quality nor his price, only about not getting his goods fast enough.

He further admitted that he was slow but he was good. In fact, he said, “I’m the best” and we believed him. So, what do you do? What would you do—buy his business? Is his business likely to fail because of the competition? Should he upgrade?

There are at least two mindsets on this, depending on whether we’re discussing a business or an optometric practice. One would believe this business is an easy picking to compete against. The other thinks of buying this business and doubling the revenue.

As a broker and appraiser these are the types of insights that present themselves when meeting with business or practice owners. The hidden value of the business is often uncovered with minimal effort. Practitioners or entrepreneurs regularly want to tell their stories and confide their trials, tribulations and triumphs over the years. One thing they’re not able or likely to do is tell a potential buyer how much business they left on the table. They might humble-brag about it and say, “If somebody younger or more competitive takes over, they will do better than me.” This revelation is left to the third party acting for the seller, and that’s where a broker comes in.

The truth is, every business or practice has untapped potential and hidden revenue. You can ethically exploit it yourself or a buyer can. Your call.

TIMOTHY BROWN

is Chief Executive Office of ROI Corporation Canada’s national professional practice and brokerage firm.

Jackie Joachim, COO ROI Corp

JACKIE JOACHIM

Jackie has 30 years of experience in the industry as a former banker and now the Chief Operating Officer of ROI Corporation. Please contact her at Jackie.joachim@roicorp.com or 1-844-764-2020.

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When Will You Really Be Ready?

Buying-Selling A Practice, Finance|Wealth, Practice, Practice Metrics & Benchmarks, Resources

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At some point, you will be selling your practice. It is a fact. But what will be the trigger? Will it simply be the right time, burnout, or illness? In my position at ROI Corporation, I have the privilege of speaking with owners across the country every day. Most often, the conversation is about when this key event should take place. People may have their offices in very different communities, face a variety of economic challenges and have diverse philosophies to practice. But one thing is certain. The following questions are the same regardless of your age, gender, or stage of career.

• Why do you really want to sell?

• Will you completely retire or would you like to stay working a day or two a week?

• What are your plans after you sell?

• Does ownership define who you are?

The last question is probably the most important. Regardless of the reason for selling, how you define yourself – your role, your life and your practice will determine how easy it is for you to proceed and go through the process of selling. Finding a buyer is easy. It is still a seller’s market. Key factors in the market have definitely changed which directly impact the final sale price such as “who is buying”? How much a buyer is willing to pay? And of course, the unknown factor – increase in interest rates.

One of the most challenging aspects about selling, in my opinion, can be the vendor. The happiest vendor is the one who calls us and says they are ready to list. This scenario can be misleading if the vendor hasn’t done all the hard work or gone through two or three years of decision making to reach this point. However, most vendors who call us are not at that point. Selling a practice that you may have owned for a number of years is a daunting thought. You are not just selling the bricks and mortar but also the long-time relationships with patients, staff and very importantly your routine.

Regardless of whether you are tired with the management of the office, politics of the profession or any other reasons, you still have a routine you follow without giving a second thought. We want to assure you that there is life after selling your practice. There are many new opportunities and adventures that life can offer you if you are willing to open yourself to see them. Every major event brings fear and trepidation but we want you to know that we will not only help you sell profitability but also with dignity. It never hurts to explore your options and we are always pleased to listen and provide our experience.

On a final note, a little bit of fear is okay. Remember how you felt walking into your first appointment?

Jackie Joachim, COO ROI Corp

JACKIE JOACHIM

Jackie has 30 years of experience in the industry as a former banker and now the Chief Operating Officer of ROI Corporation. Please contact her at Jackie.joachim@roicorp.com or 1-844-764-2020.

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Discussion: Practice Valuation Methods

Building Wealth, Buying-Selling A Practice, Finance|Wealth, Practice, Resources

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There are several commonly used formulas for determining the value of a practice. Often the different approaches are averaged together and used as a starting point to begin negotiations. In this discussion adapted from the Webinar Should I Stay or Should I Go, expert panelists Al Ulsifer (CEO FYidoctors), Grant Larsen (CEO Eye Recommend), Daryan Angle (VP IRIS The Visual Group) and Paul Gray (Optometric Services Inc.) discuss three commonly used methods in more detail.

Al Ulsifer, FYidoctors: The most common valuation method that we were seeing years ago is taking one year’s net income, and that can be on a three-year average. There are other considerations as well. A buyer will be cognizant of a practice that decides to not take holidays for the year prior to the sale, for example. So it’s important to have some stability over a period of time. It could be 100% of, or sometimes up to a net of 120% if the practice is growing and showing promise, and then adding on the fair market value of your assets. Assets being equipment, furnishings, lease holds, supplies, inventory. Sometimes it’s a bit of a challenge to assess what is the fair market value of those assets.

We have equipment companies that can go and give an assessment of what the fair market value of optometric technology is. Some folks will look at the net book value of those assets on your financial statements because it is quite a process to truly get an external valuation, a fair market value assessment of all assets in the business.

Our company will use a combination of a couple of different methodologies in a formulaic approach to generate the valuation.

Grant Larsen, Eye Recommend: There are a number of details when you are looking at some of the tangible and intangible items that impact weighted average gross income and how you value.

First, it’s a weighted average, the last 12 months being the most important, usually at about 50%, the second last year being at about 30%, and your third last year being at about 20%. That’s the weighted average of it, and you are relating it to gross income. Once you’ve got that gross income weighted average then you are looking at a number of components that will impact, plus or minus.

Looking at how well your business is run from a net income standpoint, that is an indication of efficiencies and the value of your business. Looking at the reputation of your practitioner and how that matches up with you as a buyer is really critical.

We look at the community as a whole and at the geographic location. We also look at mix of patients—the demographics, and parking and transportation. Consumers’ convenience is becoming very important to them.

Fees, credit policies, a lot of these elements need managing, so they have a dramatic impact on the value of the business, and often times it is the perception of the buyer as to whether these are positive or negative.

The last one is competition, or could be a lack of competition. We think about rural and urban practices and there is no rhyme or reason why one is more valuable than another, especially in Canada. But competition can have a direct impact on whether it is more or less valuable.

Daryan Angle, IRIS: EBITDA is certainly the most accepted evaluation in the public market.

If you take all your revenue coming into your practice and you start to pay out your expenses, wages, cost of goods, the rent, all those things and you get down to the number before you pay your taxes, before you pay interest on any money you borrowed, or before your accountant decides to depreciate or deduct an amount based on assets you have in the practice that is depreciating.

This is an accounting process that, when you are taking a piece of equipment or leasehold, you amortize or you depreciated over time, you take the number before that, before the interest, before the tax, you have your EBITDA, and that is the number that the market uses as an indication of the profitability of your practice.

Your operating expenses isn’t the number you want to use because it’s fairly common for practice owners to use their practice in creative ways to reduce the taxes you pay. Salary, running expenses, personal expenses like cellphone, automobile uses, other type of expenses that you can put through the practice which are not directly related to the operations of the practice and the buyer will not have to pay once they acquire that business.

Those are all things that you want to pull out of that EBITDA number when you are looking at adjusting your business for sale, as well as non-recurring expenses. If you changed your carpet last year, you are not going to do that every year, so you want to remove that from your EBITDA calculation when you go to sell your practice because it’s not something the buyer is going to have to do every year, and they are going to reap the benefit of the profitability of not having to have that expense.

When you make these adjustments you get to an adjusted value or adjusted EBITDA value, and then you apply to that value a multiplier. The negotiations around that multiplier relates to different factors—is it too isolated to recruit associates, is it big precisely because there is no competition? There are so many factors involved but that’s going to affect the multiplier that you applied to the EBITDA as well as what you adjust to. You may get creative in terms of what you think is a non-recurring expense, but that becomes a point of negotiation between your advisers and you, and the potential buyer.

That is the simple version of the adjusted EBITDA evaluation, certainly the one we use at IRIS, and it’s one that follows a lot of the rigorous accounting principles that you need for a public markets and one that we are very familiar with.

Paul Gray (OSI): The price needs to be fair to both parties, in particular if they are going to continue the practice together. I think it’s worth pointing out as well that some of the sales difficulties disappear when the practice is sold to an associate who has the benefit of familiarity of having worked in the practice for one or three years in advance, and as you’ve worked them in the practice, and you worked them in the management structure, and the staff interaction and so forth, the trust develops both clinically and interpersonally.

It also allows the purchasing practitioner to have a real sense of what their dollars per patient or their real revenue per patient that they generate in the practice actually is and it makes the calculation about affordability much easier. The practice must be reasonably priced to ensure that the purchaser is going to receive enough net to fulfill their financial obligations, their lifestyle obligations, taxes on their net earnings, loan payment schedule, student loans and so forth.

 

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Canadian-Adapted Private Equity Model Coming Soon to Help ODs with Exit Strategy

Buying-Selling A Practice, Practice, Products | Services | Industry News

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Canadian Eye Care Business Review (CECBR) has learned that Ken Barbet, previously CEO of Eye Recommend, plans to offer a unique solution to independent optometrists searching for an exit strategy with a portion of the financing for this venture coming from Canadian private equity.

Mr. Barbet told CECBR that developing an exit strategy for independent ODs became very evident to him as a critical issue to solve for the independent practitioner, their family, employees, and even for the welfare of the profession in general. “Over the years, many ODs struggled with how and when to leave their practice. This has caused many ODs to leave too early or too late, or even to choose a buyer who they don’t respect,” said Barbet.

Barbet’s new company will advocate a “Professional Partnership Model,” which creates a partnership between the acquiring company and the OD who currently owns the practice. The OD owner remains the lead for all professional services and the acquiring company provides all optical and support services.  According to Barbet, both parties share in the profit as the practice grows. This solution has not been used in optometry but has been used in other health care fields such as dentistry and veterinary medicine.

“Our solution allows the current owner to focus on what they are trained for and exceptional at—Patient Care. When the OD owner is ready to retire, we will recruit another doctor who is interested in ownership to take their place. The solution provides autonomy and flexibility, and allows the owner to participate in the upside of the practice,” said Barbet.

Barbet told CECBR that the “Professional Partnership Model” provides cash up front for the majority of the practice value. The remaining practice value, linked to EBITDA growth, has upside potential that can be optioned at any time, at the seller’s discretion.

Barbet disclosed to CECBR that he will be the majority stakeholder in the new company and there will be one other party as a minority shareholder in the yet unnamed business.

In a recent CECBR webinar on Exit Strategies, the view of panelists on the possibility of private equity being a force in aggregating Canadian independent Optometrists largely agreed that private equity could become a factor in Canada. Jackie Joachim, COO of ROI Corporation, which has brokered nearly a thousand Canadian health care professional practice transactions expressed the view that private equity will come to Optometry as it had for both the dental and veterinary profession. The webinar was held June 4th, prior to the reveal of the information regarding Mr. Barbet’s new company.

 

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Webinar: Should I Stay or Should i Go? Exit Strategy Considerations for ODs

Webinar

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On Monday June 4th 2018 Canadian Eye Care Business Review hosted a panel discussion entitled: Should I Stay or Should I Go? Exit Strategy Considerations.

Drs. Jeff and Tina Goodhew, independent practitioners from Oakville, Ontario, guide the discussion an expert panel of Canadian Optometric opinion leaders actively involved in optometric practice transactions.  Panelists included:

  • Dr. Daryan Angle  – VP Business Development IRIS (Part of the NewLook Vision Group)
  • Dr. Paul Gray – Director and President of the Member Relations Committee, Optometric Services Inc.
  • Jackie Joachim, Chief Operating Officer, ROI Corporation
  • Grant Larsen, CEO, Eye Recommend
  • Dr. Al Ulsifer, CEO & President, FYi doctors

The webinar provide a comprehensive discussion of factors that indpendent optometric practice owners ought to consider as they approach the important decisions around exiting their practice.  Topics covered include planning, use of a business broker, importance of assembling a trusted team of advisors, various valuation methods and the roller-coaster psychological aspects of a sale transaction.

 

The countries two leading practice aggregators,IRIS and FYi doctors, provided the benefit of their perspectives as did the two leading independent  OD networks, Optometric Services Inc. and EyeRecommend.

The webinar is packed with solid practical tips and information: essential for any practice owner that has selling their practice even remotely on the horizon.

You may watch the video slide show and audio above, or listen to the audio only from the links below.

 

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3 Must-Do’s to Increase Your Practice Sale Price

Buying-Selling A Practice, Practice

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As a financial advisor, a phrase I often use is: “If you fail to plan, plan to fail.” That saying is especially apt when discussing preparing for the sale of a practice.

OD practice owners often leave substantial money on the table by not taking the proactive, pre-sale steps necessary to gain maximum valuation for their practice at their retirement.

Here are three essential aspects of your business to have in order before you put your practice on the market.

Balance Sheet
A balance sheet is one of the most important financial documents that a business can own. It is, by most counts, a good scorecard and fitness indicator of the health of a practice. Sometimes also called the statement of financial condition, there is a lot of information that a potential buyer will learn about your practice just by looking at the different components of your balance sheet.

Having an unhealthy balance sheet is a good way to start off on the low end of the sale price spectrum, and rightfully so. Why would you expect anyone to pay a premium for a financially unhealthy business?

A balance sheet is broken up into two main parts: assets and liabilities. Subtracting liabilities from your assets gives you the amount of equity that you have in your business. That’s why you’ll often hear balance sheets described as “assets = liabilities + shareholder’s equity.”

You can look at the assets side of the balance sheet in three broad, sub-categories: cash, inventory and accounts receivable (A/R).

Buyers love a business that has cash. As the phrase goes, “cash is king.” Cash-on-hand is usually a good indicator that the business has a short A/R collections period, strong sales and few debt obligations. It also speaks to “ammunition” that could be used by the new buyer to make changes, or invest in the practice. Because of this, future cost of capital is lower than if the buyer would have to finance future purchases and take on additional debt.

Having an A/R that is in check demonstrates prompt collections from your office. No buyer wants to see a high number in the A/R column, especially high numbers in the 60 and 90 days past due category. Ensuing prompt payment (and communicating that to your patients upon their visit) can help keep that low.

On the liabilities side of the sheet, the “captain obvious” statement is that having as little debt as possible is the best case scenario. If a practice does have debt, having a “quick ratio” that is above 1 demonstrates that the practice can satisfy their debt obligation from cash flow. The larger the quick ratio, the healthier the cash flow as it relates to debt. The quick ratio is calculated as follows: current assets – inventory divided by liabilities. “Current assets” are described as cash and cash equivalents, marketable securities and accounts receivable.

If you do have debt on the practice, ensure that the terms of your debt are most favorable given the current interest rate environment, needs of your practice and cash flow. Look at establishing lines of credit with a bank instead of using a credit card for monthly purchases. Do what you can to eliminate, or reduce, your debt as much as possible—it is directly related to the valuation you’ll receive on your practice.

Sales
When looking at the potential opportunity of buying into a practice, one of the factors that can send a buyer running to the next deal is looking at a practice that has declining sales and collected revenue. Declining sales usually indicates an unmotivated doctor and staff, stagnant marketing, unsatisfied patients (low repeat/reoccurring patient visits) and low patient referrals. Fixing these challenges and deficiencies requires an additional combined investment of time, energy and/or money—all above and beyond the required investment of these three qualities when buying a business.

In the best case scenario of the buyer proceeding with the purchase of your practice, expect them to use these attributes as powerful negotiating points and justification when most likely making you an offer that is below what you were anticipating, needing, or wanting, for your practice.

To combat this possibility, ensure that you are keeping your “foot on the gas” in the years leading up to selling your practice. Having steady or increasing sales and collected revenue is appealing to a buyer—it indicates that there’s a sound marketing plan in place and a repeatable, sustainable and scalable business to be acquired.

In addition to having steady, or growing, sales, demonstrating that you have strong reoccurring revenue from a core patient base demonstrates that you deliver a patient experience that keeps them coming back to your office for their eyecare needs. In an ever-increasing competitive world, in which the value of eyecare continues to be perceived as devalued and undercut in price, showing a strong recall system and high show rates proves that you and your team provide a great patient experience.

Strong Inventory
A strong inventory (specifically your frame inventory) also is appealing to a buyer, but make sure that your inventory is the right kind of inventory.

This means having an up-to-date optical that has frames that are reflective of your patient base, multiple price points and current fashions and styles.

Having an outdated, small selection of frames increases the chance of having a bad first impression on patients when they walk into your optical, which can increase the chance of patients walking out the door with their Rx and right to the online marketplace—lost potential revenue for a future buyer of your practice. Not only will those weaknesses cost your practice money; they also will leap out at potential buyers, lowering your sale price.

ADAM CMEJLA, CFP®, CMFC®

is a Certified Financial Planner and president of Integrated Planning & Wealth Management, LLC, a financial planning and Registered Investment Advisory firm that works with optometrists nationwide. For more information: Contact Adam at  or adam@integratedpwm.com or 317-706-4748.

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Four Steps to Prepare to Sell Your Practice

Buying-Selling A Practice, Practice

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When selling your practice, you can make more money if you prepare your practice for sale well in advance–and utilize the expertise of a broker.

Of the roughly 40,000 ODs in the US, only a minute portion fit the demographic who would be interested in buying a practice, at the exact time you decide to sell it, in your exact location. In other words, the buyer market is small; so small that you must take the proper steps to ensure your practice not only sells, but brings you the value you deserve.

SELLERS ARE POORLY PREPARED

As a practice broker, I have encountered countless OD practice sellers who contact me a few months before they are ready to sell with little-to-no preparation, having never spoken to a practice broker/appraiser/transition consultant. Or they had an associate who was supposed to buy the practice, but decided not to. Whatever the case, I cringe knowing that had the owner just contacted me at least a few years prior, their practice would sell better, faster and for more. It brings to mind the saying:“Proper prior planning and preparation prevents poor performance.” In this case, “performance” can be replaced with “practice purchase price.”

To end the injustice of practices selling for less than they should, or not selling at all, here are five key preparations practice owners should take as they ready their practices for sale:

Maintain the Proper Asset List: Practice appraisers calculate the fair market value of your assets based on useful life, whereas your accountant typically depreciates assets rapidly for tax benefits. Your accountant often won’t keep an itemized list of your assets, especially after they are depreciated. So, if you’d like to avoid searching for equipment receipts from 10+ years ago, I highly advise keeping itemized records of your assets in a simple, organized worksheet including the asset type, manufacturer/model number, date of purchase and cost basis. I’m happy to provide a blank Excel worksheet, partially depicted below, upon request:

Medical equipment tends to have a useful life of 15-18 years! So, start this asset list as early as possible, and rest assured all your assets will be added to the appraised value of your practice.

 

Properly Label Expenses for Add-Backs: Your accountant’s job is to reduce your income as much as possible to minimize taxes. Your practice appraiser’s job is the opposite – to show the true earning potential of your practice. One way we do this is by adjusting your net income on tax statements for “add-backs,” which are generally discretionary expenses not fundamental to the continued operations of the practice,( e. g., owner cell phone, family health insurance, auto lease, etc.).Your bookkeeper should start carefully labeling and itemizing such add-backs at least three years prior to the appraisal of your practice. Otherwise the add-backs may not qualify or can be overlooked. Your appraiser/broker can review your tax statements and explain how best to adjust your bookkeeping to properly label add-back expenses.

Order a Practice Appraisal: A practice appraisal is one of the most important components used in the sale of your practice. A practice appraisal should cost about $2,500 – $4,000 for a single OD/single-location practice. It should be completed by the same company that will be brokering your practice for sale, otherwise the appraiser may put an unrealistic value on the practice if they are not responsible for selling it. The appraisal should include a comprehensive financial analysis using industry standard methodologies, as well as qualitative data and descriptive content to serve as the prospective buyer’s “bible” and main point of reference to make an informed purchase decision. Buyers will submit the appraisal to commercial lenders when they apply for practice purchase financing. Order the appraisal about one to two months before you expect to list the practice for sale. Each practice is different, and there exist too many variables to offer an average length of time a practice remains on the market. Gun to my head, I would say 9-11 months, but I’ve seen practices sell in two months and others on the market for years. To plan accordingly, ask your broker when you should appraise and list the practice, which will depend on your unique goals, the practice itself and other relative market conditions at the time.

Exit at Full Speed. Buyers like to see consistency, and love to see growth. Too many practice owners slowly retire, weaning hours, and allowing financials and production to decline. Sun-setting like this will only hurt the value and marketability of your practice. At the very least, operate your practice as you would normally. Don’t skimp on usual and customary expenses as your transition date approaches. If you have broken equipment, replace it. If you’re wondering whether to replace old but functional equipment, ask your broker. Among many factors, it depends on the type of equipment, timing and condition of your existing equipment inventory. Should you convert to EHR now? At this point, the answer is almost always yes, convert. Aside from the looming penalties, having an EHR in place can be one of the most marketable attributes of a practice for sale.

Above are just several preparations one should take when approaching a practice sale. Many more come into play, such as negotiating property lease renewals; managing retail inventory before and during the sale; tracking patient demographics and production; and much more. These are all matters that should be carefully planned in advance with the support of a qualified optometric practice broker to enhance the marketability and value of your practice. Remember, “Proper prior planning and preparation prevents poor practice purchase prices!”

 

RELATED ARTICLES FROM REVIEW OF OPTOMETRIC BUSINESS

Purchase an Established Practice–and Grow It
Retirement Planning Options: Staff Retention Tool
Setting Goals for Your Future: Achieve Your Optometric Visions

ERIK FERJENTSIK, MBA

Erik Ferjentsik, MBA, is president and principal consultant of Visionary Practice Group, LLC, an optometric consulting and brokerage firm consisting of attorneys, MBAs, CPAs and OD practice owners and management experts “specializing in providing practice appraisals, brokerage, and consulting services for optometrists to bring ODs the most successful results in practice sales, purchases, partnerships, and transitions.” CONTACT: erikf@visionarypracticegroup.com.

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