3 key phases in optometry practice acquisition
Historically, practice owners would hand the reins over to trusted partners, former apprentices, their children or other colleagues when the time was right. More recently, private equity acquisition and consolidation has dominated the conversation behind practices changing hands.
There are certainly benefits and costs associated with both Private Equity acquisition and doctor-to-doctor transitions, but when I think about the upside that comes with new technology, new modes of practice, and new grads eager to blaze their own trail, I can’t help but get excited.
Do you hear that? That’s opportunity knocking.
Ownership for scores of optometry practices is set to change hands this year and I’m excited to report that an increasing number of those will be doctor-to-doctor transitions. Private equity is certainly not a thing of the past, but OD-to-OD practice transitions are picking up steam once again, and my goal here is to outline each phase of the transition process — valuation, negotiation, & implementation— to help you, whether buyer or seller, understand how to approach this otherwise opaque process.
The first phase of the practice purchase journey is to estimate the present fair market value of the practice. This appraisal will serve as the starting point for negotiations to support an equitable, viable transition.
Post a thread in any online OD community or pose the query in your favorite search engine “How to value an Optometry practice?” and you’ll see various and sometimes conflicting formulas (e.g. 60% of gross revenue, 2x NET + inventory, 5x EBITDA, etc.).
These approaches offer an extremely wide range for the possible values of the practice. Whether you’re considering buying or selling a practice, it is incumbent on you to establish a robust, comprehensive method of estimating the real value of the practice.
Key Valuation Components:
Industry, Business, & Regional Overview
The present quantitative & qualitative aspects of the investment opportunity that is the practice in its own specific context
Financial Statement Reconstruction & Forecast
Novel forecasting based on last 3-years and current YTD financial statements: profit and loss, balance sheet, & income statement
Valuation Methodology. Practice appraisal through modern methods
Asset-based approaches focus on the tangible assets and goodwill of the practice. Income-based approaches evaluate the profitability of the practice. Market-based approaches compare practice performance to benchmarks.
Conclusion of Business Value
Evaluate business value as an aggregate of assets, income, & market values, as well as composite industry guidelines and expectations
Assess total cash flow requirements (inclusive of debt service and forecast cash flows) to project financial viability for the new owner
All of the above should include explanations and supporting analyses, numbers on a page are all well and good, but true understanding is necessary to take the next step.
Collectively, these components provide a transparent real valuation of the practice where all stakeholders have a clear understanding of the inner workings and financial performance of the business. Once that’s the case, the buyer, seller, and their agents should agree on the financial viability of the practice and the proposed sale.
For many doctors engaging in OD-to-OD transition, there is a standing relationship between seller and buyer. Whether we’re discussing an associate OD buying a seller’s practice or an outside OD owner with an established practice looking for expansion, agreements & negotiations and business foundations are a critical step in the practice transition process.
If the valuation is a milestone that marks the starting point, the next phase of this journey is to agree on the price and terms of the sale. Aimed at facilitating the Bill of Sale, the Agreements & Negotiations phase of the journey must include thorough examination across a litany of baseline business elements.
Key Negotiation Components:
- Inventories & equipment
- Employment contracts
- Business services agreements
- Seller employment
- Covenants & non-competes
- Terms of the sale
From the buyer’s perspective, business foundations are vital to this process, contextualizing and quantifying the vision for the practice under new ownership. Whether the buyer is a first-time practice owner or expanding their established practice, understanding the acquired business’ foundations will provide direction upon transition. To put it another way, you have to know where you are to know how to get to where you want to go.
Key Business Foundation Components:
Evaluate the state of financial, legal, & practice management to set a baseline for the operational health of the practice
Financial forecast & feasibility analysis
Quantify financial requirements, project cash flows, and conduct feasibility analysis; this approach should answer all of the “practice finance” questions
Strategic business plan
the blueprint for strategy, operations, & implementation, bringing the vision to a tangible reality (ProTip: banks LOVE detailed business plans, especially for new business owners)
Provide quantifiable metrics for the practice to meet financial benchmarks; these production goals should align with financial forecast & feasibility analysis
Agreement & negotiations and business foundations
Establish sale price and terms, evaluate the health of the practice, ensure financial feasibility of the deal, and position the buyer to secure financing.
Let’s assume for a moment that valuation and negotiations went smoothly, financing was secured, and the practice has been bought and sold by its respective parties. Now the hard work really begins, where the operations rubber meets the road, so to speak.
The third phase of the optometry practice purchase positions the buyer for successful transition, modernization, & re-launch of the practice. Whereas the approach to valuation and negotiation are rather standard across deals, implementation will vary radically based on the vision of the new owner, the degree to which the practice must evolve or modernize to align with that vision, and the pace at which the new owner wants to implement change.
Much of the work in creating a smooth, effective, and successful implementation post-sale was done in the agreement and negotiation phase of the acquisition process. If the new OD owner diligently addressed business foundations and has a sound strategic business plan in place, the next steps are already mapped out before them.
Key Implementation Components:
Renovate or relocate the physical office based on demographic & competitive analyses, lease review & negotiation, design optimization, update furnishings & equipment
Infrastructure & innovation
Office-wide technology solutions, standard operating procedures (SOPs), office processes & policies, licensing & insurances
Standard of care
Strategic inventory management, evaluate partner relationships (labs, vision plans, etc.), add specialty services, update fee structure for products and services
Comprehensive HR system: human resources policies & processes, employee handbook, code of conduct, job descriptions, leadership & management functions, compensation & benefits, associate provider arrangements, reviews, retention, and compensation
Re-brand & launch
Annual strategic marketing plan: omnichannel marketing, monthly benchmarks, practice website, social media, reputation management, media & referral kit
The above list is certainly not exhaustive, but simply an overview of some of what goes into practically implementing a new owner’s vision throughout an established practice. The goal of the implementation phase is to adapt the practice to the vision of the new owner at a reasonable and sustainable pace.
Bear in mind that each of those topic headers could (and perhaps should!) be an article unto itself. There's a lot of work to be done here, especially if you want to hit the ground running.
With the growing public health need for routine vision & medical eye care, rapid innovation across the scope of care & specialties of modern Optometry, and growing access to available financing, it’s a wonderful time to purchase an Optometry practice!
Taking the time to wrap your mind around the 3 phases of the purchase process will ensure an equitable transition and a thorough understanding of what each party is getting into and out of the process.
I’ve never been more bullish on the future of independent eyecare than I am right now in no small part because I’m inspired by this next generation of OD owners. They are champing at the bit to leave their mark on their patients, their communities, and the eyecare industry as a whole, and I’m excited to be along for the ride!