Whether new grad or seasoned, optometrists buying a practice (or opening cold) can find themselves in an exciting but also nerve-wracking place. Of all the optometric practice modalities available in today’s eyecare world, private practice ownership remains a common path. Through diligent research and preparation, prospective practice buyers can avoid many of the headaches that may otherwise come their way.
In this article, we’ll discuss several important red flags to avoid when taking over an existing practice or starting out cold.
Arbitrary Practice Valuations
While this may sound ridiculous, it is not uncommon for practice owners to value their offices using some arbitrary scale or formula. This is especially true for practice owners who have been in the same location for most of their decades-long careers and have tremendous pride in the name they’ve built for themselves. These practices have played an integral role in the community and have seen multiple generations of patients come through their offices.
For many reasons, often relating to longevity and local prominence, these practices can overinflate what their business is objectively worth. This can cause friction when it comes to negotiating with prospective buyers. Unfortunately, this can result in doctors being unable to retire while eventually offering their practices at deep discounts (or even for FREE) or shutting their doors altogether.
Doing research on the practice and the geographical area is essential when determining whether a practice is a good fit personally, professionally, and financially. Obtaining a 3rd party valuation and appraisal is also necessary to remove any emotion from the negotiation.
Historically, practice values are approximately two times annual net income. Based on performance trends of the practice over the last five to seven years, this value could be significantly less.
Buyers requiring a loan need to consider how long it will take to pay off the principal balance (like a home purchase) while also determining what a satisfactory (albeit lower) salary is during this pay-off period. In general, practices should pay for themselves in roughly five years; however, a longer pay-off period can be a multifactorial, personal decision as well.
Aversion to Contracts
Optometrists looking to take over a practice must get something in writing sooner rather than later. While this may sound obvious, this doesn’t always happen. Small town doctors may still feel their word and a handshake is sufficient.
Optometrists looking to negotiate a purchase with a practice owner who refuses to sign a contract should save themselves the hassle and move on.
Once a prospective buyer confirms they’re a good fit for taking over the practice and would enjoy living in the area, they must get a contract in place with the current practice owner. This doesn’t have to outline every minute detail of taking things over but should state some clear expectations for the next several years.
Every practice transition is slightly different. Some practice owners prefer to stay and work for a few years after the new optometrist fully takes over, while other transitions are more abrupt.
As a side note, a good thing to remember is that when the original doctor retires and the new doctor takes over, you’ll experience some patient turnover. Some optometrists could see up to a quarter of their patients switching to a different practice. This will affect gross revenue.
Details regarding purchase price, financing/loan terms, and equipment/supplies should be clearly spelled out in a contract. Will the owner be financing the deal or will a bank? For doctors looking to “try before they buy”, details regarding hours and/or salary should also be agreed upon in writing. Should the prospective optometrist later decide the practice is not a good fit, a contingency plan could also be written, allowing them to stay on as an employee in lieu of buying.
Excess Vision Plans
Through today’s robust optometric education and expanded scope of practice, medical optometry is becoming less optional and more of a requirement in today’s eyecare world. Whether or not a practice accepts medical insurance plans and bills for medically related eye problems will play a large role in the future success of the practice. This especially holds true in the context of decreasing reimbursements from vision insurance plans.
ODs looking to buy a practice need to assess what insurance plans are being accepted by the prospective practice and what the average ratio of medical to vision plan reimbursements is.
Practices that see a growing number of vision plans may find themselves setting new records for patient encounters while gross revenue remains static (or even decreases). Looking at trends over the past three to five years can allow prospective practice buyers to get a realistic breakdown of types of insurance reimbursements.
Questionable Accounting Statements
Practice owners looking to sell should be more than happy to furnish income statements and balance sheets over a given time period for a prospective buyers’ assessment. Profit and loss statements are also important. Assessing trends with these accounting statements is crucial to determining the health and performance of a practice.
A situation where the seller is reluctant to furnish documentation should be viewed as a red flag.
Practice owners may overlook or justify declining revenues over a given period. While this can be justified for myriad reasons, prospective buyers should pay attention to this with close scrutiny. Was the practice owner sick for a period and therefore cut their hours back? Was there a previous associate doctor who drew a salary without seeing enough patients? Or is the practice seeing an increasing number of vision plans with low reimbursements? These are all questions to consider when assessing a practice’s accounting statements.
Declining Local Economy
In addition to determining whether or not the practice itself is a good fit, prospective practice buyers also need to heavily research the local area.
Optometrists looking to buy a practice in an area they’re not familiar with should speak with other local businesses to get an idea of what it's like working in a particular town.
With practices that are located in shared retail spaces or strip malls, practice buyers should also identify trends with neighboring businesses.
Ask:
- Is there a high turnover rate for businesses in this location?
- Are half of the stores vacant or at full capacity?
- What type of clientele frequent the area?
- Are there predominantly big box stores or more mom and pop type businesses?
Assessing trends in population growth/decline is also important. These types of questions will help buyers get a better sense of their practice location and future growth opportunities.
Staffing Shortages
In the post covid era, businesses large and small are facing challenges with recruiting a high quality workforce to their organizations. While not a red flag, per se, prospective practice buyers should be aware of this as optometric offices are no exception to this dilemma.
Depending on how long certain employees have been with the practice, staff may also see new ownership as an opportunity to ask for a pay raise. This possibility should also be taken into account.
Insurance credentialing
Depending on the type of practice sale (typically stock vs. asset), doctors transitioning into ownership may face difficulties with insurance credentialing. Based on state and plan, some insurances are not accepting registration for new tax ID numbers. In other transition scenarios, the new doctor may be required to operate under the selling doctor’s NPI/tax ID number for a period of time.
Poor Online Reviews
A practice’s online reviews should be examined closely.
Poor comments/evaluations from previous disgruntled patients can really tarnish a practice’s reputation, making it difficult to change the public’s perception.
Prospective buyers should be aware of this potential challenge when taking over a practice.
Miscellaneous Considerations
Prospective buyers should also put themselves in the shoes of their patients when considering a practice to buy. For instance, are the facilities ADA compliant, or will significant renovations be required to accommodate elderly, less mobile patients? What is parking like? On a busy Saturday, do patients need to walk several blocks to your office or can they pull up to the front door?
Lease agreements can be another overlooked area when assessing a practice. A lease that expires in 2 years may pose more of a financial risk to prospective buyers compared to a lease that expires in 10 years. Negotiable lease agreements that restrict competition with other optometrists and/or optical dispensaries can also be advantageous for practices located in retail settings.
Prospective buyers also should be aware of current equipment that may need repaired or replaced—anything from a phoropter that needs cleaning to an OCT or old slow computer(s) that may need servicing or replacement. These items can be costly expenses for a new practice owner.
In general, the maximum loan amount that lenders will typically grant ranges between 70-85% of gross income of the practice. Wells Fargo, Small Business Administration (SBA)and AOAExcel (through Bank of America) are lenders commonly involved in practice transitions.
Practice ownership should also be seen as a long-term commitment. It is a major red flag if the current owner has not owned/operated the business for any significant length of time.
Conclusion
It is crucial for those considering this path to do a thorough investigation of the practice and the geographical area they’re looking to work in. One must closely examine the opportunity costs of practice ownership; if the net profit is similar to what an employed OD would make, prospective owners should consider if the responsibility of owning a business and risk is worth the reward.
Whether new grad or seasoned OD, prospective practice buyers shouldn’t be afraid to walk away from a potential practice negotiation that does not align with their personal, professional, or financial goals.
Despite the challenges of researching and finding a satisfactory practice, optometrists are still able to pursue this rewarding career avenue.
Special thanks go to Eric Baas, OD of iCareAdvisors and John White, OD for their insight, advice, and feedback on this article.
Dr. John White graduated SUNY College of Optometry in 1980 and just retired after 40 years of private and commercial practice. Dr. White has consulted and lectured extensively on practice management, practice transitions and medical eye care. He has also participated in numerous global eyecare missions through OneSight.
Dr. Eric Baas is a co-founder and principal of iCare Advisors, LLC which assists optometrists through the entire cold start process to position them for success. He is also a partner of Solo Eye Care & Eyewear Gallery and Union Eyes in Chicago and teaches the Business of Optometry course and Private Practice Simulator elective at the Illinois College of Optometry (ICO). Dr. Baas graduated with honors from the University of Wisconsin-Madison with a degree in biological sciences. He then earned his Doctorate of Optometry degree from ICO and went on to complete a residency in Primary Care and Ocular Disease. Dr. Baas speaks across the country about starting cold and brings extensive knowledge and experience in financing, location analysis, lease negotiation, and practice design in addition to the comprehensive process. Outside of optometry, Dr. Baas enjoys traveling, playing tennis, and hanging out with his Boston Terrier, Snoop.
