How to overcome the challenges of practice transitions

Previously in “Pros and cons of private equity firms in practice transitions” (April 2019), we shared the story of a colleague who finally came to peace with a decision to retire from a successful group practice he had founded.

After approaching his associates with a fair market offer for his practice shares, he was surprised they declined the offer, stating they did not see the value in buying the practice.

This conundrum of how to transition out of a practice is increasingly challenging for some ODs, while many younger colleagues are simultaneously seeking private practice opportunities.

With a growing number of successful older practices simply being shuttered, let’s continue to tackle the question of why private practice transitions can be so challenging.

The American Optometric Association’s (AOA) 2017 Survey of Optometric Practice found that:¹

• 27 percent of ODs have been in practice more than 30 years
• 58 percent of ODs provide care in private practice

Given the aging provider population and large percentage of ODs in private practice settings, this topic is increasingly more relevant.

In this final installment of a three-part series, we will consider the traditional sale of a practice from one doctor to another.

Read the first installment: How to overcome barriers when buying or selling a practice

Transition timeline
Transactions of this type can sometimes take three to five years-from beginning to consummation, so be sure to plan accordingly.

Also consider whether the seller prefers to sign on the dotted line, hand over the keys and walk away, or if there is an option for the new owner to “buy out” over time with cash or sacrificed earnings with a transitionary period during which the seller stays on to see patients. If the latter, how will compensation and benefits be structured?

Buyer profile
Does the seller prefer a new/recent graduate, an established associate, or a current practice owner? Someone native to the area or with local connections?

There may also be the possibility of bringing someone on for a trial associateship to determine if such a transaction is a good fit. There is no right or wrong answer, but if there is a preference, it may change how to proceed in the next step.

Also by Dr. Wroten: How to know if a professional employer organization can help you

Identifying/recruiting a buyer
Consider seeker postings on job boards, such as the AOA’s Career Center, one affiliated with your state optometry association or your optometry school, or possibly one of the for-profit job boards. A seller should also consider listing their opportunity on those job boards, or in a school or state association’s newsletter communications.

Other lead sources include state association executive directors, state regulatory boards (if they are willing to share their list of new licensure applicants), and faculty at the schools and colleges of optometry.

If planning early enough, an OD could recruit a future buyer from his current high school/college student patient base by encouraging them to consider optometry as a career-don’t roll your eyes, it has happened more often than you would expect.

Lastly, do not overlook the resources a practice transitions consultant or headhunting firm may offer for finding a buyer or a seller. 

Related: How private equity affects optometryPractice valuation
While there is a fee associated with practice transition consultants that can be negotiated up front, the knowledge and experience they can bring to the table can save time, frustration, and money in the long run-just be sure to ask if they have experience in eye care.

According to Bill Nolan, executive vice president of Williams Group, a practice’s value is based on its assets and earnings. Assets are tangible (equipment, furniture, fixtures, inventory, land, building) and intangible (“good will”-the value of which can be hard to determine).²

Earnings may be obvious-the more the better-but the amount of free cash flow (the cash that a company is able to generate after spending the money to maintain or expand its asset base) is also another general gauge for practice value.

Related: Blog: Put profit first in your practice

This differs from net income-the company’s profit, calculated by taking practice revenues and subtracting the costs of doing business (such as depreciation, interest, taxes, and other expenses).

These concepts lead to the four generally accepted practice appraisal methods in current use today:²

• Assets and earnings: Valuation based on hard assets, good will, inventory, and supplies

• Capitalization of earnings: An investment model with a capitalization rate of typically 15 to 20 percent

• Discounted free cash flow (DFCF): Values free cash flow over time, considering the practice as an income-producing business

• Debt service: Valuing the practice’s ability to service its debt

Related: Know what practice metrics to measure

Transition team
Consider utilizing your certified public accountant (CPA), a labor attorney, a practice transitions consultant, and-depending on the specifics of the transaction-an experienced banker/financial advisor to guide the decision-making process.

Financing the deal
Self-funding a transaction-as opposed to a buyer seeking an external source of funding-can be attractive to both parties by reassuring the buyer of the seller’s extended good will for the practice’s success. It also generates sustained interest earnings and tax breaks for the seller.

Related: How to calculate the value of your practice

Regardless of which funding mechanism is used, remember: Anything an OD can reasonably do to promote the new owner and help his former practice succeed will make the practice a more attractive option to buyers and therefore benefit both parties. A financial advisor, CPA, and consultant can guide an OD through this process and explain the financial and tax implications.

Other considerations
Will equipment and/or the land and building be part of the sale? When an OD sells the practice, he also needs to remember that he is no longer the owner. Let the new owner run things the way she wants to, offer advice only if asked.

There is much to consider when it comes to any practice transition. With proper planning, an OD can avoid becoming overwhelmed-as long as he does not procrastinate.

As Benjamin Franklin once said, “If you fail to plan, you are planning to fail,” so start planning now for a successful practice transition.

Read more content by Dr. Wroten

References:

1. American Optometric Association. 2017 AOA Survey of Optometric Practice: Practicing Optometrists and their Patients. Available at: https://www.aoa.org/Documents/2017_Practicing_ExecutiveSummary.pdf. Accessed 5/8/19.
2. Nolan B. How to assess the value of an optometric practice you want to purchase. Williams Group. Available at:
https://www.thewilliamsway.com/assess-the-value-of-an-optometric-practice/. Accessed 5/8/19.