Consult Before You Buy
A consultant can make the purchase of a practice easier on you financially.
By Richard S. Kattouf, O.D.
Q I graduated from optometry school five years ago and have been working in corporate optometry as well as in an independent practice. I want to buy an existing practice or buy in as a partner, but with my debt, I'm afraid to make the move. Do you have any advice?
Dr. T. A. Swartz, Via e-mail
A: There's a huge misconception that young doctors can't purchase a practice because of the debt service of their school loans. Let's examine some facts:
- We're in a buyer's market. Many practices are for sale and there's a small pool of buyers. Now is the best time to purchase at a tremendous value.
- Sellers have no choice but to be imaginative in the development of the buy-sell agreement. For example, he could arrange lower down payments and amortizing the balance over 20 years but requiring a balloon payment at seven to 10 years. This allows the buyer to make smaller monthly payments on the front end of the loan until she can afford to pay the balance.
- With proper consultation, most practices can double in size in a few years by adding services and maximizing insurance reimbursements. This means the buyer's net income and equity grow rapidly.
- Current interest rates are low. At present levels, this saves the buyer tens of thousands of dollars.
- Working as an employee doctor is like purchasing term insurance or renting space. There's no value (equity) in either case. As an owner, there's no limit to your income or status in the community.
- Invest in professional consultants before you purchase or venture into your first practice. If you don't, you could encounter numerous pitfalls. Consider Dr. Ferris's situation.
After graduation, Dr. Ferris purchased a practice he'd been familiar with for years. He didn't hire a professional consultant to represent him as an agent to negotiate with the seller and develop the buy-sell agreement. The seller was grossing $700,000 and wanted $650,000. No one ever appraised the practice. The buyer and seller proceeded with the deal together and Dr. Ferris agreed to the asking price. The seller's attorney drafted the buy-sell agreement, but he'd never developed one for the optometric profession.
Analyzing the situation
Three years after purchasing the practice and increasing the gross income by $300,000, Dr. Ferris retained my company's services to determine the reason for his poor cash flow. The reason was simple: He paid $230,000 more than the true value of the practice. No one considered his debt service and how this would be affordable. Consequently, the monthly payments were choking his profits.
Dr. Ferris never learned how to analyze and control his cost of goods and percent of salaries to gross. As a result, both of these key financial areas were out of control. I renegotiated the buy-sell agreement by amortizing the balance over 25 years but ballooning the total in 10 years. I taught Dr. Ferris how to evaluate his finances on a monthly basis and now he's less stressed, has an increased cash flow and total control of his finances.
The lesson to learn is to seek professional advice before these enormous business ventures. It saves you money, reduces stress and avoids costly pitfalls.
Dr. Kattouf is president and founder of two management and consulting companies. For information, call (800) 745-EYES or e-mail him at email@example.com. The information in this column is based on actual consulting files.