Compelled to Sell
Compelled to Sell
Here's how I went about closing the door on my practice to open the door to a new career.
John Scibal, O.D., Morehead City, N.C.
It all started because of a beer. When I would leave my practice to go out to lunch, I kept noticing the other patrons drinking a cold beer.
"Wouldn't it be great if I could do that?" I thought.
Perhaps I set the bar low, but that became one of my life goals — to enjoy a beer at lunch.
I graduated from optometry school in 1983, opened cold and owned and managed a large independent practice in coastal North Carolina for more than 20 years. Now, in 2008 at age 52,1 realized it was time for a change. I wasn't ready to completely retire, though. I had about 15 years left of an active career.
After thinking about my experiences in running a private practice and what I enjoyed most about optometry, I decided I wanted to begin a second career in consulting. I had developed good business skills through the years, I'm good at taking a problem and creating an action plan, I'd been getting increasingly involved in lecturing and authoring on a variety of optometric topics — particularly electronic medical records and practice management — and I thoroughly enjoyed educating other doctors and staff members on ways to improve their practices.
Here are the specific steps I took to sell my private practice.
Crunching the numbers
Now that I knew I wanted to sell my practice, I needed to determine whether I could afford to do so. After all, it had offered me many years of excellent income— income that would come to an abrupt end. I contacted my accountant and financial advisor to crunch the numbers, and the consensus was I could indeed afford to sell. How so?
I'm a firm believer in creating wealth outside optometry. It is the rare optometrist who becomes truly wealthy solely through his practice. True wealth is achieved from outside investing and passive income. In my case, I achieved this wealth through real estate and the stock market.
For starters, I owned the real estate where my office was located — an 11,000 square-foot building I'd purchased in 1999 that was in a high-traffic area. So, aside from my 5,000-square-foot-office, I had three tenants. In less than five years, I will pay the bank note for the building and collect more than $9,000 per month. In addition, I made some other real estate investments — mostly condos — on my accountant's advice. Overall, despite the recent economic downturn, these additional investments have increased my net worth.
(As a brief aside, I realize the real estate market certainly doesn't guarantee windfall profits in the current economic climate, but I contend that now is actually a good time to find bargains. And, keep in mind that interest rates are at historic lows. For those interested in real estate investing, I suggest first talking to your accountant to determine whether it's right for you, and then find a reputable real estate agent knowledgeable in commercial property. Chances are your accountant or lawyer can provide you with recommendations to assist you in finding the best real estate agent, or check with other business leaders in your community for referrals. Like-wise, today's weak stock market should not deter investing. Rather, consider it a buying opportunity. A diversified stock portfolio need not be high risk to achieve future gains. As every investment analyst will tell you, the thing that holds most people back isn't that they make the wrong investments, but that they try to time the market and often end up making no investments.)
Another reason selling my practice was feasible: I had doggedly funded my retirement account to the maximum level almost from the beginning of practicing. My investments were nothing exciting — mutual funds — and the account had grown nicely through the years. Although, ideally, I hope to pass my retirement money to my wife and children upon my death, it was reassuring to know that, that money is available for us, should we need it.
Other factors that revealed I could afford to sell: My spouse is still employed as a teacher — providing a stream of income — and I knew that my optometric degree and North Carolina state license would allow me, if necessary, to get back into clinical care through fill-in work while my consulting business got off the ground.
I'd contemplated waiting to sell my practice until my consulting business was up and running, but ultimately, with the support and encouragement of my family, I decided to sell the practice first, then worry about my new career. The bottom line was that I felt I had the necessary experience and skills to be successful, even if that meant my income would be less to which I was accustomed.
What's it worth?
The only way to determine a business' value is through an appraisal. (Keep in mind that some lenders want appraisals performed by someone certified by the Courts of the state in which the practice is located just in case the deal falls through and ends up in litigation.) I chose a certified business appraiser (CBA) who specializes in optometric practices to perform my practice appraisal.
My choice was based on her experience and the many articles she had written in the optometric trade journals on this topic. Having both retail and professional components, our industry is unique. As a result, I would be wary of having a local accountant or lawyer perform the appraisal, as these professionals may not have experience with optometric practice sales.
The most important aspect of any business is profitability and "true net" cash flow. Net income, as indicated on one's tax returns, doesn't represent true net income for most practices. As owners of a small business, we typically "expense out" as many things as possible to avoid taxes. Therefore, "non-operating" expenses, such as the beach house, SUV, supporting spouses or children, payroll expense and any other expenses that a new owner wouldn't incur are adjusted as needed, and that money is reclassified as net income.
Other items that typically require "normalization" are rent and doctor salary. A buyer must know the true, fair market value of rent and the salary for a replacement O.D. It's not uncommon for a practice owner who owns the property to pay higher rent to increase expenses in an effort to reduce net profit and thus reduce tax liability. But, after all adjustments and normalizations are completed, the more cash available at month's end, the more the practice is worth.
My appraiser evaluated and compared my practice's key financial indicators, including revenue per patient, per staff hour, per doctor hour, per square foot and frame inventory turnover, practice condition, neighborhood and demographic information (e.g. unemployment and population trends) to like-sized peers. These indicators were graded as "below average," "average," or "above average." These grades either raise or lower the "business risk" and, thus, the value of one's practice accordingly.
After six weeks, the appraisal was complete. Now, I had an asking price. The price reflected a practice that had a high net with above average profitability.
Practice for sale — shh…
I wanted to advertise the sale of my practice confidentially, so as not to scare off my patients or alarm my staff.
First, I approached O.D.s in my area who had multiple practices and may have been interested in expanding. I sought these specific practitioners because my practice garnered annual revenues that exceeded $1,000,000, and I knew they had the financial clout to afford my practice. Further, I knew they'd be able to see the value of a high-net, highly delegated practice. Some of these practitioners I already knew, and some I found with the help of contact lens and frame reps who I trusted would be discreet. They were.
Next, I hired a broker, whom my appraiser recommended to me as someone who had lots of experience with optometric practices and was honest. The broker listed my practice on his web site as "large high-net practice in Coastal North Carolina," though neither my name nor the practice's name was included in the listing.
He definitely lived up to his honest reputation. He performed his own financial analysis of my practice to confirm its value in his mind and was perhaps my biggest critic. Despite a high net income, the practice had been showing flat sales for the past few years, and he saw this as problematic from a buyer's view. As a result, he insisted I prevent my frame inventory from going downhill and continue my regular work schedule.
After roughly three months of flying under the radar, word of the sale finally got out. I received a phone call from my former office manager, and she asked: "Are you selling your practice?" She informed me that everyone and their brother had already heard about it.
The next day, I talked about the practice's sale with my staff. They were generally happy for me when I told them of my plans, although naturally anxious about their future. I assured them that I was simply creating an exit strategy, and that although the practice was for sale, it might never happen, and that we would all conduct "business as usual." This was the manner in which we all agreed to handle the situation when patients would start to ask questions.
Now that the sale was no longer a secret, I decided to list it in our state optometric newsletter, and I mentioned the sale to all the sales reps who entered the practice.
All inquiries went through my broker, who very quickly determined who were "players" and who were just kicking tires. Eighteen months after I decided to sell, I had a viable buyer.
Closing the deal
The practice price — within 5% of the appraised value — was readily agreed upon, We signed a letter of agreement.
Important terms of the agreement included how I would finance the purchase. Originally, I was going to finance the sale 100%. The reason: I felt it would provide a nice income stream each month and reduce my tax liability. I could charge a slightly higher interest rate than the banks charged to make this route even more personally advantageous. But, both my accountant and broker suggested I finance as little as possible. If I financed the sale 100% and the practice went downhill and ultimately out of business, I would own it again. In addition, although the buyer looked good on paper financially, what if I had to chase him down each month to collect payment? So, I agreed with my accountant and broker and financed only 10%.
Other terms of the agreement: rent amount, a non-compete covenant, my duration of continued practice, my per diem salary, personal financial responsibility for all equipment loans and leases and buyer responsibility for the ongoing contracts for the Internet, janitorial and credit card handling. Although the broker arranged most of the agreements, a lawyer was required to draw up the legal documents, including the asset purchase agreement, bill of sale, assignment and assumption agreement and promissory note. To make a clean break, I agreed to work only one day per week at the practice for one year.
Surprisingly, the biggest challenge of the sale was loan approval for the buyer. I was accustomed to going to my local bank any time, for any reason and getting a loan instantly, as my real estate investments had given me leverage with these banks. I found, however, that local banks aren't in the small business sales loans business because these sales are inherently risky with no real hard assets to take over, should the business fail.
Thankfully, my broker was experienced in facilitating small business loans and worked with both the buyer and the bank to secure the loan. Specifically, he went through the U.S. Small Business Association (SBA) (www.sba.gov). To secure the loan, the SBA required I finance 10% of the sale, the buyer provided a 25% down payment, and the SBA financed the remaining 65%. The loan process took approximately three months.
I've been retired from private practice for more than six months now. Being a one-day-a-week employee is a change of pace. I spend my remaining days working on my new consulting business, according to my own schedule, and of course, I drink a cold beer with lunch every chance I get. OM
||Dr. Scibal is a practice management consultant at Scibal Consulting (http://scibalconsult ing.com). E-mail him at jscibal@scibal consulting.com.|
Optometric Management, Issue: August 2010