Article Date: 11/1/2000

Inside the Mind of the Seller
Thinking about buying a practice? Here's how to get the information you need to negotiate a fair price.
By Ann M. Beardsley, M.B.A., Boone, N.C.

Buying and selling a practice is a delicate negotiation that involves more than money. The dollar amount of the deal is important, but often the selling and buying optometrists are looking for other benefits as well.

As the buyer, of course, you're looking for a fair price and you may have something to offer the seller to help you get it. If you find out exactly what he wants from the sale, you'll be on your way to owning your own practice without paying more than you need to.

Here are some key questions to ask and how the answers can help you make the best deal.

Why is the doctor selling?

By and large, optometrists are honorable, so chances are they'll tell you the truth about why they're selling. But it may not be all of the truth. What the doctor doesn't tell you may be the key to finding out what extras you can offer him.

Is the selling doctor looking for a retirement package? More time to spend with his family? A chance at a different mode of practice? An opportunity to be employed and get out of the hassles of running a business?

If he says he's tired of running a business, that could be true. But maybe he also wants to explore laser surgery opportunities, in which case you may be able to offer him referrals.

If you're buying from an older doctor whose practice is weak in comanagement or therapeutics, he may consider continuing employment with you while you expand into these areas, thus getting a chance to learn new skills.

Older doctors aren't necessarily equipped to deal with the changes that mass marketing represents or with the HMOs and insurance companies that dominate many markets. Most solo practitioners selling their practices today started before the large commercial optical chains promising "eyeglasses in about an hour" took off in the early 1980s. A retiring doctor has seen a lot of changes in the relatively short time he's been in practice and that might be why he's ready to hang up his white coat.

In this case, he needs you more than you need him. He has only three choices: to sell the practice, to hire a partner for an eventual buyout or to walk away from his life's work. You're offering to buy, which is an immediate cash flow increase for him. Hiring a partner can be risky, and it could take as long as 15 years before the selling doctor can leave. And walking away is an option he'd rather not exercise. Use today's market to your advantage, but don't walk away from a great opportunity out of pride -- yours or his.

How healthy is the practice?

The simplest, most straightforward way to get the answers you need is to ask the doctor. However, some discreet inquiries will help round out the picture for you.

To learn more about the reputation of the practice, talk to other healthcare professionals in the area. For instance, you could visit the ophthalmology practices that the selling doctor refers to. Tell them: "I'm thinking about opening a practice in the area. What do you think of my competition?"

To evaluate staff members and the day-to-day operation, send a "secret shopper" -- a friend or family member -- through the practice for a routine examination. Don't talk with staff members unless the doctor gives you his permission because they might not know he's thinking about selling.

Another consideration is the type of practice, says Jay Petersma, O.D. "If you're looking at a practice that relies heavily on a specialty, such as bifocal contact lenses or vision therapy, be aware that those patients are not necessarily patients of that practice but of that doctor. They may travel a great distance for that specialized care," says Dr. Petersma. When the doctor sells his practice, many patients who come in for routine care may decide to find a doctor closer to home. "I would not recommend that you pay very much for good will in such a practice," says Dr. Petersma.

What's the practice really worth?

Be aware that the seller values his practice highly, whether it's a down-on-its-luck practice in a decrepit mall or a half-million-dollar practice in a thriving medical conglomerate. His ego is involved, whether he admits it or not. By offering a price far below what he's asking, you're insulting him. By paying more than he asks, you're cheating yourself.

When your older selling doctor went through optometry school, most practices sold for 80% of 1 year's gross income. However, according to Bill Nolan of Williams Consulting Group, a professional in practice sales and valuation, most practices today sell for between 50% and 65% of 1 year's gross income. Of course, this general rule of thumb doesn't apply to practices that need a great deal of rehabbing.

If your selling doctor is still assuming that he can get 80% for his practice, you'll need to be prepared to show him that times have changed. If you have the facts to back up your claim -- consultants and appraisers can help with this task -- and present them to him in a non-emotional, historically based offer, he'll be more likely to consider your offer without reacting as if you'd insulted him.

For more information about assessing the value of a practice, contact the National Practice Resource Network of the American Optometric Association (314-991-4100).

What's the bottom line?

When it comes time to do the deal, negotiations begin in earnest. Talk to your own tax accountant when you structure the contract. Here are some pointers:

Explore nonmonetary benefits. Once you know what the seller is looking for, think of ways you can give it to him without including it in the purchase price. One innovative buyer offered $20,000 less than the tentatively agreed price, but offered to hire the seller for 20 days during the following year at $1,000 per day.

This guaranteed the new doctor 4 weeks of vacation and another tax-deductible expense during the coming year. It also assured him that the seller wasn't going to disappear with all the equipment. And it showed the community that their former doctor had faith in the new doctor.

Another option you might want to explore is a multi-year partnership. Most patients see their eye doctors every 2 years, so having the older doctor stay for 1 year may not be enough. If he stays with the practice longer, he'll be able to prime his patients for the turnover.

Buying a Job

In purely economic terms, buying a practice is like buying a job. How much are you willing to pay for that job? Here are some figures to mull over.

Say the practice you're looking at nets $100,000 a year. What would it cost you to hire a doctor to work the practice? Let's assume you'd pay $60,000 a year. So in essence, you're buying a $40,000 annual return.

How much would you have to invest in today's market to get $40,000 in interest? If you think an average rate of return is 10%, then the practice could be worth $400,000.

From that point, deduct for any major changes you'd have to make. You'll notice, I'm not even considering how much the practice grosses. Why? A lot of practices gross high, but once all the bills are paid, there's not much left for the doctor.

-- Jay Petersma, O.D.

Make installment payments to the seller. One of a selling doctor's major concerns is his retirement income. He may or may not have been contributing to a retirement plan during his working years, so structuring your purchase as an installment loan may be advantageous to both of you. He can invest his regular payments from you into a retirement plan, and he won't pay capital gains taxes until he receives the money from you. This lessens his immediate tax burden.

Meanwhile you can take the full payments as tax deductions. If he continues to work for you as an employee (not as an independent contractor), you may be able to make payments directly to his retirement fund. As always, check with your accountant to make sure whatever plan you work out is legal.

Tie the purchase price to a profit goal. One new option that's gaining acceptance by sellers and buyers is to include an extra amount of the purchase price in the "goodwill" portion of the contract, tying this amount to a specific profit goal that's defined and recorded by both of you.

For example, you could include $100,000 in your purchase price for goodwill. If the profit goal isn't reached within 1 year, you don't owe the entire portion, but perhaps half instead. This "earn-out" helps assure the buyer of a profitable practice.

Structure a loan that's fair to both parties. A selling doctor rarely requires the entire purchase price up front -- be wary of one who does. Your banking officer can help structure a loan that's fair to both of you. If you're buying real estate as well, you may be able to structure this portion of the sale as a Section 1031 exchange, whereby the seller defers the income on the real estate. Check with your tax attorney before setting this up because strict regulations apply.

Give and take

By and large, the selling doctor wants the practice's physical assets valued low to reduce his tax bite, while you want them set high so that you can depreciate them. An actual valuation of each piece of equipment won't necessarily give you anything more than an additional expense. To meet the needs of both of you, you'll have to negotiate a total price, then structure it fairly among real estate, inventory, goodwill, physical assets and a noncompete clause. You'll have to give and take over this.

Being prepared to negotiate everything doesn't mean you have to. If the inventory is valued at $40,000 when you draw up your contract, but is worth only $39,500 when you actually take over, chalk it up to the give-and-take of buying a business. In other words, don't sweat the small stuff. There's definitely value in having something that's already established, a ready-made patient stream, for example.

Above all, remember that money isn't the only thing that's negotiable. If you find out what else the selling doctor really wants and structure your offer in a way that gives him at least part of it, you'll both benefit greatly. The more you give, the more you get. *

Ann M. Beardsley is a free-lance writer who managed an optometry practice. She received her M.B.A. from the University of Houston.

Optometric Management, Issue: November 2000