Article Date: 3/1/2001

Worth
Is Your Practice Worth What You Think?
Learn about outside influences that may affect the value of your practice.
By John M. B. Rumpakis, O.D., F.A.A.O., Lake Oswego, Ore.

Practice Value

PART 1 Factors Affecting the Value of Your Practice
PART 2 Managed Care, Current Income Profiles and Trends
PART 3 Intangible Factors and Formulas
PART 4 Suggestions and Strategies

Establishing a market value for an optometric practice has long been a process cloaked in mystery for many optometric practitioners. The methods of many practice management specialists within the field differ greatly when assigning a value to a practice -- each has his "unique" formula. However, the demographics and personality characteristics of the optometric population are changing dramatically -- and this will definitely have a huge affect on you if you're buying or selling a practice.

The makeup of the profession changes with many practitioners now nearing retirement, and the dynamics of supply and demand of prospective buyers and sellers affects values. In this four-part series, learn about market forces that are currently in play, what obstacles you may be faced with and what steps you can proactively take to ensure that you can enhance and preserve your practice's value by understanding both the historical and current workforce issues facing our profession. Without understanding these changes, you'll be at a disadvantage when assessing the value of your practice, or one you intend to buy.

  PART ONE

 

This is the first in a series of four articles which will guide you through the process of valuing your practice. Each article in this series will build upon the information introduced in the previous article to help you see the full picture when valuing your practice.

The information will vary from factors to consider to strategies for improving your practice's value. The series will help you accurately value your practice and make changes to increase its value.

In the beginning ...

As we all know, the practice of optometry has evolved significantly over the last century. This metamorphosis has taken our profession from dispensing spectacles out of a suitcase to providing services and products that are at the very forefront of eyecare technology. We now have diagnostic and therapeutic drug privileges in all 50 states, and some O.D.s are now performing various types of laser surgery. This change in scope of practice has significantly affected the nature and composition of our practices.

Primarily, optometry has been revenue dependent upon the retail nature of our business, and although this still continues to be true, progressive practitioners report that an increasingly greater proportion of their revenues are currently generated from the provision of services. Our practices have become more sophisticated in nature. In order to compete, optometrists have had to invest in their office infrastructure -- more investment in professional equipment, more continuing education and the increase of automating their office processes. Also, let's not forget the additional costs that are commonly associated with keeping the appearance of the practice current and up to date.

In the past, simple logic would've suggested that as the investment within an office grows, the sophistication of the profession grows. The idea is that as our worth as professionals within the healthcare arena becomes more prominent, the value of an optometric practice would increase. Well, unfortunately, this simple logic doesn't always prevail.

What's to blame?

As the optometric profession has matured, the nature of practices and the mindset of practitioners have changed as well. While we may agree that numerous factors affect the value of a practice, we may disagree on what those factors are and how much they influence the process of valuing a practice.

Right now, four significant events may adversely affect the value of an optometric practice in the marketplace. Combined, these four factors are changing the landscape of the optometric profession -- changing the profile of what an optometric practice is compared to years ago and what its worth will be in the marketplace.

These factors are:

  1. the number of post-World War II practitioners now nearing retirement age
  2. the change in the gender balance of today's labor force
  3. the change in the risk-reward mentality of recent Generation-X graduates
  4. the impact of managed competition within our field.

Not my practice

So, why should any of those factors matter to us as a profession? We may believe that we're immune to those factors -- feeling that our day-to-day lives within our own practices and communities certainly aren't subject to any of those market forces. Often, I hear optometrists say that the value of some practices may be affected, but it certainly won't be theirs.

Unfortunately, the answer to all of these questions is that no one's immune to these realities. Whether we choose to admit it or not, these factors will affect our profession more than we may realize.

The American Optometric Association's (AOA) recent publication, Caring for the Eyes of America 2000: A Profile of the Optometric Profession, covered many topics. Some of these were:

Of the 34-page report, nearly 15 pages were dedicated to just three topics. These topics were the composition of the optometric workforce, the impact of third party/managed care upon our profession and statistics concerning trends in optometric income. The statistics presented were extremely sobering. Read on to see these stats for yourself.

Constant demand

To help us focus on the future, it's important to understand the past and how it has led us to where we are now. The post-World War II environment within the United States was euphoric. The future of our country was bright, optimism within our country was running high and the economy was strong.

Optometry, as an occupation, was emerging and becoming an attractive option for many individuals. The attraction was from the independent, entrepreneurial nature of the profession, the cultural and economic status gained within the community, the rather constant demand for services that we were uniquely able to provide and the relatively low startup costs in both education and practice infrastructure.

This is clearly demonstrated in how our profession has grown within the last 50 years. The number of active practitioners within the United States workforce has grown at a respectable pace, now reaching nearly 32,500. The number may be paltry compared to the 777,000 physicians in the United States in 1999, but it still represents an oversupply of nearly 850 optometrists. The oversupply doesn't even take into consideration this year's graduating class of nearly 1,125 nor adjusts for foreign students who don't intend to practice within the United States.

Growing supply

According to a study conducted for the AOA by Abt Associates of Cambridge, Mass., the current demand for all optometric services requires at least 23,000 optometrists. This figure doesn't include any time requirements for record-keeping, other office work and travel related to patient care.

However, this doesn't tell the entire story. Over the next 5 years, it's estimated that approximately 550 optometrists are expected to retire annually. The number of projected retirees will increase steadily to more than 820 per year by 2015.

At the same time, the supply of practicing optometrists is projected to increase. Here's a look at what to expect:

It certainly isn't difficult to see that the supply of optometrists is outpacing the projected demand for our services. By 2010, the oversupply compared to demand is projected to total nearly 4,500 optometrists.

The gender gap

If you took a historical look at the manpower studies within optometry, you would find that the makeup of the optometric labor pool has been predominately male. Not anymore.

The gender gap within optometry has closed significantly. The demographic characteristics of optometrists entering practice today are quite different from those of older optometrists. Here are some interesting facts:

Balanced profession

We're also seeing this trend in schools and colleges of optometry. In 1995, the balance of female graduates increased to greater than 50% of all graduates. In comparison, the AMA reports that in 1999 nearly 43% of all graduates were female. It's clear by these studies that the ratio of women to men within healthcare professions is becoming much more balanced.

So why would this be a factor affecting the potential worth of an optometric practice? Speaking in general terms, some females who've entered the optometric field may have chosen optometry as a career because it would allow the flexibility of practicing part time, providing the time to raise a family and still contributing to the household income.

According to the Abt Associates study, the continuing increases in the proportion of female optometrists will tend to reduce the overall supply issues of optometrists nationwide, as female optometrists tend to work fewer hours than their male counterparts. The gender difference is by no means universal or absolute.

However, since the gender balance in our profession has changed, it's a significant factor in determining the statistical number of potential buyers within a given population, which tends to be gender blind. Therefore, it contributes to the factors that affect the value of a practice in the open market.

Different mindset

In addition to more women in the profession, the behavioral patterns of the current graduates may become another significant factor affecting the value of an optometric practice. Many insights have been made into the characteristics of Generation-X.

The children of the Baby Boomers are currently entering the optometric workforce. The internal philosophies and mindset of this generation, and its subsequent impact on the labor force, are problems now being studied by many organizations. It has been suggested that because of the wealth effect of the Baby Boom generation, the children of the "Boomers" have a significantly different view of the risk-reward quotient. The methods Generation-X uses to set their internal prioritization structures, which in turn help to determine their basic work ethic, are being questioned.

This generation has experienced higher levels of disposable income than previous generations. Their Baby Boomer parents have typically provided a higher standard of living for them than their predecessors.

The mindset of Generation-X tends to be more driven by high monetary returns and what fits their lifestyle demands. The most recent generation entering the optometric workforce, born between 1965 and 1981, is driven by a different set of priorities.

Show me the money

According to author J. Conger, Strategy and Business, financial well-being is very important to Generation-X. As an example, the Roper organization found that 69% of today's 29-year-olds are interested in a high-paying job. This is in stark contrast with 50% of individuals in 1978 who preferred a job that just "paid more than average."

Comparatively, a University of California at Los Angeles study asked freshmen in 1993 if being very well off financially was an objective they considered essential or very important -- 74.5% responded yes. The same question was asked in 1971, and just 40.1% reported it as essential. When asked why it was important to go to college, 75.1% of freshmen in 1993 said, "to make more money." This compares to only 49.9% who said so in 1971.

How does it apply?

Four prominent character traits of Generation-X people have implications in today's workplace:

The average solo practitioner has a difficult time providing any of the elements that are considered essential by this generation. In workforce terms, this may imply that the newer graduates may be less likely to take the entrepre- neurial risk of owning their own optometric practice.

These individuals may tend to choose employment rather than ownership of their own practice. Choosing employment will give them a relatively high income with less risk. Also, it'll give them the flexibility of being able to change places of employment when they become bored or disenchanted.

Stay tuned

Many outside influences will affect the value of your practice. Keep in mind, the demographics of our profession can play a major role. You may find that your practice isn't worth what you thought, but once you know, then you can take the necessary steps to increasing its value.

In part two of this article, which we'll publish in April, I'll discuss managed competition and current income levels, and I'll also delve into the beginning of the valuation process. 

Dr. Rumpakis is chairman and CEO of Practice Resource Management, Inc. in Lake Oswego, Ore. He was previously in solo practice for 13 years. This paper was submitted in partial fulfillment of fellowship in the American Academy of Optometry. You can reach him at success@practiceresourcemgmt.com.


Optometric Management, Issue: March 2001