Article Date: 6/1/2001

Practice Worth
Wrapping Up Your Practice's Worth
In the last part of this series, learn how you can maximize your practice's selling price.
By John Rumpakis, O.D., F.A.A.O., Lake Oswego, Ore.

 

This is the fourth in a series of four articles which guided you through the process of valuing your practice. Each article in this series was built upon the information introduced in the previous article to help you see the full picture when valuing your practice.
The information varied from factors to consider to strategies for improving your practice's value. The series was designed to help you accurately value your practice and make changes to increase its value.

So now the time has come -- time to either sell your practice or to buy a practice. We've discussed many factors that can have an impact when you're considering this very important decision. Just to recap, the following factors can influence your practice's worth:

How you're affected

When consulting with doctors, I find that many of them think that marketplace conditions simply don't apply to them, and they place far too much faith in the mathematical valuations that we discussed last month. Sometimes, they simply rely on what their pride tells them the practice should sell for. When the reality hits that their practice isn't worth what they'd originally thought, it's often like a slap in the face. No one enjoys facing that reality, especially when you can do so many things to prepare and ensure that you get the maximum value for a practice. So, let's go back to cover some basics that are often forgotten.

Supply and demand

You're probably well aware of the relationship between supply and demand. If the supply is low and demand is high for a product, the product should have a higher market value. If the supply is high for a product and the demand is low, the product will typically command a lower price.

Unfortunately, while supply and demand is a well-understood concept, it's rarely applied in the mindset of both sellers and buyers of optometric practices.

A typical optometrist who's selling a practice looks back on some 20 to 30 years of work and sees a practice that has a steady gross income and fairly stable patient base. This seller anticipates that after his long career the sale of the practice will yield a good retirement income base. In fact, the doctor often relies on it. This seller may have also hired a practice consultant or broker to evaluate and determine the worth of the the practice.

The consultant or broker will typically perform some form of analytical assessment or valuation and help the seller set the "market price."

The typical buyer though, sees things quite differently. In today's market, buyers and sellers have dramatically changed. The supply of sellers is presently high, by some sources higher than it has ever been. Demand is low, and by some accounts lower than it has ever been.

Naturally, in this situation, the market value declines regardless of what the value may be on paper. More often than not, the intangible factors we discussed in part 3 of this series and emotions of both the buyer and seller tend to influence the selling price.

Why has the market shifted?

Three things have influenced the fluctuations in the market. Gender changes within the profession; lack of commitment within the risk/reward equation for the Gen-X practitioners, and the influence third-party insurers can exert within the practice.

What it all means

Right now, it means that in the current environment it may be more difficult to sell an optometric practice.

The imbalance between supply and demand has created a marketplace that favors buyers. Many practitioners who have unsuccessfully prepared their practices for sale are now finding that the marketplace is unforgiving, and they're left with relatively few options.

By some accounts, the average selling price of a practice (based on equal gross and net revenues) today as compared to a practice in 1997 is about 20% less.

How can you prepare?

Just like selling a home, you can take many steps ahead of time to help increase your practice's value. Start preparing to sell your practice at least 3 to 5 years before you actually put the practice on the market, and focus on some key areas.

Solo practice is shrinking

If practitioners aren't more proactive in promoting and maximizing their practices, I predict that we'll see a large-scale consolidation within our profession. Many of the practitioners who aren't successful in getting their "asking prices" might simply resort to closing their doors, liquidating their equipment and selling their patient records to a larger clinic.

So, who will benefit if this happens?

So who suffers? In the long run, only the stature of solo, private practice optometry whose value to our profession formed the single largest building block to our success.

This modality was our foundation, yet now it may better serve as a stepping-stone to the next phase of our professional existence. The move away from private, solo practice may be an evolution of sorts that's occurring because of a combination of market forces not encountered until recently.

The practice worth myth

The myth about what a practice is worth is no different today than 10 or 20 years ago; it will always exist.

The marketplace is blind to who is the seller and who is the buyer -- no matter who performed the practice valuation. One party will always believe that the practice is worth more, and the other party will always believe it's worth less.

The final arbiter is the marketplace. And one simple rule will always prevail: Something is worth whatever someone is willing to pay for it -- no more, no less. 

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 Dr. Rumpakis via e-mail at success@practiceresourcemgmt.com.


Optometric Management, Issue: June 2001