Enhancing Practice Value
Some important considerations before you decide to sell and retire.
Jerry Hayes, O.D.
One of the most common questions I get as a consultant is from O.D.s who tell me that they're ready to sell their practices and retire is that they want to know what the magic formula is for valuing their practice. This may come as a surprise, but there's no 2 + 2 = 4 formula for calculating the value of an optometric practice.
I'll explain how appraisers value your practice and how you can enhance its selling price.
Calculating the value of a practice is similar to filling out your income tax return -- you have to work through a variety of calculations to get the right number. To determine an accurate value of a practice, a professional appraiser starts by considering a variety of factors such as growth trends and inventory. We then do an analysis of the profit & loss statement to determine cash flow so we can calculate how much the buyer would have left over for debt service after drawing a reasonable salary.
Rules of thumb
Sure, we have a dozen rules of thumb, such as "a practice is worth 1 year's gross," "net plus inventory" or "three times net." Problem is, these guesstimates are based on averages. In reality, there's no such thing as an average practice.
The last 20 practices that my firm appraised were valued, on average, at 69% of their gross. But, there was a wide range. Some of those practices appraised for as low as 40% of annual gross and others for more than 100%. Why the big variation? One rule of thumb I can give you is that when it comes to practice value, your net-to-gross ratio matters a lot. More than 30% is good, less than 30% isn't so good.
What to expect when selling
Which brings us to the basic question every seller wants to know: "How much will I get if I sell my practice?" Let's look at an example of a practice grossing $500,000 that sells for $360,000 cash, which is 72% of the gross.
Depending on how much of the sales price the CPAs allocate to the category of 'good will' versus inventory, the tax bill could cost as much as 25% of the selling price. Therefore, on a sale of $360,000, a seller might have to pay $90,000 in taxes, leaving you with only $260,000.
Optimistically, the annual investment income generated by $260,000 might amount to $20,000. A person who's been living on $100,000 a year would have a tough time retiring on that.
I hope I haven't burst too many balloons, but for most O.D.s, the sale of a practice isn't going to generate enough funds to finance a retirement. However, you can do a few things to enhance the selling price of your practice. Here are a few ideas:
- Do a better job of managing your overhead. All things being equal, the higher your net percentage, the more your practice will appraise for.
- Along the same lines, show the highest net dollars you can. Keep clean financial records and avoid running personal expenses through your practice.
- Don't be afraid to invest in your office as you near retirement. An attractive facility and up-to-date equipment will enhance the curb appeal of your practice.
- Support your asking price with an independent appraisal. Show the buyer what a great financial investment your practice is.
Plan ahead for a fruitful future
Hopefully, you'll now have some idea as to what to expect (whether it be years from now or months from now) when selling your practice. The more time you give yourself to plan, the better things will work out for you. Next month, I'll talk about some common exit strategies to keep in mind for when you decide to retire.
A FREQUENT WRITER AND SPEAKER ON PRACTICE MANAGEMENT ISSUES, DR. HAYES IS THE FOUNDER AND DIRECTOR OF HAYES CONSULTING. YOU CAN REACH HIM AT (800) 588-9636 OR
Optometric Management, Issue: October 2001