Prospering Despite Debt
Don't let debt keep you from practice ownership. Here are some options.
By Richard S. Kattouf, O.D.
Q I'm a graduate of a private college of optometry. My debt service is more than $150,000. I see no way of affording a practice. Any thoughts?
Dr. H. A.
Rohane, Via e-mail
A: There has been a significant reduction of new graduates purchasing practices in the last 10 years. One reason is the high debt that creates a mentality that purchasing a practice is not affordable.
But we're in a buyers' market because of the following reasons:
- The number of buyers is low.
- More practices are on the market. Close to 5,000 O.D.s older than 65 are still practicing and the majority of these practices are for sale.
- Many graduates have a "job" mentality. They simply want to be an employee of a practice or a corporation.
Learn to compromise
Because we're in a buyers' market, the seller must be more liberal in his terms to make the sale affordable and attractive. Below are some arrangements that sellers have agreed to just to make the sale of their practices affordable to a buyer:
- Act as the banker because many buyers don't have the equity to get a bank loan.
- Accept a lower down payment from the buyer.
- Accept smaller monthly payments on the front end of the transaction and still get a balloon payment in a set period of years.
- Let buyer's family member co- sign a bank note. This way, the seller is paid in full and the buyer gets a lower interest rate from the bank.
- Sell part of the practice and give buyer the first right of re- fusal for the other 50% in a set period of time.
- Agree to a work equity agreement. The buyer works more days and the seller works fewer. During this period, the seller is drawing the same income as when he was working full time. The buyer is paying for the practice by working more and drawing less income.
- Find another doctor to partner in the purchase of the practice.
- Accept lesser value in return for higher interest rate.
Benefit with a broker
Dr. Larson (not his real name) called my company to broker his practice. This process includes appraising the practice and establishing a profile of the buyer. The profile is necessary for the broker to properly choose the potential buyer during the interview process. All potential buyers must sign a confidentiality agreement. This protects the seller from the sale of the practice becoming public information.
Negotiating the sale
My company appraised Dr. Larson's practice at $220,000. The buyer was also a new graduate in debt and had no equity. He could only offer a $25,000 down payment and the seller wanted to be paid over seven years. The monthly payments weren't affordable to the buyer, so to accomplish the sale and make it work for all parties, I suggested amortizing the balance over 15 years to keep the early payments lower and ballooning the balance in seven years.
The seller asked for a higher interest rate because he was so agreeable to the terms. In the negotiation process and development of the buy-sell agreement, it's the broker's responsibility to work with the buyer's and seller's accountants to budget the terms in a manner that is beneficial to both parties.
Dr. Kattouf is president and founder of two
management and consulting companies. For information, call (800) 745-EYES
or e-mail him at email@example.com.
The information in this column is based on actual consulting files.
Optometric Management, Issue: August 2003