Article Date: 7/1/2004

0704056

practice made perfect
Sell High By Mapping Out Improvements Now

With managed care and an increasing number of doctors choosing to work for chains, is it possible to sell a practice at a handsome profit? Dr. Morgan, 45 years old and the father of three, realized he wanted to move back to the farm shortly after the birth of his second child. That's when he contacted us for help.

Disappointing conclusions

We suggested Dr. Morgan map out his practice management strategies with an eye on selling high. This article shows you how important it is to have a plan so you too can sell at top dollar when you're ready. (This usually means that you need to allow one to two years to implement changes that will improve your net or enhance the sell-ability of your practice.)

Dr. Morgan's practice grossed $800,000 in 1999, but he didn't know his net. We calculated it for him before performing the appraisal, and we discovered that it was only 19% -- 12 percentage points lower than the national average of 31%. One of the most important factors in determining the value of a practice is cash flow. Typically, the higher the net, the higher the value and vice versa.

Dr. Morgan had a top notch gross, especially for a one-O.D. practice. But we were concerned that he wouldn't be able to sell the practice for what he deserved because of the low net.

Concentrating on net

We felt that it was in Dr. Morgan's best interest to improve his net before getting his practice formally appraised. Although Dr. Morgan wanted to start trying to sell his practice within the next six months, we recommended waiting about 18 months before formally appraising the practice. In the meantime, we encouraged him to let us help him improve his net. Because of the complexity of his practice situation, we did this through an on-site consultation as well as a practice profitability study.

To show him how much he was leaving on the table by selling the practice when it had such a low net, we estimated the practice value assuming a 19% net and a 31% net. Our ballpark calculations indicated that with a 19% net, the practice would be worth approximately $400,000, but the value would increase to about $565,000 with a 31% net. Quite a difference!

Once Dr. Morgan saw that he would lose about $165,000 by selling his practice with its low net, he agreed to wait 18 months to have the practice appraised. We mapped out an aggressive strategy for the intervening time to recapture his lost net.

Getting down to business

The three areas in which Dr. Morgan's expenses were eating up his net were:

1. rent

2. staff salaries

3. cost of goods.

Because he practiced in a town that had a high rental cost, moving wouldn't help his situation. Staff salaries and cost of goods were a different story.

At the time, Dr. Morgan employed eight full-time employees (full-time equivalencies, or FTEs) and was spending $208,000 on staff salaries and benefits. We felt this was about $48,000 more than his practice could afford at that level of gross.

There were two primary causes of the high staff costs:

1. Our analysis indicated that with a gross of $800,000, the practice was overstaffed by one full-time employee

2. Dr. Morgan hadn't properly trained his staff in lifestyle consulting, so they tended to serve as order-takers and not make recommendations about lens technology based on need.

Not surprisingly, both doctor and staff claimed that the practice couldn't manage with fewer employees. Because the doctor wanted to be able to "grab" any employee for assistance in the lanes or optical, no one except for the lead optician had a job description. Assigning primary job responsibilities allowed us to begin working on efficiency issues.

Increasing efficiency

The first issue that needed improving was the number of jobs that the bench optician edged. This employee was taking all of her time to edge when, by our calculations, it should only take 40% of her workweek. We let the pre-tester go because of chronic tardiness and made the bench optician the new pre-tester. In doing this, we not only reduced cost of goods by 4%, but staff costs by $23,000.

We re-negotiated lens discounts with our suppliers and noticed that our lab often forgot to apply credits for returned products in a timely manner. We also began to order contact lenses using a purchase order system and a hold for 48 hours, which reduced shipping and handling for one or two pair.

Putting us over the top

The real breakthrough came when we fired the office manager/insurance clerk. After six months of telephone and e-mail coaching, this individual couldn't grasp the concept of being a "shirt-sleeve manager," willing to roll up his sleeves and get his hands dirty. He had a tendency to threaten fellow employees instead of teaching by example.

We promoted the bench optician (now the pre-tester) to office manager and hired a high school graduate (at $7.00 an hour) to edge under her supervision. The new office manager/pre-tester also implemented a retail approach to staffing the optical. What this meant to staff was that the number of opticians working was predicated by the number of patients seen.

Because everyone wanted to work a full week, front desk and opticians got serious about recall and the practice's net not only increased from 19% ($152,000) to 32% ($296,818), but the gross increased from $800,000 to $927,000.

Dr. Morgan successfully reduced his staffs' salaries by six-percentage points, by eliminating one full-time position.

Sweet success

By the end of 2002, Dr. Morgan's practice was grossing $927,000 and netting 32%. We then began to formally appraise his practice. The end result was a value range of $670,000 to $690,000. A few months ago, Dr. Morgan accepted an offer of $675,000 and he and his wife are moving closer to her family.

What about you?

Do you have all the "holes" in your "practice bucket" plugged? If your net isn't at least 33%, then you may be leaving money on the table when you get ready to sell your practice. Hopefully, you have time on your side. Why not take that time to get your practice in top-notch financial shape? Like Dr. Morgan, you may have nothing to lose, but quite a bit to gain!

 

See For Yourself: Comparative Income Statements

  1999/"Before" 2002/"After"
Revenue  800,000  927,000
Cost of Goods Sold 288,000/36% 278,100/30%
Staff Salaries & Benefits 208,000/26%  185,400/20%
Occupancy Costs 72,000/9% 61,857/6.7%
Patient Care Costs & Equip. 16,000/2%  23,501/2.5%
Marketing & Promotion 16,000/2% 23,028/2.5%
General Office Overhead 48,000/6% 58,296/6.3%
Practice Net 152,000/19% 296,818/32%

  

Marilee Blackwell, president, Blackwell Consulting (800-588-9636), and Donna Suter, president, Suter Consulting Group (423-236-5465 or www.donnasuterconsulting.com), team up to offer financial guidance and on-site consulting services designed to increase your gross revenue while significantly improving your net income percentage.

 

 


Optometric Management, Issue: July 2004