Ready to make an offer on a practice? Look
for these signs of trouble before you take the plunge.
By Gary Gerber, O.D., Franklin Lakes, N.J.
going to buy a car, you'd probably spend a lot of time researching your options.
You'd likely ask owners of the car you're interested in about their experiences,
and you'd definitely take a test drive. Despite the rich leather seats and the
awesome sound system, if you learned you'd only get three miles per gallon or
that maintenance costs were way above the norm, you'd probably have second thoughts
about buying the car.
same holds true when shopping for an optometry practice. The following warning
signs should prompt you to step back and analyze your decision to move forward toward
or back away from the purchase.
1. Reluctant Disclosure
Buying a practice is a decision based mostly on
numbers. Without accurate numbers, you can't make an educated decision. However,
as a consultant who helps O.D.s buy and sell practices, I've found the most common
warning sign is when a seller resists timely and complete disclosure of information
you need to make a careful and informed decision.
Usually, this reluctance is based on
emotion, not malice or deception. In most instances, the seller has nurtured
the business since birth and has never shared its inner workings with anyone
let alone a stranger! So compassion and understanding on your part can go
a long way toward the goal of collecting the requisite data.
That said, I recommend caution when
a seller won't disclose the following four items:
to 5 years of tax returns, banking records, profit and loss statements and accounts
documents, such as current lease agreements for the office and equipment
and any employment contracts with associate doctors or staff members
documents like appointment books or their electronic equivalent
training and procedure manuals and office policy manuals
for any unusual items your research produces, such as liens against the practice,
pending lawsuits or other rare but serious roadblocks to a sale.
If the seller provides his own
appraisal, make sure to have it reviewed by a qualified appraiser of your choice
who has experience with optometry practices. If you're uncomfortable with the
appraisal, have another one done. If the seller refuses, walk away from the deal.
information supplied should be current, complete and accurate. If you're not
sure it is, don't wing it or make an educated guess. Again, retain someone who
can give you a non-emotional, qualified assessment.
2. Erratic Spending Patterns
I'm not a proponent of putting too much stock
in benchmarking and trying to run your practice to conform to industry norms. However,
the practice you're contemplating buying should at least have its key business indicators
in the right "time zone." For example, in most practices the cost of goods sold
(COGS) comprises about 30% of overall sales. A slightly higher or lower number isn't
a deal breaker if it's explainable and logical. But, COGS of 15% or conversely
50% should stop you in your tracks and prompt you to seek a detailed and
Another key metric is the cost of labor.
This index should be about 18% to 20% of total gross sales. However, in some parts
of the country, this might be way too high or woefully low. Finding quality
employees in the New York metropolitan area who will work for $10 an hour is unlikely.
In other parts of the country, that rate would be overpaying. If this number is
close to where it should be, you'll be able to determine if raising or lowering
it can help the future net revenues of the practice.
3. Practice Is Trending Down
In examining a practice's financial data, look
for trends. Don't make the mistake of looking only at gross sales. Net income to
the practice principals is a crucial indicator and if it's declining, make sure
you find out why.
Some downward financial trends are
more easily reversed than others. For example, if the practice is declining because
the practitioner has been cutting back office hours, the buyer has to be extremely
careful in forecasting future growth based on expanding office hours. Increasing
your hours is no guarantee patients will come flocking back, as they've probably
already found another practice.
However, if the practice's numbers
are declining because of a continued influx of low paying (and low netting) third
party patients, carefully paring down the number of these plans you accept may
reverse this trend.
4. Bookkeeping Discrepancies
After the practice pays all its bills, the practitioner
keeps what's left. And that's what you're really buying, right? Not exactly.
The practice's bills often include
items that should be counted as net. For example, payroll taxes and health insurance
paid by the practice should count as net.
A simple rule you can use to find these
"hidden" net items is to ask: "If I were an employee instead of an owner, would
I be paying these myself?" If the answer is "yes," these hidden costs are probably
net income. Conversely, some items that an owner may consider net may not be. Personal
automobile expenses are often in this category.
5. Selling Potential, Not Reality
Beware of sellers who try to sell you on the potential
of future earnings. I often see this in the sale of part-time practices. For example,
one of my clients was looking at a practice that was open 3 days a week for patient
care. The seller insisted that if the "young energetic doctor" would be willing
to expand the hours, the business would grow.
We examined appointment books from
a few years back and cross-referenced with net income. Sure enough, we found that
what was a full-time practice with a higher net 5 years ago, was now a part-time,
lower netting practice.
6. Cookie-Cutter Practice
The single biggest warning sign is often the hardest
one to spot. Bringing in experts to help in your evaluation can pay dividends, especially
when they uncover this red flag.
This warning sign is mediocrity. Is
the practice similar to others in the area? Does it look the same, offer similar
services and products at similar fees, have similar office hours and so on? If it
does, then you have to ask yourself, how much work will be involved, and what is
the potential in changing the core business culture, values and systems of operations?
For example, assuming you want
a very high-netting practice, how much energy and revenue would it take to turn
a middle-of-the-bell-curve $400,000 gross, 28% net practice into a $3 million gross,
31% net one? Is the current location large enough? Will the current equipment support
the added volume?
If you decide to upgrade what we call
the "technology gestalt" by bringing in a lot of new and updated equipment to the
practice, consider how staff and patients will perceive this change. A careful look
at the pros and cons of this financial undertaking often shifts a buyer's mindset
from "buy this practice" to "start my own."
If you successfully navigate these
potential roadblocks and do find a practice that fits, I have one more piece of
advice. You don't have to reinvent the wheel.
What's Behind That Appraisal?
A well-done appraisal will fully and accurately
disclose all the formulae used to arrive at the fair market value for the practice.
Be alert for appraisals that don't disclose exactly how the appraiser arrived at
Don't Change For Change's Sake
Changing an established business from one model
of operation to another can work, but it takes time. When the front door keys are
ultimately passed to you, don't assume that all the great practice-building ideas
you've kept bottled up through the years will work in your new practice. Making
wholesale, sweeping changes is usually frustrating and nonproductive. You can't
change the Holiday Inn Express to the Ritz Carlton overnight. The guests will leave
and the staff will quit.
Similarly, if you have aspirations
of converting a primarily retail practice to a more medically-based practice,
go slowly. Realize that the current patient base was attracted to the retail
flavor of the practice, not the medical one you hope to implement.
Whatever changes you make and
in whatever time frame you make them the good news is they are your changes
at your practice, and this is an enviable position to be in. You have successfully
navigated a myriad of roadblocks and have a practice that bears your imprint. Congratulations
and best wishes for continued success!
Gerber is the president of Power Practice, a company specializing in making optometrists
more profitable. Learn more at powerpractice.com or contact Dr. Gerber at
Optometric Management, Issue: September 2005