Article Date: 10/1/2006

view from the top
Just Assume the Payments!

There's a difference between buying a car and an optometric practice.

GARY GERBER, O.D.

The math is usually straightforward: Take over the payments of a smaller car like a Hyundai and pay \$109 per month. Take over the payments of a luxury Mercedes and pay \$1,500 per month. While this might work with used cars, the logic doesn't always work when buying a practice.

Here we'll illustrate why selling a highly leveraged practice, usually a newer one, isn't as simple as, "Just take over the payments." Let's look at a couple of examples.

"Come on down!"

Let's say a doctor spends \$250,000 to open up his new office. In doing so he is very careful to ensure that the correct amount of money is put towards a professionally produced marketing program. He spends weeks training his staff before the grand opening. He is active in the community and becomes an expert at running every aspect of his practice. Due to his hard work and diligence, at the end of two years he is profitable and netting about \$100,000.

Another doctor opens up 50 miles away. He too spends \$250,000 to open his office. However, his thought is that, "No one has an office that looks as great as mine. I have every optometric gadget known to mankind and I have a great personality." His "marketing" plan consists of joining a few insurance plans and running a Yellow Pages ad. His staff is poorly trained because he feels they are not as important to his success as he is. At the end of two years, he is showing a consistent and frustrating \$2,000 per month loss. Trying to cut his losses, he decides to sell his practice and advertises, "Willing to sell for remaining payments!"

"No money down!"

Both doctors have borrowed the exact same amount of money and the monthly payments are about \$3,800 per month for the remaining five years. However, the second practice is worth a lot less than \$228,000 (\$3,800 per month times the remaining 60 months). Whatever the cause or causes, the second practice has demonstrated its inability to be profitable. There may be myriad reasons, but regardless of what they are, the practice doesn't have a positive cash flow. This means the value of the practice is probably only equal to its hard assets (inventory, equipment, fixtures, furnishings, etc.). This amount often depreciates rapidly and after two years might only be worth 50% or less of what it was when the practice was new.

"Financing available for those who qualify!"

The other challenge in selling the second practice for the amount of the remaining loan payments is that a buyer will find it difficult to obtain financing. Lenders are rightfully concerned with ensuring that the money they loan is paid back. To that end, they carefully scrutinize tax returns and profit and loss statements. In doing so, they are searching for two very important metrics. The first is cash flow. The second measure is the doctor's salary. The want to make sure it's high enough for the doctor (borrower) to survive — so he can pay back the loan! In the above case, the buying doctor would be financially strapped the day he takes the keys from the seller. For that reason, he has a slim chance of acquiring financing.

Whether the practice you're thinking of buying is a Hyundai or Mercedes, "buyer beware" applies when "assuming the payments" of any practice.

DR. GERBER IS THE PRESIDENT OF THE POWER PRACTICE, A COMPANY SPECIALIZING IN MAKING OPTOMETRISTS MORE PROFITABLE. LEARN MORE AT WWW.POWERPRACTICE.COM OR CALL DR. GERBER AT (800) 867-9303.

Optometric Management, Issue: October 2006