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