fix this practice
Buying a Practice In Any Market
The housing bubble is about to burst. What's a fair price for a practice?
RICHARD S. KATTOUF, O.D., D.O.S.
Q After having worked in corporate optometry for five years, I am negotiating the purchase of an independent practice. The seller seems very firm in his asking price. I have yet to have it appraised, but I know that practices don't sell for greater than the previous year's collected income. What should I do?
Dr. D. B. Neimer
A: Your situation is more common than you may think. Selling practices is directly proportional to the sale of homes or buildings in a given area.
Optometric practices on a national level are in a buyer's market. There are many more practices for sale and fewer O.D.s are going into private practice.
It is essential to have the practice professionally appraised. You would not purchase a home or building without such information. Be careful to choose an appraiser with experience in the ophthalmic arena. Attorneys and accountants have no concept of how to calculate the goodwill of an optometric or ophthalmologic practice.
Following are scenarios of two clients I consulted with who exhibited situations similar to yours.
Learn to compromise
A buyer (my client) was very interested in a practice in a northwestern state. The firm asking price was $270,000. The buyer hired me to appraise the practice. The gross income had been flat for the last four years and the net income was only $50,000 from a collected income of $220,000 in 2004. It was a general practice with no optometric specialties and limited involvement in medical optometry.
The owner tried to sell the practice's potential, which I agree it had. The problem is that the seller never came close to achieving it. As a buyer, you do not pay for potential, you pay for what has been accomplished with a practice, not promises of what you might achieve. I appraised the practice at a value of $140,200, but the seller seemed to have his feet in cement at the $270,000.00 figure. I counseled the seller on "the market" and made it clear that my client (the buyer) would walk away from the purchase if he did not accept the offer by a specific date. The seller conceded and accepted the fair market value that I had appraised. This was a good deal for both parties and for our profession since we preserved an independent practice.
Rock and a hard place
Another buyer (my client) had worked with a senior independent O.D. for twelve years. From the onset of their relationship, they had discussed the possibility of the associate becoming a partner. As in many of these situations, it never came to fruition, which is the fault of both parties. The associate doctor (buyer) hired me and asked that I contact the senior O.D. and initiate an appraisal and buy-in. The senior doctor refused to have the practice appraised, but did provide me with an exorbitant asking price of $470,000, which was equal to about 50% of what the practice was grossing (collected income) or around $900,000.
Turning lemons to lemonade
The senior doctor refused to negotiate or provide me with financial data in good faith. There was no associate agreement in place, no restrictive covenant (non-compete) clause and nothing that prohibited my client (buyer) from marketing her patient base. I advised and consulted with my client to help her establish her own practice less than a mile from the senior for a start-up investment of $150,000.00. My client's capture rate of her patients was close to 70%. Two years later, she is reaping greater financial rewards than she ever had as an associate and she is building equity.
Get professional advice when purchasing practices. Do not allow a seasoned owner to push a one-sided financial agenda. Professional consultants can make these deals beneficial to all parties.
DR. KATTOUF IS PRESIDENT AND FOUNDER OF TWO MANAGEMENT AND CONSULTING COMPANIES. FOR INFORMATION, CALL (800) 745-EYES OR E-MAIL HIM AT ADVANCEDEYECARE@HOTMAIL.COM THE INFORMATION IN THIS COLUMN IS BASED ON ACTUAL CONSULTING FILES.