Article

MAXIMIZE YOUR PRACTICE’S PRICE TAG

BY PERFORMING ACTION STEPS WITHIN TIMELINES, YOU CAN ELEVATE YOUR EBITDA BEFORE PUTTING YOUR PRACTICE ON THE MARKET

THE RULES of business are universal, and the sale of an eye care practice is no exception: The buyer wants a business that has a pre-made revenue stream. The seller wants fair compensation for the revenue stream that he or she created. Practices, as a whole, these days have little innate value. The value of a practice is largely based on some agreed-upon multiple of EBITDA, or Earnings Before Interest, Tax, Depreciation and Amortization. This multiple can be influenced by the overall value of tangibles, such as furniture and equipment, the value of the overall inventory on hand, the term of your leased spaced or if you own the building. However, at the end of the day, your practice’s price tag is based on cash flow and, most importantly, profit. The buyer is looking for an ROI in the form of cash flow and, possibly, an addition for potential growth and EBITDA.

So, how can you elevate your EBITDA to maximize your practice’s price tag? We’ve found that the answer lies in performing action steps within these specific timelines.

FIVE YEARS BEFORE SALE

The two action steps:

  1. Move to EHR to become more attractive to potential buyers. Paper charts have little to no value because of the work involved in converting them. Also, EHR facilitates dealing with an insurance-dominated world, something attractive to potential buyers.
  2. Evaluate operations. Fine tune your HR manual, call centers, purchasing processes, etc. By being more efficient, we can increase profitability through increased patient throughput and better patient experience, which usually relates to increased revenue per patient. In addition, start assessing what the practice does well and what needs improvement or overhauling. Further, start trimming practice expenses to increase overall profitability. (That said, be careful not to reduce important operational costs, such as necessary human resources, that will affect overall revenue generation at this point in the process.)

THREE YEARS BEFORE SALE

The four actions steps:

  1. Go deep with operation assessment. Start by evaluating current costs and profitability. Look to cut one-time expenses, such as large equipment purchases that are not high revenue generating or recurring expenses, such as flowers for the office or unnecessary office supplies, while maintaining a strong revenue production model. For example, you can reduce material costs by joining a buying group and negotiating with suppliers about getting better pricing. (If you don’t ask, they won’t give you a better price.)

    Next, be sure to code what should be coded to maximize revenue. In general, you want to stop giving your services away, and if a service is not covered by insurance, you want to collect up front. Collecting up front will not only help increase practice revenue, but it helps reduce accounts receivable (AR). Collect all deductibles up front. You may also want to consider hiring a collections agency. (A private practice attorney can be most effective at getting owed money.)

    Now, examine operational efficiency. Specifically, look for time slots where you can schedule additional patients. You could start a new niche, or revenue stream, that will boost overall practice revenue. (See http://bit.ly/2hgWKzz and http://bit.ly/2AlLOYI for additional information.) (Let your staff know about your efforts, so they feel they are part of the process. There is value in passing to the new owner a happy and motivated team.)

    Finally, ramp up your marketing efforts to bring in new patients by enhancing your practice web site and increasing your practice’s social media posts. (Check out the “Social Media” columns in OM for ideas.)
  2. Compose/organize three years of solid data. This data should include at least the following: tax returns; income statements with detailed categories (such as HR, COGS [cost of goods sold], equipment, overhead, marketing and occupancy); list of tangible assets (such as furniture and equipment); managed care contract copies, cash collection by payer (YTD and previous year), procedure productivity report by CPT code, list of current practice liabilities; and a spreadsheet, or chronological listing, of the previous five to seven years of revenue, expenses and profit.
  3. Hire an appraisal consultant. Using the solid data illustrated above, this person will help determine the true (and non-emotional) value of your practice as well as aid you in gaining a better understanding of where to set the asking price. (Your appraiser may not necessarily be your negotiator, but he or she may be able to offer good advice regarding the sale of your practice.)
  4. Market your practice to buyers. Having followed the previous action steps, you should be satisfied with your practice’s appraisal and, therefore, ready to find a potential buyer. It is important to find more than one potential buyer of your practice because having possible buyers bid against each other may increase your practice’s overall valuation. In addition, too often when a seller works with just one potential buyer, he or she finds out months later that the sale isn’t going to happen, and the seller must start all over again. Our advice: Contact all local prospects, and tell them that you are thinking about selling your practice and that you wanted to let them know before you put it on the local market. This enables interested parties to let you know about possible non-compete contracts they must wait out until they can make an offer, giving you a good idea of when to officially put your practice on the market.

TWO YEARS BEFORE SALE

The two action steps:

  1. Spend the money to collect AR now. You want to minimize AR as much as possible before the last year prior to putting your practice on the market to increase cash flow, while leaving less for you to collect as the practice sale progresses.
  2. If you lease space, extend the lease to increase the term, but decrease overall cash outflow. By extending the term, you can usually negotiate a lower monthly lease payment, which, in turn, creates short-term cash flow.
  3. Examine your schedule. Determine how you could reposition your current schedule blocks to help one to two more patients per day. Could you extend your hours by a few a week to improve your overall volume and revenue? Could you maximize your staff productivity by being only fully staffed during the busiest times of the day? (Stagger start and finish times to maximize productivity without increasing overtime and other HR costs.) Could you double book the first appointment of the day and after lunch to achieve this?

ONE YEAR BEFORE SALE

The three action steps:

  1. Decrease moderate expenses, such as overtime. The goal is to make your business look as if its overall profits are continuing to rise even at the end of the sales cycle. Reduce overtime to zero by creating a policy that there is to be no overtime.
  2. Interview a banker who has experience in our industry to assist you with negotiations. Your lawyers and accountants need to do their part, but neither know and/or understand all the nuances during a negotiation for the sale of all or part of your business. There are so many areas that never get addressed by them, so you could have regrets. These bankers/brokers will be paid a percentage of the sale and work hard to help you get organized and prepared for the sale, in addition to ensuring you realize the full monetary value of the practice. Finding such professionals may take some interviewing of other local businesses and various banking groups.
  3. Have your ducks in a row. Specifically, be prepared with details regarding equipment condition and value, all outstanding lease or contract terms, explanation of creative accounting and all managed care contracts. The buyer will request this information.
  4. Keep contract considerations top of mind. As part of the sale, you, the seller, may negotiate to stay in the practice as an employed provider for some agreed-upon period. This, of course, necessitates the employment contract, which outlines all the duties, responsibilities and limitations of your new employment role. We suggest you hire an attorney to provide the buyer your employment agreement. This way the buyer knows where you are coming from and can, therefore, set what you want.

If you own the real estate where the practice resides, you have two options: sell both to the buyer, which requires a transaction for the business and a transaction for the actual real estate, or sell the practice and lease the space (the buyer never buys, or he or she can purchase the real estate through some term).

If you are not planning on staying in the local area, the first option may be the best for you. With that said, there is value in continuing to own the real estate and lease back to the new owner. This is a diversified income stream that should be considered while preserving an asset for future liquidation.

PHOTO CREDIT: Evan Schmidt

TIME’S UP

By following the action steps outlined under each timeline, you have an excellent chance of elevating your EBITDA and, therefore, getting a great price for the practice you’ve poured all your blood, sweat and tears into. Something to keep in mind: Although you’ll have an increased focus on the sale of your business, don’t take your eye off the fact that you are still running a business every day. OM