An under-discussed trend in eyecare is just how few young ODs are actively looking to own practices. There are a number of reasons for this – millennials’ reaction to their parents’ workaholism, the explosion in student loan debt, broader changes in optometry’s demographics, etc. One thing I see that consistently stalls deals between interested older and younger ODs is a fundamental misunderstanding about what drives the value of a practice and what it takes to own one.
If you’re interested in buying a practice or considering selling your practice, here are three things you need to know.
1. Young ODs CAN get financing to buy a practice
As I work with sellers, there’s a persistent sense young ODs can’t get a loan to buy a practice because they often have six figures’ in student loan debt and don’t have cash for a down payment. But this just isn’t the case. I know of at least three national lending institutions that regularly and happily lend to young ODs buying practices.
If the deal checks out, typical terms are 100% financing on up to 70% to 75% of collected gross revenues, financed over 10 years at 4.5% to 5.5% interest. Having said that, here are two things that are important to a bank that doctors tend to overlook:
The bank will want to be confident that the new owner can carry the revenue production of the practice, or at least that there’s a plan in place to maintain (and hopefully grow) the practice.
Banks vastly prefer that a young doctor have a nice reserve of cash savings in lieu of aggressively pre-paying student loan debt.
2. Young ODs often thrive as owners
I also hear concerns that young doctors don’t have the management to succeed, and I think it keeps senior ODs from even asking their associates if they want to buy the practice. The reality is, no one knows how to run an optometry practice until they take on the responsibility; everyone has to learn on the job.
But most buyers are competent enough to sustain your practice. While hard work, running an optometry practice is a well-understood exercise in management. Conscientiousness and a backbone are all a leader needs to maintain an established practice. Vision and charisma will push a practice to new, uncharted success. And yes: I’ve worked with doctors that have run practices into the ground after buying, but it’s shockingly rare for that to happen.
Young ODs usually thrive after buying a practice. I recently met a young woman who grew her practice from $400,000 in revenue the year she bought it to $1,200,000 in just five years. I regularly see young ODs buy $1.2MM or $1.4MM practices and grow them to $1.8MM or even $2.0MM. Their energy, training and vision is more than enough to drive ongoing success.
3. Practice profitability easily justifies the cost of equity
Now for the most common concern of doctors on the purchasing side of the table. I’ve had a spate of partnership consults lately where an owner puts a price tag in front of their associate without discussing how much the associate would earn as a partner or owner. The potential buyer often panics: “how can I possibly afford that?”
Just like your personal income is a critical question when considering how big of a mortgage to take out for a house, it’s impossible for a young OD to assess whether they can afford a practice without knowing how much they can expect to earn as an owner. Always start with their income potential, then discuss the purchase price.
And most practices provide their owners a very healthy income relative to the cost to buy them. In most situations, a fair market price for a practice will still give an associate a nice raise even after they make their loan payments on buying all or part of a practice.
Sellers, remember that the acid-test math for a potential buyer needs to be as follows:
“How much will I earn as an owner” – “My payments on the purchase loan” = “More than earn today”
Practice ownership still makes sense
Owning a practice is still a great way to practice optometry. From an income perspective, absolutely: practice owners still earn about 50% more than employed ODs, not to mention owner benefits like having control of your schedule, your team, your office culture, and your style of practice.
Young ODs, if you want to own your own practice, go for it. Chances are, you’ll do great.
Older ODs, if you’re ready to sell, give a young OD the chance to buy you out. Your practice will be in good hands.
To all: my best wishes for your continued success.
Nathan Hayes is the Practice Finance Consultant for IDOC. He is a 10-year veteran of the eyecare industry, working at HMI Buying Group and Red Tray, Prima Eye Group from its inception and now IDOC. In his current role, Nathan helps OD practice owners manage their overhead, grow practice revenues and profits, and maximize their personal income, free time, and professional satisfaction. For questions or comments about this article, please contact firstname.lastname@example.org.