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Wednesday / August 17.
HomemitwocentsExit Strategy – What is Your Practice Really Worth?

Exit Strategy – What is Your Practice Really Worth?

Business consultant Michael Jacobs reflects on lessons learnt from a high profile career in optics, giving mivision his ‘two cents worth’ on the future for independent optometry, Australian-style. In this article he talks about the options for independent optometrists planning their retirement.

You are in your mid-50s to 60s. You have owned and operated your own optometry practice for 30 plus years. The business and the profession have been good to you for most of those years. You have made a decent living, put a couple of kids through private school and generally had a pretty decent lifestyle. But things have changed. The kids have left home and have lives of their own. The industry has changed, become far more competitive and less collegiate. The profession has changed too; technology advances, therapeutic qualifications and so on. The subject of retirement crops up more regularly in dinner table discussions. Some of your older colleagues have already retired and have shared their enthusiasm for their new lifestyle.

Maybe it’s time you gave some thought to your exit strategy. Having recently ‘retired’ myself, I have formed the view that retirement needs to be approached with the same degree of rigour, planning and forethought as any other business venture.

Now for the purposes of this discussion (and to keep this article to a manageable length), I will ignore financial planning aspects of retirement other than to say that one of the objectives of your plan should be to maximise the return you get from your practice at retirement.

in the past few years a significant number of independents have simply closed their doors and walked away from their businesses at retirement due to a total lack of buyers

What is my Practice Worth1?

So to the first issue, the elephant in the room if you like. What is your practice really worth? Years ago therenwere guidelines that would have given you a pretty good approximation of its value, such as 60 per cent of annual sales or four to five times annual profits; however recent sales have seen those numbers diminish significantly. In fact in the past few years a significant number of independents have simply closed their doors and walked away from their businesses at retirement due to a total lack of buyers.

These are of course, two extremes in the above instances… so what can you, the humble independent practice owner, do to improve your chances of selling your practice at the top of the scale versus the bottom?

I would suggest that, in decreasing order of importance the following factors are the major contributors to practice value:

Gross Sales

Putting it crudely, it is difficult to make a mountain out of a molehill. Size really does matter. I would also include practice location in the same category as size because location contributes significantly to sales volume and most corporate or franchise buyers are very aware of the importance of location.

Profitability

Second only to gross sales is profitability, but profitability is meaningless if sales are small. For example a AU$500,000 turnover practice with 25 per cent or $125,000 profit is nowhere near as attractive to a buyer as a $2,000,000 practice with 15 per cent or $300,000 profit. So, gross sales and profit go hand in hand.

Sales Growth

An old, well established practice with an ageing patient database and shrinking sales, no matter how large the gross sales are, will not be attractive to a buyer willing to pay top dollar. Yes, you may sell your practice but at a substantial discount to a similar size practice which is demonstrating growth.

Patient Database

The size and quality of your patient database underpins the future potential of your business. Too many independent owners pay too little attention to this factor. What is the average patient age? Is the average age of your patient base growing or shrinking? Are you recruiting sufficient numbers of new patients to replace lost patients and actually grow the business? Do you have mobile phone numbers and email addresses for all your patients? Do you accurately record patient data such as profession, trade and hobbies that might assist in marketing to the database?

While there are a myriad of other factors that will influence practice value these will generally be the most significant.

The Plan

At some point it is important to take a close look at your practice and ask the hard question; will I be able to sell my practice? If you own a small practice in a regional or rural area, or your small suburban practice is surrounded by large, well established competitors, then your chance of selling is quite minimal. In this instance you may wish to maximise the cash flow from your practice in the years before retirement versus vainly investing in new fit out or better instrumentation. It is however important to make this decision several years before retirement to allow time to harvest the cash flow.

On the other hand, if you believe that there is potential for your practice to be sold then you will take a different approach. Your particular approach will be influenced by a number of factors including your particular style of practice. If your practice has a very high consultation to retail ratio, is primarily a behavioural practice or focuses on a particular specialty such as contact lenses then you will be seeking an owner/optometrist with similar interests. While this reduces the pool of potential buyers it makes it easier to locate those same buyers.

Alternatively, if your practice fits what I would call the “typical independent practice model” your plan should be to focus on the four factors above: gross sales, profit, growth and patient database to maximise your value to potential buyers.

Regardless of your practice size, location or style you should actively seek to recruit younger optometrists to work in your practice with a view to becoming a partner and eventually full owner. This approach has a number of benefits to both parties. The potential owner has the opportunity to try before buying; to experience the practice first hand; to physically see the operation and its performance on a daily basis and to pay off their purchase while they work. The existing owner has an outstanding opportunity to gradually introduce a new optometrist to their loyal patients and slowly reduce their workload as retirement approaches.

Plan Ahead of Time

If you take nothing else away from this article it should be this. You need to have a plan at least five years before your intended retirement date. Anything less and you are gambling with your future.
Finally, seek professional advice. There are many business brokers who will try to sell your business for you but my recommendation is that you stick with industry specialists. You will almost certainly sell to another optometrist or optometric group and optometric industry specialists will already know most of the potential buyers.

Michael Jacobs is a business consultant and columnist for mivision. He was the former Chief Executive Officer of Eyecare Plus for 10 years until early 2015.

Reference
1. For an excellent overview of the valuation of differing size practices (albeit from a US source) see www.eyecarebusiness.com/articleviewer.aspx?articleid=103370 .

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