When it comes to raising finance to acquire or fitout a practice, optometrists are generally perceived to be relatively low risk. Even if their practice falls into ruin, they can walk down the street and get another job to cover their debts. While this can make arranging finance easier than it would be for mainstream industries, it’s still not a ‘walk in the park’ because optometry is not your run-of-the-mill business.
For this article, we spoke to experts in optometry finance and business development to get their best tips and tricks for arranging finance.
Arranging finance to acquire an optometry practice may be challenging, but if you have experience, you’re ready to back your capabilities and throw yourself into business, it can be well worth the effort.
While frustrating for those who “just want an answer so they can get cracking”, the loan application process will take time because no two optometry practices or practitioners are the same. This means every application to finance the purchase of a greenfield or existing practice will be assessed on a case-by-case basis.
However, according to Paul McKinley, Managing Director of the award-winning accounting and finance broker Optometry Finance Australia, there are a few factors that will positively (or negatively) influence a lender’s decision-making process. Understanding these before you even begin to prepare your application will be advantageous.
EXPERIENCE IS ESSENTIAL
First up, he says, if you’re applying for a commercial loan to finance your own practice, you’ll need to have at least five years’ experience managing and growing a practice before a bank will even consider your application (except in unusual circumstances, which we’ll cover later).
Your experience will preferably have been acquired across all aspects of the practice, from managing the cash flow and purchasing decisions, to reviewing the monthly management reporting, preparing business plans, budgets, and forecasts, and making decisions on staffing, marketing, stock purchases and inventory mix.
PLANNING IS POWERFUL
All banks are rightfully keen to reduce their risks when it comes to lending. To stand a chance of getting a loan, Mr McKinley says a good credit rating is essential (you can obtain a free copy of yours at www.equifax. com.au or www.experian.com.au). You’ll also need to have prepared a viable business plan and cash-flow forecast.
This is something that Mark Corduff, Business Services Manager at ProVision, is keen to highlight.
“Commencing the process of either opening a greenfield practice or purchasing an existing practice starts with a business plan and ensuring you have support around you,” he told mivision.
“The business plan and financial plan dovetail into preparing to apply for finance. In a greenfield scenario, being conservative regarding cash flow, while ensuring optometrists don’t have a problem with covering expenses and loan repayments in the first few years, is extremely important. When it comes to purchasing an existing practice, a purchase price that ensures a return on investment in the first three years, due diligence on practice financials, and favourable lease terms – with security of tenure of at least seven years – are just some of the important components that financiers look through in the application process.”
Other factors Mr McKinley says will lower the perceived risk for a lender, especially if you have less than five year’s senior management experience, are:
- The size of the loan you’re applying for – the smaller the better,
- Any cash contribution or deposit you can make,
- The backing of your own assets, i.e., any property you own, or
- A progressive buy-in of the practice (e.g., a staggered buy-in of 25% pa over the ensuing four years, where the existing owner is staying on).
“If you’re buying an existing practice, lenders will want to analyse how long the business has been operating, along with its credit (borrowing) history and the proposed level of borrowing going forward,” Mr McKinley explained. “They’ll want to see the practice’s current financial statements and tax returns and to understand the length of the remaining commercial lease.”
Furthering Mr Corduff ’s comment about lease tenure he said, “it’s important to understand that if the practice you’re buying only has six months left on its lease and no hope of renewal – perhaps the shopping centre is closing or the premises you’re moving into are being sold – you’re unlikely to raise finance. An alternative option might be to arrange a long-term lease for new premises in an area close by, so that the existing patient base will be retained… or buy a practice and the building in which it operates.”
The latter strategy can make it easier to raise funding and provide greater flexibility to extend the terms of repayments. As Mr McKinley points out, if you’re planning to acquire a freehold property, loan terms can run for up to 25 years (like a traditional home mortgage). However, if you’re taking out a leasehold loan, the term will probably max-out at 10 years, subject to the commercial lease in place.
Another strategy that may make owning your own optometry practice more viable is to look beyond the confines of the city.
As Philip Rose, Professional Development Manager at Eyecare Plus says, the opportunities are surprisingly fabulous.
“I’m increasingly surprised at the lack of interest in investing in regional Australia. Practices outside the city are generally less expensive to acquire and often come with the opportunity to purchase the building. Front of house staff are less expensive but likely more loyal, and patients are more loyal too.
“So, not only do you get to enjoy a more relaxed lifestyle, but your clinical work will also be more fulfilling, and your business is likely to be more profitable than it would have been in a metropolitan area.”
Credabl’s Six Tips to Get Your Equipment, Fitout or Practice Loan Approved
- Check the eligibility/lending criteria. Generally, your business needs to have been operating for a certain period before you become eligible for a loan. However, asset finance or tools of trade loans for new businesses can be fast-tracked if certain guidelines are met. Understanding your risk rating, depending on the amount of the loan, is also good due diligence.
- Prepare your business case. Your lender will ask you a few more questions about what you need the loan for. Tools of trade finance is generally straightforward; however, practice purchase or practice setup will require a lot more understanding of the project and business vision to get the loan across the line.
- Understand how the loan will be structured. Discussing the finer details with your accountant to understand the loan structure and cover these grey areas will make for a smoother process and avoid any discrepancies.
- Know the legal entity. This is crucial to ensure loans and invoices are made out to the correct entity, particularly if you are looking to purchase goods first and then seek reimbursement. The name on the tax invoice is the legal owner of the goods so if a tradie’s name or practice manager’s name is used, for example, it must be changed and will slow down the process. If it involves a trust, make sure you have a copy of your signed trust deed handy, as the lender will need this. While we are reliant on our accountants to keep our records, they are quite busy during the end of the financial year (EOFY), so may not be able to get to these quickly.
- Prepare your 2021 numbers. After two years business of disruption, many lenders are now requiring draft or management accounts, particularly if it’s for a new practice setup.
- Have documentation ready. Do you have your financials and documentation on hand to draw up your loan documents? We often find certain documents take a while to obtain and can hold up a loan approval.
When it comes to an optometrist considering a greenfield site versus acquiring an existing practice, particularly in the current climate, there are different loan facilities available for different scenarios and needs.
If setting up a practice, a specialist lender like Credabl will typically ask you about the area, demographics, your understanding of the competition, how you will differentiate yourself from competitors, and lease terms.
If purchasing a practice, your lender will typically vet the financials of the business, understand the reasons for selling, assess the existing staff and the purchaser’s impact on tenure and retention, as well as determining that your business and culture fits with the practice and existing clients.
RISK MITIGATION IS REQUISITE
While we’re used to banks lending up to 100% on the purchase price of a motor vehicle to someone with a good credit rating (knowing they can resell it to recoup the debt if things go pear-shaped), it’s a different story when you’re looking at buying a practice.
Mr McKinley says this is because there are three key components associated with the prospective practice’s value: the stock, the plant and equipment (fixtures and fittings), and the inherent goodwill.
Of course, stock, plant and equipment are the easiest to quantify, and can generally be disposed of, if necessary, to recoup bad debt. Goodwill is trickier because it’s intangible.
Let’s say a practice sold for AU$500,000, and that included:
Stock $50,000
Plant and equipment $100,000
Goodwill $350,000
The bank can take a charge over the first two items, but if the practice is so run down, it is making losses two years down the track and the patient database is significantly eroded, it’s likely the goodwill will have become worthless.
To mitigate the risk of this, any bank will want to feel confident that you’re going to do everything you can to make a go of your business. And, to encourage you to do so, they’ll usually require security in the form of:
- A 20–50% cash deposit – they’ll feel more confident that you’ll work hard knowing you have “skin in the game”,
- Property as collateral – if you have equity available in your residential property (the value of your property less any associated debt), banks may lend up to 100% (including the current mortgage) against the appraised value of the property. This will release the equity you need to fund a practice purchase, meaning you won’t need a cash deposit, or
- If you’re buying a commercial standalone property for the practice, some banks will lend up to 100%.
Mr McKinley says it doesn’t end there. “As the Director of the practice, you will often be asked to sign a Director’s Guarantee, which means in the event your company cannot meet its financial obligations (such as commercial leases and bank loans), you will be personally liable for the company debts.
“You’ll also need to be party to a General Security Agreement (GSA) imposed by the bank. Essentially this creates a security interest over all your present and future assets, which means the bank will have access to all the assets your business owns as collateral for the loan issued. This was previously referred to as the ‘fixed and floating charge’ before the introduction of the Personal Property Securities Act (2009) came into force.”
While all of this sounds complicated and slightly scary, preparation is key.
Coming back to the wise words of Mark Corduff, “The business planning process, when completed comprehensively, not only acts as a key part of gaining finance. It also prompts optometrists to critically analyse their competition, risks, and opportunities, as well as presenting plenty of ‘ah-ha’ moments that ensure they focus their time, energy, and capital in the right areas, so they are set for success.”
LEAN IN
Traditional financing arrangements are not your only option. As Mr Corduff says, optometrists are increasingly buying practices with the assistance of vendor finance. Additionally, they’re seeking specialist advice. “Reputable brokers that understand the optometric industry (like Optometry Finance Australia and Credabl), have been a brilliant resource and assist in taking the stress out of the process, guiding potential owners while ensuring they benefit from the most competitive interest rates in the market.”
If you don’t necessarily need complete independence, there is also the option to enter into a joint partnership agreement with Specsavers or a franchise agreement with Options Optometrists Kodak Lens.
More Risk Averse?
Specsavers JVPs are A class shareholders while Specsavers itself holds a B class shareholding. A class shareholders typically comprise an optometrist and an optical dispenser. This year, Specsavers is stepping up its store opening program while expanding its footprint in many current stores. 100% of partners’ new store shop fit costs are financed by Specsavers.
Whether it’s a new store shop fit or an expansion into larger premises, Specsavers finances all the necessary work and manages the end-to-end process as well as the payback of loans.
According to the company, Specsavers stores are supported by an annual marketing fund that will top $70 million in 2022, and its stores, on average, achieve annual sales exceeding $3 million.
Payroll, accounts payable and quarterly BAS are all managed for each store by Specsavers; with easy-toread monthly profit and loss accounts and end of year financial statements produced detailing how the business is tracking. Payment of all taxes and paydown of any business loans is also managed by the company. A monthly market-rate salary, superannuation package and a monthly distribution of profits is made to all partners.
Options Optometrists Kodak Lens is an optometry franchise model, developed on the West coast over the last decade, that founders Lance and Natalie Schaffer say delivers “the correct blend of independence and structure” to franchisees, enabling them to become successful business owners in their own right.
The model enables a greenfield or converted franchise to be opened under sole ownership or in partnership. The all-inclusive turnkey cost includes everything including stock, consumables and all the necessary equipment, which optometrists can add to or upgrade.
Options Optometrists assists with lease negotiation but leaves lease ownership in the hands of the franchisee and any negotiated landlord contribution is given back to the business owner, which can be as much as $100,000. To support the start-up, a guaranteed income of $1,000 per week, regardless of turnover, is paid to the business owner for the first 12 months of operation.
“We’re very focussed on people – on staff and patients – with strong training programs, an emphasis on educating as opposed to selling to patients, and designated 30-minute appointments, which means quality time with the optometrist,” Mr Schaffer said.
Optometry Finance Australia
Paul McKinley, Managing Director
Optometry Finance Australia is available to help you plan and prepare to raise finance and can introduce you to medical financiers. Our team at Optometry Finance Australia will “go into bat for you” by comparing over 50 national lenders and over 3,000 commercial and consumer loan products, negotiating a great rate, and providing a tailored finance solution to meet your needs.
Visit: www.optometryfinance.com.au
Credabl
Stafford Hamilton, Chief Executive Officer
As a responsible lender, Credabl is committed to ensuring that the numbers work for our clients and will not put you into financial stress.
We ensure we follow our best interest duty and keep things simple, while also helping you navigate the lending landscape alongside your professional goals and circumstances. The Credabl team is always available to discuss your financial needs and see how we can assist.
Visit: credabl.com.au
ProVision
Mark Corduff, Business Services Manager
ProVision’s Associate Membership program has been designed to assist potential owners from start to finish. We assist them on business planning, financial reviews, fit out advice, lease negotiation ad HR advice. whether they have decided on a location for a greenfield site or an existing practice and are looking for a partner or outright ownership.
Visit: bit.ly/38X5eds
Options Optometrists Kodak Lens
Lance Schaffer, Co-founder
Options Optometrists Kodak Lens franchise model comes with an all-inclusive turnkey cost that covers everything required, including all stock and consumables as well as necessary equipment, which optometrists can add to or upgrade.
Visit: optionsoptometrists.com.au/kodak
Eyecare Plus
Philip Rose, Professional Development Manager
At Eyecare Plus we work with both practice vendors and buyers to achieve a fair and reasonable deal that reflects the practice’s potential. We work with vendors to help prepare their practice ahead of sale and equally, we help buyers with preparing business and finance plans and with assessing opportunities that present. Every practice is unique in location, patient demographic, culture and potential so it’s critical that we actively work to match vendors and buyers, ensuring a win – win – win.
Visit: eyecareplus.com.au
Specsavers
Kimberley Forbes, Pathway Program Manager ANZ
Every Specsavers store is available for franchise. Specsavers’ Port Melbourne and state-based field teams support partners with services, from recruitment, local area marketing and store design, to merchandising, retail consulting, training, and development; from national marketing and back-office work to professional development, CPD and a full career ladder service.
Our joint venture partnership model leaves all stores – and the profits and saleable shares of those stores – in the hands of store partners.
Visit: spectrum-anz.com
