So, you always thought you’d like to retire at age 65, and as you nudge 64, you figure you probably need to start getting all your ducks in a row. Well, you’re probably leaving it a little late. There’s quite a bit you should be doing a few years out to ensure your practice – the business that you’ve put years of blood, sweat, and tears into – will generate the maximum sale price when the time comes.
Paul McKinley looks at how lenders assess your practice value and what you can do to increase it.
Professional advisors can help you navigate the complexities of preparing your practice for sale by providing you with the tools, insights, and knowledge you need to make informed decisions
Preparing an optometry practice for sale can be a daunting and complex process, but it is a necessary step to ensure a successful sale transaction. Like any other business, medical and optometry practices require careful preparation, including financial, administrative, and legal due diligence, as well as branding, marketing, and negotiation strategies.
Understand Your Practice Value
Before you can make any meaningful progress in preparing your business for sale, it is essential to assess its value accurately by carrying out a comprehensive evaluation. Once you have an idea of the value of your business, you can begin to make strategic decisions to improve its standing when it comes time to sell.
Factors that will influence your practice value include, inter alia:
• The size of your patient base,
• The profitability of your business,
• The condition of your physical assets, and
• Your market position.
Calculating the practice value is not an exact science – there are numerous valuation methods, and many subjective variables within these, but there are usually three key components.
Make sure your stock is current, well presented, and in line with the demographic of your target market, which can often correlate with the surrounding suburbs in which you operate.
Stock value is readily ascertained by a stocktake at or around the time of the practice sale.
Plant and Equipment
These are all the assets your practice is selling, including medical equipment, computers, furnishings, and fittings. You should have regard to the age of the equipment (and therefore, its remaining useful life), its written down value (WDV) as per the financial statements, as well as the current fair market value (perhaps the most relevant in terms of sale value). This might be a mutually agreed upon figure, taking the above into account, but can also be determined by an independent licensed valuer, for a fee.
This is usually the largest, and most subjective, of the three sale price components.
It’s a measure of the profitability of the practice, and all things being equal, can be likened to its future earning capacity (profitability).
Valuers, accountants, and banks, typically use an EBITDA (earnings before interest, tax, depreciation, and amortisation) calculation here. Taking a weighted average of the last three years net profit, they adjust (add back) these ‘non-cash’ items, and then apply a ‘multiplier’ factor to this normalised result, to arrive at an estimated goodwill figure.
While normalised EBITDA figures are difficult to refute (being based on actual financial statements), there is often some ‘flex’ in the multiplier factor being applied.
Typically, we’ve seen multipliers from zero through to 3.75, with stronger (higher) factors applied for practices with:
• Large, well-maintained databases,
• Strong, consistent financial statements (performance),
• All commitments (including tax liabilities) up-to-date,
• A well-established and solid reputation,
• Longer handover periods from the vendor,
• A longer remaining commercial lease,
• Existing referral relationships,
• Any niches the practice has, including advantages over competitors,
• Good culture and team stability, and
• Fresh fitout and fixtures.
One of the first things the potential buyer (and, in turn, their bank) will want to see is your financial statements to ascertain the profitability and trends of the practice. They’ll usually want to see the past three years.
Optimise Your Financial and Operational Efficiency
The financial and operational aspects of running a practice are critical to the overall success of the business.
Therefore, it is essential to optimise these aspects of your practice before putting your business on the market. Pull together accurate and up-to-date financial statements and ensure that all financial and accounting records are in proper order.
To optimise operational efficiency, take steps to improve your patient experience and communication. For example, with patient surveys, ensure that your scheduling system is efficient, reduce unnecessary administrative costs, and ensure that your staff are adequately trained and supported.
Preparing your documentation is an essential step that cannot be overlooked when getting your practice ready for sale. Documentation is what sets the stage for your practice and provides potential buyers with an insight into the operations, performance, and value of your business. Some key documents include:
• Financial statements (statutory and year-to-date management accounts),
• Tax returns and tax portals,
• Employee contracts and agreements,
• Leases and property information,
• Licences, permits, and accreditations, as appropriate,
• Records of patient demographics,
• A summary of clinical protocols and procedures,
• Information regarding medical and office equipment, and
• Contracts with hospitals, physicians, and insurers (including referral agreements).
Engage Professional Advisors
Professional advisors can help you navigate the complexities of preparing your practice for sale by providing you with the tools, insights, and knowledge you need to make informed decisions. They can also provide you with legal, regulatory, and tax advice that will be instrumental in ensuring a smooth transaction.
Some of the key advisors you may need when selling your practice include finance brokers, financial institutions, lawyers, valuation experts, business brokers, and accountants.
By way of example, stamp duty may not be payable (in some states) on goodwill and intellectual property, however it may be payable on other assets included in the sale agreement (your tax accountant can advise you here).
Furthermore, the buyer may consider implementing a restraint of trade, which prevents the seller from operating within a certain distance of your new business, and for a pre-determined period of time.
Additionally, you should seek some advice regarding capital gains tax (CGT) on goodwill and the sale of the business (as opposed to the sale of assets). You could potentially end up paying no CGT with the different exemptions available to small business.
In addition to the above, it is essential to take steps to effectively market your practice sale. This includes creating a plan to attract potential buyers, highlighting the strengths of your practice, and being transparent about any weaknesses or concerns.
If you’re a member of a national network organisation of independent optometrists (such as ProVision, Eyecare Plus or Eyebenefit), they’re likely a good starting point, as they may have members looking to purchase, or expand their current practice.
The absence of a longer remaining lease (or at least, the option to renew) may be cause for concern for both the incoming buyer and the banks if finance is required to fund the purchase. If the lease was not going to be renewed, the practitioner will need to relocate, possibly causing disruption, a likely erosion of the patient database, and loss of profits.
Lenders love a transition period as it gives them comfort that there is unlikely to be significant disruption arising from the change of owner and management.
Even if the practice for sale is well established with a large database, a perfunctory handover will work against it. A lender could consider that patients may not be receptive to an abrupt change of owner and may choose to take their business elsewhere. The preferred, and usually more successful approach is where the new owner is introduced and slowly transitioned in. This is also better received by patients and practice team members.
If the potential buyer needs finance to purchase your practice, the lender will conduct an extensive review of their risk profile. Key factors will include:
• Their experience in the industry, including any prior history of running a practice (preferred),
• Time spent operating in your current practice (preferred),
• Financial backing of the buyer, including asset position (their own property offered up as collateral is sometimes required, and again, is preferred), and
• Deposit contributed to the purchase (preferred, as lenders like to see ‘skin in the game’ from the purchaser).
An up-to-date patient database or customer relationship management (CRM) system and active marketing are seen by lenders as key ways to demonstrate that patient relations are established and that loyal, long-term patients are nurtured. If done correctly, it can lead to a steady flow of referrals as well, which is often your cheapest form of marketing.
Social media should not be ignored either, as these various forums (including Instagram, Facebook, Tik Tok, YouTube, etc.) can help attract new patients and increase your practice’s online profile, again making it more attractive to both potential buyers and lenders.
Marketing can be time consuming and does require some expertise, so as you are preparing your business for sale, consider outsourcing to a reputable agency.
Smooth the Way
In conclusion, preparing a practice for sale can be a challenging and complex process, but it is essential to ensure a successful transaction. To get your practice ready for sale, it is necessary to understand its value, optimise your financial and operational efficiency, prepare your documentation, and seek out support and guidance from expert advisors. Following these steps will help you set the stage for a smooth and successful sale of your practice, enabling you to transition gracefully (and financially) to a well-deserved retirement.
Paul McKinley CA BBus is the Managing Director of Optometry Finance Australia.