Practice Transitions

8 Red Flags to Watch Out for When Buying a Practice

By Maria Sampalis, OD

April 21, 2021

Practice ownership is the dream of many optometrists. Buying an existing practice can be easier and more doable than starting a practice cold. Buying a practice can also be a great way to expand a practice you already own. But before making the big decision to sign a purchase agreement and take over a practice, it is important to make sure there are no indications that you are getting a lemon. Here are signs that you may want to reconsider or renegotiate before agreeing to sign the sale papers.

I purchased a practice in August 2020, folding the patient base of the practice into that of a practice I already owned. My practice revenues have increased 35 percent, and our net profits have increased 20 percent, since then. Here is what I have learned about weeding out poor prospects for purchase and using weaknesses of the practice you are thinking of buying to negotiate a lower price.

The Seller Did Not Have an Independent Assessor Do a Practice Valuation
If your seller did not have a professional broker, with experience valuating optometry practices, conduct a valuation of their practice, don’t rush to seal the deal. The independent valuation also should be up-to-date, meaning that it wasn’t conducted long ago, or when the practice’s circumstances were much different than current circumstances.

The Seller Who Says an Unfavorable Valuation Isn’t Accurate
Be wary of sellers who try to explain away or make excuses for a valuation that isn’t impressive. They may make statements like, “My practice really makes more money than that. All my cash is not reported. That’s why it’s really worth $100,000 more than you’re seeing on the books.”

And I would say: “That’s great for you–but I have to make my decision based on what is in your books and from the objective practice valuation.”

Old, Dated Equipment & Equipment that Has Not Yet Been Paid Off
Older equipment has lost its value if the technology it features has been supplanted by newer technology that has become the standard of care. As a general rule, if newer versions of a seller’s equipment exists, the equipment should not be a factor that increases the sale price. New equipment that is owned by the seller outright and is in good shape is another story, and can, indeed, justify a higher sale price.

For equipment that is not out of date or damaged, but is still being paid off by the seller, you want find out before the sale what the interest rate is for the loan that is being paid off. Generally you would want it to be lower than 4 percent if you were going to take over paying it off as part of the sale deal. You also would want to evaluate the terms of the loan, asking, for example, “Can I pay it off earlier and lower the interest rate?”

Unfavorable Long-Term Contracts with Vendors
Before agreeing to purchase a practice, get a list of all the long-term contracts with vendors the seller has, such as those with internet and software providers. What is the cost per month of these contracts, how much time is left on the contracts and could you break the contracts without incurring a significant penalty? Or could these contracts be renegotiated?

Discontinued Frame Inventory
Discontinued inventory–a frame that a brand is no longer selling–is not worth anything, as it could only be sold as clearance merchandise for which, at best, you would break even. For that reason, frame inventory that has been discontinued should not be given as a factor to justify a sale price.

If the seller persists, insisting that you could still make money off of selling it, I would respond by saying: “If you couldn’t sell it, what makes you think I will?”

Staff Payroll that Increases Just Before the Sale
A classic move is for a seller to give pay increases to staff just before a purchase agreement is signed. Their rationale is they want to do something nice for staff on their way out (knowing they’re not the one who’s going to have to pay that higher salary!).

Have a conversation with the seller about keeping staff salaries steady through the sale, so that the salaries you were shown before agreeing to buy the practice are locked in. Have it written into the sale contract that the staff payroll is what the owner told you it was. That way, you can evaluate the staff and their salaries after you make the purchase, and decide on your own whether you think their salary is reasonable or due for an increase.

High Staff Turnover
Ideally, you want at least some of the former owner’s staff to stay with you through the sale, providing familiar faces to patients as you introduce yourself to these patients you have inherited. For that reason, the seller will claim there is value in the staff you will be getting through the sale, and that the staff is a reason for a higher sale price. That could be true–but not if the practice’s records show a high staff turnover rate. That would indicate unhappy employees who are not likely to stick with you after the sale, and may not even still be employed by the practice by the time you take it over.

All Medical Billing with the Same Diagnosis Code for Most Patients
Even in a practice with a high concentration of elderly patients, not all patients are glaucoma suspects. Check to see what is typical for other nearby practices in the number of certain diagnosis codes, and pause and reconsider your decision to purchase if what the other local practices are experiencing doesn’t align with the medical records of the practice you are thinking of buying. A practice with all medical billing with the same diagnosis code used for most patients could indicate over-billing or insurance fraud.

Maria Sampalis, OD, is the owner of Sampalis Eye Care in Warwick R.I. and sublease at Warby Parker. She is also the founder of Corporate Optometry on Facebook. Dr. Sampalis is also founder of the new job sitecorporateoptometrycareers.com. She is available for practice management  consulting. To contact: msampalis@hotmail.com

 

 

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