By Janice Mignogna and Harry Kaplan, OD, FAAO
Fifteen to 20 years ago, practices usually sold for 100 percent of gross revenues. Things have changed drastically with the growth of managed care. Nationally, a minimum of 70 to 80 percent of all optometric patients are covered under a third party care system for their services and materials. In most metropolitan areas, the percentage of managed care swells to 90 to 95 percent and benefits are more the norm and expected.
Third-party providers often control, for the most part, how we practice. They tell us what constitutes a minimum examination, equipment required, educational update, minimum office hours required, required paperwork to be filled to be reimbursed, and dictate the reimbursement rates. It is also the OD’s responsibility to make sure the patient is truly eligible for services. In addition, every two to three years, contract renewal terms change with different deductibles and other restrictions take place. Keeping abreast of all the third party plans in which a practice participates takes much time and effort.
The Value of a Practice
The Good Old Days
100 percent of
gross revenues
Today
50-70 percent of
gross revenues
Practice expenses such as rent, salaries, lab bills, utilities, and insurance, continue to increase, however the reimbursement rates tend to consistently go down. Even the normal mark-ups on optical materials and contact lenses are diminshing due to the competition from the 800 telephone companies and large commercial chains who buy goods at lower costs than private optometrists.
In addition, it is still not known whether the proposed new health plan bill will create additional challenges. All these factors combined have lowered the value of most practices to a value of 50 to 70 percent of the gross formula..
True Net is the Key
The gross value is only one component of the true value of a practice. It is the “true net” that pays all the operating expenses and gives the doctor his/her take home pay, This occurs after taxes and there needs to be enough left over to pay off the practice.
In addition to the gross value, we at the Bennett Center review the present market value of all assets including equipment, furniture, computers, lab equipment, contact lens inventory, and frame inventory.
The practice value encompasses weighted averages of the past three years of the IRS reported expenditures, both gross and the true net are taken into account. True net includes all the perks of the owners. Depending on many factors, we usually multiply that weightiness by 100% to 120% to obtain the final net figure which is then added to the market value of equipment and inventory for a final value figure. This value is then added to the gross value and divided by two for a final practice value. This appraised figure can be adjusted up or down depending on many additional factors of the practice.
Most practice appraisals use an “accountant” approach. This includes the use of three to four formulas for the appraisals that include gross, true net, inventory, equipment, etc. In the average appraisal, it is presented according to this formula, the practice is worth “so much.” This is done for three or four formulas and then they average them together. The vast majority of ODs, without an accounting background, do not understand the formula and how the value was derived. Unfortunately, many times the value may be slanted to the party paying the cost of the appraisal. At the Bennett Center, are fair in this assessment because the reasonable cost of the complete appraisal goes to the Pennsylvania College of Optometry, Salus University, and not to any individual allowing for a fair and unbiased report.
Fourteen Points Reviewed
In addition to the appraisal value analysis, the practice is reviewed by assessing 14 different points. We then compare them to the AOA national average survey figures. The AOA survey is updated every two years and has the latest statistics of the profession across the country. These points include comparing the percentage of the operating costs (cost of goods, lab bills, rent, utilities, rent, marketing, staff, chair cost per hour per patient) to the total gross of the practice and also to the national average to determine if costs are within an accepted ratio. Cash flow is a crucial element in any purchase and must be reviewed.
All of the above statistics give both the buyer and seller detailed background knowledge of the strengths and weaknesses of the practice and suggestions on how to improve certain aspects of the practice. These comparisons can affect the final appraised value up to 5 to 10 percent in some cases. This approach gives both the buyer and seller an understanding of the value of the practice and enables them to negotiate terms for the final cost. In most cases, the final agreed upon price will be the final appraised price or within +/- 5 to 10 percent. Both parties are advised to review all aspects of the buy/sell of a practice with their accountant and lawyer.
An after appraisal consultation is provided for both parties. There are many situations where the seller and buyer cannot come to agreement on the final price of the practice. This most commonly occurs when the buyer requests the appraisal because the seller has his/her own interpretation of what the practice is worth.
Janice Mignognais director of the Irving Bennett Business & Practice Management Center of Pennsylvania College of Optometry at Salus University in Philadelphia. She can be reached at jmignogna@salus.edu.
Harry Kaplan, OD, FAAO, who taught practice management for 20 years and who conducts practice appraisals, consults to PCO. He can be reached at hkaplan@salus.edu.
