By Mark Wright, OD, FCOVD
and Carole Burns, OD, FCOVD
Do you want to maximize the value of your practice? Are you looking to sell part or all of your practice? We can help. The Association of Practice Management Educators (APME) members (these are all the practice management educators at the schools and colleges of optometry) look at practices every year as our graduates receive practice offers. We have seen great deals and really terrible deals…for both sides. To help coordinate this effort, and standardize our responses, the APME created the Practice Management Center (PMC) in 2015.
The PMC web site is optometrymatch.com. Both providers and seekers can start their search there. APME and PMC are here to help both optometry students and the alumni of all the schools and colleges. We are creating tools and resources for you to use in managing your practice.
The work of the PMC has given us very specific knowledge about how to best evaluate practices. Let’s consider this week how to maximize the value of your practice. There are many numbers that can be considered when evaluating a practice. Here are two of the most important that the PMC considers: Practice Efficiency and Doctor Efficiency.
Practice Efficiency tells you how well the practice is managing its expenses as a percentage of the practice gross revenue collected. Here’s how you come up with that number:
1) Calculate all practice expenses.
2) Add back anything that is not a real practice expense, such as auto and truck expenses; depreciation; travel expenses; and continuing education expenses (did you really need to go on that cruise to keep your license current?).
3) Add together everything it costs you to have all of the doctors – including owner doctors – in the practice and the true net of the practice. Then, divide this number by the total revenue collected by the practice.
The practice efficiency should be higher than .27 (or if you want to put this into percentages, 27 percent). If your number is lower than .27, and you want maximum value for your practice, then you need to put immediate attention on getting this number higher.
Focus on your expenses and get them under control. At a minimum, here are percentages you should achieve:
Cost of goods sold should be less than 27 percent.
Staff payroll (that is, non-doctor, non-in-house optical lab staff that are edging or finishing lenses) should be less than 23 percent for a “typical” practice.
Occupancy costs (everything it costs you to occupy your space) should be less than 9 percent.
Clinical equipment expenditures should be less than 2 percent.
Marketing expenses (for a practice greater than 3-years-old) should be less than 2 percent.
Everything else, everything that did not go into one of the above categories, is called “overhead.” Overhead should be less than 10 percent.
Adding up the numbers in the list above, you get exactly 27 percent. That’s your minimum. You can do better. If you want the best price for your practice, then you must do better. If you are below 27 percent, there is a concern that your practice may not be able to be sold because there may not be enough money for the buyer to pay the loan for the purchase, and for the buyer to live comfortably. That’s a deal killer.
The other key number is doctor efficiency. The median full-time equivalent doctor should generate $700,000 in revenue collected per year. To calculate the doctor efficiency of your practice, divide the total gross revenue collected by the number of full-time equivalent doctors in your practice. If the resulting number is less than $700,000, then your doctor(s) may not be effectively prescribing complete solutions to improve patients’ quality of life in the four major arenas (home, school, work and play).
The problem could also be found in the optical dispensary. In some practices, the doctor will prescribe a solution only to have the optical staff talk the patient out of the prescription. Somewhere between the doctor and the optical staff there is a problem that must be resolved if you want to have a practice that is above the median.
Take this week to look at your practice efficiency and your doctor efficiency. Maximize these numbers to maximize the value for your practice.
Mark Wright, OD, is a board member of the APME and CEO of the PMC, and a professional editor for Review of Optometric Business.