By Chad Fleming, OD, FAAO
Purchasing or expanding a practice can be more costly than you think. Here is how to break down the financials to project when you reach profitability.
DETERMINE FINANCING OPTIONS. If buying into a practice, decide whether to finance through practice owners or via a lender.
CONSIDER BREAK-EVEN TIME. It should take no longer than three years to break even.
CHOOSE INITIAL INVESTMENTS WISELY. Invest first in instrumentation like an OCT, which immediately allows you bill and earn money.
When you purchase or expand a practice, you have the advantage of building on an-already established business. But that doesn’t mean there aren’t complex finances to manage. In “Starting Cold: Calculate & Manage Expenses to Reach Profitability,” I outlined the key expenses associated with starting a practice cold. In this piece, I will point out key financial challenges connected to practice purchase and expansion. Based on my experience asa career coach for AOAExcel, an AOA-sponsored business education resource, there are four key considerations.
AOAExcel, a wholly owned subsidiary of the American Optometric Association, recently partnered with Healthcare Professional Funding (HPF), a subsidiary of the Bank of Maine, to offer financing for optometrists. HPF offers 100 percent financing with fixed rates for start-ups, practice acquisition, equipment, improvements, relocations and expansions.
HPF boasts a “dedicated team well versed in the eyecare marketplace” and “over three decades serving health care professionals.”
Click HERE or call (855) 944-2265 or (855) 944-2265 to learn more about AOAExcel’s customized financial lending for ODs.
Crunch the Numbers
Many of the optometry practices that are being bought and sold in today’s market are solo practices. These practices on average are grossing about $550,000 to $600,000. There is great variation depending on the geographical location of the practice and how many hours the doctor is working. Based on a gross collections average of the last three years, $575,000, the practice would be valued somewhere between $316,250 and $373,750. Not all practices are being bought and sold between this range, but many of them end up somewhere in this range.
Monthly revenue needed to continue operations for a $575,000 grossing practice = $48,000
Costs to consider in purchasing a practice
Practice purchase = $316,250 – $373,750
Equipment upgrades = $50,000 – $120,000
Cash flow interruptions for first 3 months = $30,000
Marketing Boost = $7,000
Attorney fees = $2,000
CPA fees = $750
EHR compatibility (including IT, hardware, etc) = $10,000
Total EHR addition = $30,000 (if you need this, then the EHR compatibility above can be eliminated)
Optometry Practice Purchase Consultant = $2,000-$8,000
Total above (using the average on any ranges, used $20,000 for EHR) = $494,000
An optometrist is one of the safest loans a financing company can invest in. Current rates for loans discussed in this article made by optometrists are between 4.6-5.9 percent.
Four Key Considerations
Who Will Finance My Purchase/Practice Buy-In?
I bought into an existing practice after working as an associate for one year. The practice owners offered to finance my buy-in with a larger total purchase price over a 10-year period, or I had the option to pay them the total amount, which was less, but I would then need to get financing through a lender. The interest plus total was much less if I went through the owners of the practice.
Today,many associates buying into a practice are financed by the owners. Currently, my business partner and I are buying a second practice, and we are using a lender to finance the complete transaction. We are in a much different financial position now than when first entering into practice, so it allows for more opportunities to borrow money without upfront cash.
Average Loan Interest Payments
It aids financial planning to know how much you probably will need to pay in interest on your loan in the next decade. Click HERE to download a PDF with projected average loan interest payments for the next 10 years at $500,000 borrowed at 5.0 percent.
How Long Will it Take Meto Break Even?
I have seen practices break even after one year, and some have taken up to three years. Most of it depends on the market research done prior to the start of the practice and how ripe the area is for a new OD or another OD, so do your research thoroughly. Attending local AOA chapter meetings may give you a sense of the market you will be entering. Those doctors starting a practice from ground zero will have to be the most patient to break even. I believe the best option currently, due to supply and demand of Baby Boomers selling their practices, is to buy a practice. An established patient base is a catalyst to early profitability.
I have seen purchased practices turn a profit within the first couple of months as the cash flow is already established and many of the expenses of a start-up are not present in a buy-out. Many ODs come requesting my services through AOAExcel to help them negotiate a purchase, and I am constantly surprised at how many get caught up in the purchase price. It needs to be fair and within the current market, however, buyers today are often passing up great dividend-producing practices. It is about cash flow more than it is about price.
How Do I Space Out Additional Investments?
Take baby steps when it comes to additional investments like instrumentation, unless that piece of equipment generates revenue in clinical care. For instance, an OCT is immediately going to make payments for you as you need it to manage patients, and testing results in revenue. That is an investment that immediately has a return. Adding more comfortable chairs in the reception area may comfort patients, but the ROI is in patient perception, and that is difficult to measure.
I recommend and live by taking the “perception” steps consistently, but spacing them over time as the practice succeeds. I also recommend and live by investing in instrumentation that has a clinical purpose and immediately generates revenue.
Create Practice Investment Wish List
In my case for the second office, a “wish list” has been created to start crossing off as the cash comes in. I am old school, believing “the borrower is slave to the lender.” I take the philosophy that the more our practice and I, personally, can do to be debt-free, the better. We will get the equipment we need, but since we are purchasing an established practice, the minimal equipment needed to generate cash flow is already present. This is why I advise many ODs to look for practices to purchase so you can spend revenue generated from the practice and limit the amount of money that you have to borrow. The “tipping point’ when you become a lender and self-insured comes much quicker in life when you limit debt upfront. Just because you expect everyone to own and operate iPads does not mean your patients necessarily need or want this. They want answers and great clinical care.
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Chad Fleming, OD, FAAO, is the Business & Career Coach for AOAExcel and also a partner with Wichita Optometry, P.A. in Wichita, Kan. He assists optometrists in the buying and selling of optometry practices, coaches ODs through the transition process from associate to partner, and speaks on business strategies for practice growth. To contact: BusinessAndCareerOD@ExcelOD.com