By Bob Schultz
President and CEO, Vision One Credit Union
Optometrists make a common assumption, and an errant one: “If I build a good practice during my working career, I can sell the practice and live well in retirement.”
In most practices, the value of a practice itself will not fully fund retirement. We have to think in new ways.
Part of that new thinking is envisioning an optometric career as a pathway with an entrance and an exit. The early years are spent testing various practice settings, seeing what works best for you, and acquiring management skills to augment your clinical skills. The middle years should be spent building wealth, both inside and outside the practice. When young, we don’t tend to look far into the future, but in fact a practice should be bought with a plan to meet your financial needs and concludes with an eventual sale.
When buying a practice, like buying a house, you are investing in something of value and building the value of that investment. However, market economics are far different than in generations past. You really have to have a wealth-building plan that you put into play from the start in order to enjoy a nice lifestyle and a successful retirement.
The following are a few key points to keep in mind when creating your plan, as well as some disconnects between what a borrowing optometrist thinks and what a lender that understands optometry knows.
It is very important to create a sound business plan prior to making an investment in a practice. Your business plan should include:
Professional objectives, ownership structure and your resume
Area demographics: geographic profile of the area, patient profile, trade area and target market, office profile
Two year (minimum) Financial plan
Five year (minimum) Strategic Marketing plan
When it comes to financials and strategy, many optometrists make faulty or naïve assumptions. The following are common disconnects between an optometrist’s thoughts when looking to acquire a practice and a lender’s analysis when considering whether extending a loan makes good economic sense.
Too Small a Practice…
Optometrist: “I will look for a smaller practice that requires a smaller debt. After all, I have student loans and may not qualify for a large loan.”
Lender: “A small practice, commonly with a single optometrist and possibly a spouse as sole staff, may be economic as is–but it may not produce sufficient cash flow to support practice acquisition debt and a new owner’s personal income requirements. Buying a larger practice with a better net cash flow most often is a better investment.”
Too Large a Practice…
Optometrist: “I will look to purchase a large practice with a healthy net cash flow.”
Lender: “A large practice with a healthy cash flow is a good investment. But does this new optometrist have the management and financial skills to handle a large practice? How well have they studied the market, and what experience do they have running a practice? Does their plan support hiring the expertise to help manage a large staff, handle billing, coding, collections and electronic health records, etc.? “
Too Aggressive a Growth Strategy
Optometrist: “I will double the gross revenues of the practice in Year 1, going from $500,000 to $1 million.”
Lender: “The biggest risks come in the first year or two of transition”. There are many factors to be considered that will affect revenues during this time:
Will patients stay if the selling optometrist leaves? What is the transition plan?
If the selling optometrist stays (as in a partial buy-in situation), does he or she make a good partner with the purchasing optometrist?
If the selling optometrist spent 40 minutes with a patient and if the new optometrist’s growth plan is to spend 20 minutes with a patient in order to see more patients and/or streamline the process, will patients stay?
If the new optometrist’s plan is to add additional services not already being offered (such as medical), how will this affect the practice growth?
Will the new optometrist be able to continue on all insurance panels?
I Can Make it Work
Optometrist: “I can scrimp and save for the first few years until the practice takes off. My salary doesn’t matter.”
Lender: “A loan is viable only if the net cash flow from the practice can support the acquisition debt service and still meet the personal income requirements of the borrower. A borrower’s plan cannot ignore expenses of student loans, car payments, house mortgage or rent and any other personal expenses. These requirements vary by person and by region. If the income requirements are not covered by the practice (especially if revenue drops) or other outside sources, then the purchasing optometrist needs to search again for a practice with a better net cash flow.”
In summary, when buying your practice there are key points to keep in mind:
Create a viable Financial & Strategic Marketing Business Plan to include transition and eventual exit
Do your homework and due diligence on the practice to determine viability of location, cash flow expectations, transition risk and growth potential
Match your business skills and financial needs to the appropriate size practice
Vision One provides a comprehensive planning guide for optometrists looking to acquire a practice. The guide details application requirements for financing the outright purchase or start-up of an optometric practice, as well as for a partial interest acquisition (partner buy-in agreement). The entire guide can be downloaded as a PDF (see link below).
Vision One Credit Unionwas founded in 1951 by optometrists as a credit union for optometrists. As a California-based institution, service was expanded nationwide in 2004. VSP and Essilor funded $30 million into “Vision Loans” a venture with Vision One Credit Union. The funds are loaned in creative ways to first time practice buyers to further the survival of independent optometry.
The Vision One Credit Union Practice Acquisition and Start-Up Guide
This guide is available atwww.visionone.org/home/education