“What is my optometrist practice worth?”
This is a question we get frequently from the medical community, and optometrists are no different. Today and in the near future, there are a large number of professionals retiring nationwide who are curious about the worth of their business.
The unfortunate part is that most optometrists don’t know what their practice is worth or don’t follow the right business valuation methods to make their practice more valuable when it comes to retirement. The value of the practice in many cases is the largest piece of the retirement nest egg.
You may evaluate the retirement statements from month to month but don’t take the time to stop and analyze the value of the largest asset — your practice. Many times, we get the phone call from the optometrist saying, “Hey, I’m ready to retire…” and they simply haven’t thought about implementing the steps to make their practice more valuable.
Here at McMill Advisors and CPAs, we believe it takes at least two years to maximize the value and make the practice desirable to buyers. If you’re planning your retirement throughout Northeast Nebraska, take the time to plan ahead and make your practice more valuable with these tips.
- Focus on EBITDA
The definition of value can come in different forms. One obvious form that most buyers will use to measure is by evaluating your EBITDA. EBITDA stands for earnings before interest, taxes, depreciation, and amortization and is a comprehensive measure of a business’ worth.
Interest, taxes, depreciation, and amortization are called “add-backs.” These are numbers that are technically expenses when it comes to your tax return and financials, but they are added back to get a better understanding of cash flow. As you get closer to selling your practice, you need to look yourself in the mirror and say this three times, “I want to increase my EBITDA, I want to increase my EBITDA, I want to increase my EBITDA!”
There are many variables that go into the valuation of practices, but EBITDA is the one that is focused on throughout negotiations. Later, I will describe why EBITDA is so important when it comes to selling the business.
- Compare Yourself to Your Peers
How well do you look compared to your peers? Benchmark yourself against competitors and work on the areas that need improvement. Ratios of wages to revenue, cost of goods sold to sale of goods, and profit to revenue are all good metrics to analyze compared to the industry. Your associations have great statistics to work with and you need to know how you stack up against them.
- Prepare to Sell Your Business
Don’t just show up and think you will sell your business overnight. It’s a preparation over time. Determine what kind of business you have to offer for sale. There are many things a buyer will look for:
- Is this a mom & pop shop?
- Is this a sole doctor’s office?
- Is this a multi-doctor office?
The more and more you can get away from “John/Jane Doe Optometrist Office” versus a generic name of a clinic, the better off you typically are. Buyers want to buy a franchise or an enterprise. Buyers are less likely to pay more for a mom & pop shop that is tied solely to a single doctor.
- Organize Your Financial House
Are your financials and tax returns easy to understand and do they both tell the same story? Sometimes there can be a difference between the financials you use internally, to the tax return, to the information reported to the bank, depending on how information is prepared.
We want to make sure there is consistency on reporting the operations. If there is inconsistency, then the buyers start to wonder what they’re actually buying when they don’t know for sure what the numbers are. The buyers look for consistency and they want to trust the numbers ideally over a period of three to five years.
- Diversify Services and Products
How many of your services are related to the elderly? How many of your services are related to families? Are you a practice known for a certain area or are you well-diversified across the community? Do you take on all insurances? Do you take on some insurances that aren’t profitable? Are you taking on Medicaid patients? All of these questions should also be factored into the valuation of your practice.
- Consider Your Internal Infrastructure and Climate
Do you have the personnel to run the business without much oversight and are there talents within the clinic that can be utilized for a buyer that might be attractive? These talents may include a billing specialist, a frame specialist, a lab specialist, and so forth. Having these additional weapons at your disposal can make your practice more valuable.
Diving Into EBITDA
Now that you have the various items that buyers look at, let’s talk about the term EBITDA and why that is so important.
EBITDA is the typical measurement of the success of the organization from year to year. Buyers will typically want three to five years of history to see what the overall trend of the business is and if it’s trending upward.
They look for variances and relationships between some key areas, including:
- If cost goods go up on frames, why did that happen if sales didn’t go up?
- What is your gross profit margin? Has it stayed the same?
- Based on the industry, how do your wages compare to your overall gross sales?
- How does your cost of goods sold compare to merchandise sales, and how does that compare to the industry standards?
- How does the bottom line compare to the industry standards? Is it in the range of roughly around 13-16% of revenue?
- What are you paying your doctors? Is it around 17-20% of overall production?
You want to set yourself to become profitable, as much as you can, before the sale so that you show a trend of profitability. It is also ideal if you meet or exceed industry benchmarks.
Breaking Down Multiples
Once the numbers are compared to the benchmarks, the industry, other similar practices, then EBITDA tends to come into play to where a “multiple” is applied. What I refer to as the multiple is a runway of time. This is the amount a buyer is willing to pay for a business based on EBITDA, typically anywhere from two to nine times EBITDA, as the multiple.
What that really means is the buyer is willing to pay two to nine years worth of earnings (or cash flow) that the company has historically generated. The obvious statement would be the higher the multiple, the more runway a doctor gets for the value of the clinic.
The easiest and the most widely used valuation method is the multiple of EBITDA. As you generate higher cash flow, then the multiple goes up to where it is more attractive for larger clinics to acquire. Whether it’s strategic that they want that location in a specified area, it’s a nice product mix that fits their offering, or they are going after an overall large EBITDA to blend into their operations these are all factors that come into play.
Why Are You Selling?
Once all of this is determined, the seller needs to step back and ask the question, “Why am I selling?” If it’s for retirement, then it’s an obvious reason — you’ve worked hard and want to enjoy the fruits of your labor. If you’re looking at getting a high price tag or a high multiple, I would ask the questions, “Are you still having fun at your job?” or “Do you think the future of your industry is positive, the future of your business in your location is promising, and you can continue to keep growing the practice?”
If you’re still having fun or if you still feel that the future of your company is extremely positive, then I want you to take a step back and just do a soul search to determine if this is the right decision of going down the road of merging with a practice or selling.
When you do sell out and after you receive those funds, what do you do next mentally and physically? That’s what you must answer before you go down the road of selling the business. You must understand that once that money hits your account, you will have some form of loss of control.
Control of a company will exchange hands. There could be a consolidation of operations and you must understand that there may be long-term employees that no longer are employed after day one when the new clinic is formed. Will you be able to serve patients and for how long?
If you did a soul search and you like the looks of that future — having money in hand without the risk of ownership — then maybe that fits you. Or you can exit the industry entirely and do something else with your life. I think business owners that want to sell never sit down and think, “Yeah, the money is nice, but what is my next step in life?” That’s the biggest thing that gets missed and it’s the decision that should have the largest amount of time spent before being made.
To conclude, start getting your ducks in a row. Prepare your practice for sale by getting your finances in order, setting up more of a clinic atmosphere, a solid positive culture, and a business that can run without you making daily decisions. That is what is attractive to a buyer. All of this doesn’t happen overnight. You must start planning for the exit of yourself out of a business and start asking these questions earlier rather than later.
I think Warren Buffet said it best when he said, “Valuing a business is part art and part science.” The science is just looking at the pure numbers, whether it’s a calculation of the EBITDA, looking at the value of the assets, or looking at the hard data.
Where the art comes into play is all the intangibles, like I described above — location, culture, staff in place, multi-doctor clinic/single-doctor clinic, type of revenue, insurance or private pay, the volume of frames and other incidentals being sold to patients, or the average age of patients and how this plays into the buyer’s desires.
When you’re looking to understand business valuation methods, it can be for various reasons. Regardless of the reason you’re selling, the main point remains the same — getting a proper valuation of your practice can provide the knowledge of what it takes to make your practice more valuable over time.
There really is no hurry, as you should remember that the value of this business will always be there in some fashion. There is talk lately with all of the stimulus money and additional money out there, that it is assisting other clinics in acquiring businesses.
With low capital gain rates and low interest rates, it’s the perfect environment to sell. I’m here to say that that is probably all true, but it’s not the perfect time to sell if you’re mentally not ready, if you’re still having fun, or if you don’t want to lose control.
Take a deep breath, take your time, and know that this is the most important asset in your financial picture and you need to do it right. If you have questions about this article or want to talk further on how this can apply to your practice in Northeast Nebraska, give us a call.