2009 Revenues, Tips

Many optometry offices that reported down revenues in the first quarter are seeing increases the last couple of months. It's important to track your month by month revenues with prior years. Determine the seasonality of your revenue. Rememeber that some months are better then others. Plus buyers and lenders want to see your month by month comparisons between years.

Tips to keep your profits up:
Trim your inventory 10% and free up needed cash.
Add more medical services.
Don't cut fees
Stay positive and stop reading the newspapers :)

Vision Expo West

We'll be heading to Las Vegas for Vision Expo West the first week of October 2009. Looking forward to see what's happening, new frame lines and the buzz. Be sure and call me to send up an time to meet.

Case Study: Practice Sale #2

The practice offered for $550,000 including $60,000 of inventory and was on the market for about 9 months. Two buyers has been “kicking the tires” for several months. Buyer A’s wife just had a new baby and that delayed any thoughts of an offer. In the meantime, Buyer B was indecisive and delayed any offers. A couple of months later Buyer A renewed their interest and began talks with the Seller. The seller was anxious to retire and spend time with grandchildren. Buyer B finally chose to put in an offer that was $175,000 below asking price. By this time Buyer A also submitted an offer within $40,000 of the asking price. The seller was inclined to accept this offer. Since the seller had initially met Buyer B first, they were given the option of matching that offer. Buyer B increased their offer by $80,000, (still substantially under the other offer). Two weeks later they were informed that Buyer A’s offer was accepted. Buyer B was upset because they incurred costs for a consultant to assist them. Nonetheless, the seller proceeded with Buyer A’s offer. Buyer A had already been approved for 100% financing by a lender. We proceeded in getting the buyer approved with the landlord. The buyer began due diligence and orientation at the practice to facilitate the transition. Within 30 days the transaction was completed.

Summary:

Buyer B was upset because they paid a consultant to assist them, and did not get the practice in the end. Seller was upfront in allowing them to match the other offer but felt that the initial offer was an over aggressive low bid, especially when they increased their bid by over $80,000. Furthermore, they refused to provide the appraisal from their consultant. (An otherwise emotional seller without our help might have refused to even respond.) This buyer’s offer also included a cover letter as to why the office was so bad as a means of justifying the low price.
Always present offers in a positive light. Never be critical. Never rationalize or justify your offer. Compliments and carrots go much farther then sticks and criticisms.
Timing is everything. Months might pass with no activity. Then, bamm! One, two then three offers appear. Make a decision and keep the transaction moving quickly.
Be prepared and stay one step ahead. Buyer B was pre-approved and quickly submitted all the papers to the lender for a formal approval. They showed the seller a copy of the lender approval for the full amount. The gave the seller a lot of confidence. It also insured the buyer that the practice had sufficient cash flow to justify the price and their personal income needs. (Note: Other smaller offices with much less gross revenue will not cash flow and cannot be valued simply on the net income approach.)
Be fair. Buyer A presented a reasonable offer along with a friendly and positive cover letter. The seller felt it was lower than they wanted. However, they liked the buyer and chose to accept. In the end both sides probably felt the other got a little better deal than the other. –That’s the definition of a win-win scenario. After the sale the transition went smoothly. They received a lot of help from the seller. Revenues in the first year showed about a 10% increase. The seller felt good that the buyer was successful and that the practice patients and staff were in good hands.

Case Study: Practice Sale #1

The process of completing the sale for a practice is complicated and often charged with emotions. The deal sometimes involves compromises for buyer and seller. Third party requirements for example from lenders or landlords create hurdles. The key to a successful deal is how to overcome and manage the obstacles and hurdles. Each case is unique and handled differently. To help buyers and sellers understand the process we’ve presented a case study of completed sales.…

Case #1:The practice offered for $250,000 including $30,000 of inventory and was on the market for approximately 6 months. The office was operated part time by the owner and was established for over 15 years. The owner was selling for personal reasons to spend more time with family.

Two written offers were received within a short time of each other. Buyer A offered about $150,000 and Buyer B offered about $220,000. While buyer B was still slightly lower than the seller’s asking price, the offer was accepted. Buyer B began their due diligence process including the loan and landlord approval applications. In order to apply for a loan the buyer was required to submit tax returns from the seller including a current profit and loss statement. By the time the offer was accepted the seller did not have up to date financials required by the lender. There were significant delays in getting the current profit and loss statement from the CPA. By this time the lender also required the 2008 tax returns. Upon receipt the 2009 P&L reflected a significant drop in revenue for the first six months. The seller did not have comparison periods for the prior year making it impossible to determine if the revenue was seasonal or had indeed dropped. Both buyer and lender were uneasy about the significant drop. The explanation of reduced hours and more time off was not acceptable to the lender. The buyer had requested a concession in the price of about $30,000 and along with a seller’s note of about $35,000 for five years. The seller accepted the revised offer because of personal reasons and recent trends in the office. Feeling that other buyers would respond in a similar manner the seller felt it better to sell now rather than wait 6 months or longer for another buyer. They were not prepared to put the energy back into the office to re-grow the practice revenues.

The seller accepted and already was itching to leave. They were focused on personal issues and the practice was not a priority. (Nor had it been for several months). Inventory levels declined, recalls were not mailed, doctor hours reduced. Both buyer and seller were anxious to get the deal closed so the buyer could start to rebuild and grow the office. The buyer still saw excellent opportunity in the growth potential of the office and location. Closing could not happen fast enough for everyone.

While the buyer was very comfortable with the practice and the revised price, the lender rescinded the loan due to the latest revenue drops in combination with the buyer’s personal credit obligations. The buyer elected to pay cash for the balance of the purchase price along with a short term seller’s note of $35,000.

With both parties anxious the closing was delayed as we waited for the landlord to complete the lease assignment paperwork. A week or more passed until the paperwork was ready for signature. On the day of closing the buyer reviewed the equipment and inventory. The buyer felt that the seller had further depleted the level of inventory and found its value to be less than what the seller previously stated. The buyer felt that many of the current frames had been sold and the remaining frames were discontinued. The seller and buyer agreed to adjust the frame value by $2,000.

Based on the scenario we should be aware of several items that could affect a sale:

It is imperative to keep all tax returns and financials up to date, file tax returns on time and maintain current P&L statements and corresponding revenue for previous years by month.
During the escrow process make sure inventory levels are maintained. Inventory fluctuates every day. However, the value of the practice is based on a regular stable inventory level. The practice cannot function with reduced or old inventory. If the inventory increases then the seller should also be paid for higher amounts on hand.
Declining revenues are a red flag. Today buyers and lenders are cautious of declines in 2009 revenues and without the benefit of prior year comparisons for the same period it is impossible to determine the seasonality of the revenue and if in fact it is a decline or simply a seasonal effect.
If you must reduce doctor hours or take time off for more than a month make sure that you find a relief or fill-in doctor. Make sure that revenue is maintained. Your office value is based on cash flow. If a trend of 6 months or more reflects dramatic revenue drops then a buyer or lender might have concerns.
Stay focused on the growth of the practice right thru the closing date. If you “check out” before closing you risk the buyer cancelling due to a material change in the revenue.
The buyer overcame hurdles in the practice focused on the “big picture” and the potential of the office. They also received concessions from the seller based on significant material changes that occurred over numerous months.
The seller compromised because the priority was other personal family matters and the long commute to the office. Also the spouse worked elsewhere allowing the family to continue earning a good income.