Practice Concepts

Visit us at the Monterey Fall Optometry Symposium

2010-09-02T23:13:00.000-07:00

Visit us at the Monterey Fall Optometry Symposium. November 5 - 7, 2010. Call us today to schedule an advance appointment. Also download your free exhibit floor pass . Click here.

What’s the real investment value of a practice?

2010-08-10T09:24:00.000-07:00

When you purchase assets like a public stock, treasuries or gold with cash it is easy to calculate the return on your investment. Your yield would equal today’s value minus your original cost. Then divide that by the original cost and again by the number of years you’ve owned the asset. If you bought gold for $10,000 three years ago and today it is worth $15,000, your yield is 50% or about 16% per year. ($15,000 - $10,000) div $10,000 div 3 = 16%) These are considered passive investments because you have no control over how they perform.

How would you calculate the return on an investment that required no cash down? Imagine buying gold using a 100% loan and repaying the money with some reasonable interest and still having something left over. Using the example above with a loan having interest of 8% per year you would still keep about $2,500. That’s a huge return considering there was no cash investment. Your risk of course is in repaying the loan if the investment drops in value. However, you have invested nothing of your own money.

Imagine now that you can actively “work” the investment to increase the yield. How much more could you earn?

This example illustrates the often overlooked opportunity of purchasing a practice. There are little to no other opportunities where you could buy something using 100% borrowed funds, pay it off from the profit of that investment and have the control to increase the profit.

For example, based on the assumption below a buyer could increase their investment by 50% over 5 years without using any of their own money. Further, they would earn about $70,000 in the first year after debt payments. With an assumed 10% growth rate per year they would earn $130,000 after debt payments by the 5th year. Plus they will have an asset worth $120,000 more. Allowing for the balance of the loan remaining the net equity would equal more than $200,000. This means that at the end of the fifth year if the practice was sold for the same multiple value the buyer would yield $200,326 after paying the remaining loan balance. That’s in addition to the annual salary. Of course after the debt is paid off in 10 years their annual income would increase to about $160,000.

Assumptions

Annual growth - 110.00%

Purchase price - $200,000

8% Loan over 10 yrs - $200,000

In example two below, if the buyer was able to achieve a 15% growth rate their earnings would increase to $170,000 after 5 years with a 100% return on the initial purchase price. (i.e. the practice is worth)

Assumptions
Annual growth - 115.00%
Purchase price - $200,000
8% Loan over 10 yrs - $200,000

A smaller office with less profit initially, still offers excellent equity and income after the 3rd year. Over 5 years with a 15% growth rate per year, a buyer could resell the office and earn $227,000 after paying off the remaining debt. The buyer still receives a salary during this period. Admittedly, the salary in years one and two are lower than average, but over the long term the buyer would have earned $550,000 plus the equity in the practice. This is completely accomplished without any cash investment whatsoever.

Assumptions
Annual growth - 115.00%
Purchase price - $187,500
8% Loan over 10 yrs - $187,500

In all cases you have the control to increase this yield by improving efforts your business skills. Owning a practice can be challenging at times, however, there is no other opportunity that allows one to leverage your money and have the investment itself payoff the debt. Even in today’s market, lenders still provide up to 100% financing.

Successful Strategies for Buying and Selling your Practice

2010-07-08T16:13:00.000-07:00

Whether you are searching for a house, car or practice the key to finding and buying your dream is knowing what you want –and what you don’t want.

Finding your dream practice is made of 3 primary subjective and objective criteria. They include: The style of practice, the region or area, and the immediate profit generated.

Determining the “gotta haves” and “don’t wants” in these specific areas will improve your chances and reduce wasted searches.

First, decide where you want to live. Keep this as broad as possible to improve your selection. A smaller geographic area will substantially lengthen your search time.

Second, figure out the style of how you want to practice. Is your focus more medical or high end retail eyewear? Is there a specialty you like? Each has their pros and cons. Retail settings will have higher rents, require Sunday and evening hour, street signage or visibility and much more walk by traffic. Medical offices will have lower rents, little or no signage and much less walk by traffic. Expensive frame lines needed for retail settings require minimum stocking levels and more cash outlay. Also determine your socioeconomic make up desired for your patients. Often lower economic patients can be more rewarding as a doctor.

Third, figure out how much money you need to earn immediately (your personal budget). Does you spouse work? Do you have savings or family support. If you must earn an immediate income of $80,000 and have no other source of secondary income or help from family --- then do not look at small grossing practices with profits of less than $80,000. This is a waste of time for you and the seller.

Write these criteria down and only search for practices that fit. You can always amend your goals in the future – but if you change, then be diligent and write it down.

To review:
Determine the style of how you want to practice: Retail, high end eyewear sales, vision therapy, low vision, general medical eye health, contact lens specialties.

Do your personal budget: What is the minimum income you need to have immediately and for up to 2 years? After any secondary income from a spouse, family or second job. A general rule of thumb for adjusted profit is 1/3 of the gross. However, practices grossing under $300,000 will have a lower profit margin. If you need to make a minimum of $100,000 income and cannot wait 2 years or longer to build ---then only look at practices grossing $400,000 and higher. If you do decide on a smaller grossing office, then be realistic about how long it will take to grow the profits. Also secure a second part time job until the practice can sustain itself. Can you afford to earn less money and for how long? This will determine the smallest practices you should consider.

Where (city, state) do I want to practice? Cities and more popular areas will have a higher demand and often bigger price tags on the practices. Rural offices will often have higher net profits, opportunities to purchase the real estate and are often more value priced. Urban or retail settings have higher rents, more competitors and bigger populations. (patient opportunities)

Every practice has its pros and cons. There is no perfect practice. Your dream practice will become a reality much faster if you follow your written guidelines. The checklists below will help understand your budget, practice style preferences and narrow your focus on your search.

Current Monthly Income
Gross Salary/Owner Draw ...........................................................................____________________
Spousal Salary ...............................................................................................____________________
Gross Rental Income ...................................................................................____________________
Interest Income/Dividend Income...............................................................____________________
Other Income (__________________________________) ...............____________________
Other Income (__________________________________) ...............____________________

                                                      A. Total Monthly Income .......................____________________
Current Monthly Expenses
Residence Mortgage or Rent ........................................................................____________________
Mortgage Payment (rental) .............................................................................____________________
Rental Expenses .............................................................................................____________________
Auto Loan/Lease Payments ..........................................................................____________________
Installment Loan Payments ..........................................................................____________________
Credit Card/Line Payments ..........................................................................____________________
Utilities/Phone .................................................................................................____________________
Insurance (personal/household) .................................................................____________________
Food ..................................................................................................................____________________
Clothing ............................................................................................................____________________
Property Taxes (historical rate) .....................................................................____________________
Alimony/Child Support ....................................................................................____________________
Medical .............................................................................................................____________________
Childcare .........................................................................................................____________________
Other Expense (____________________________) ...........................____________________
Other Expense (____________________________) ...........................____________________

                                           B. Total Monthly Expenses                              ____________________
                                           C. Net Discretionary Monthly Income            ____________________
                                           (A - B = C)

                                           D. Net Discretionary Annual Income              ____________________
                                           (C x 12)

Choose your Style of Practice:

                                                                         Want                                  Don’t want

Retail setting (mall)
Medical professional bldg
Sunday hours
Evening hours
General optometry services
Vision therapy specialty
Low vision specialty
Contact lens specialty
High end eyewear
Buy a building
Dispensary
Professional services only

Choose your Geography:
                                                                        Want                                   Don’t want

Rural (small town)
Suburban
Urban (city)

Getting a practice purchase loan. What you need to know to get approved

2010-05-04T20:03:00.000-07:00

Specialty lenders have been far less impacted compared to the drastic changes in the mortgage industry. However, there has been more scrutiny in reviewing loans and the backup paperwork. Some lenders have revised their guidelines based on the performance of other business loans unrelated to optometry. While some of this may be knee jerk reactions, Buyers and sellers can take certain actions to increase their chance of getting a loan.

I recently attended a conference with a lender who provides loans for all medical practices including optometrists. The performance of their portfolio in all divisions often dictates what type of risk they will take. This particular lender prefers smaller loans because it spreads the risk out over more people. (i.e. They might prefer three $350,000 loans than one million dollar loan).

Another lender may prefer larger loans of one million or more because every loan requires the same amount of paperwork. Larger loans will earn them more money.

Essentially each lender has their preferred loan criteria. A decline or approval may not have anything to do with the buyer’s credit or the value of the seller’s practice. With that in mind here are several tips to increase your chance of getting the best loan.

1. Ask the lender what the average size loan they have in their portfolio. Also ask the minimum and maximum loan size.

2. Determine if a down payment is needed. If yes, can it be in the form of a seller’s carry back or do they require a minimum down payment from the buyer.

3. A declined loan doesn’t mean you have bad credit or the seller’s practice is “bad”. It simply means that it doesn’t meet the lenders credit rules. Another lender might have different rules.

4. Rate: Most lenders rates vary within about 1%. For smaller loans this has little impact on the payment. We suggest you focus on customer service (i.e. turnaround time), prepayment penalties payment terms length, etc) For example; a one percent difference on a $300,000 loan might be about $150 month comparing 7% - 8% and 8% - 9%. We are not suggesting you pay more – but that you focus on the “Big Picture”

5. Ask about the minimum FICO score needed.

6. Go to www.freecreditscore.com and review your credit profile.

7. Pay all you loan and credit card payments on time, especially student loans.

8. Get a 10 year term life insurance policy now before you identify a practice to buy. Most lenders will require life and/or disability insurance. This can take up to 2 months and might delay closing. To give yourself an edge over other buyers, get at least a 10 year term life policy for $500,000 - $1,000,000.

9. Prepare a cover letter describing your experience and responsibilities in previous jobs. Lenders are looking for confidence in a buyer. Buyer’s should not be overconfident, but should exhibit some know how in running a practice. Your cover letter should also include steps you’ll take to grow the profits and revenues.

10. If the practice has a smaller gross be prepared to work a second part time job or show that your spouse has a second income. Lenders are focused on cash flow and the ability to pay your personal debts and repay their loan. If the practice doesn’t have enough profit, you’ll need to provide proof of secondary income.

11. Seller’s revenue: Get 3 years of monthly gross cash collections from the seller. Many practices in 2009 had revenues that were down 10% or more. The current value may be different today than last year. However, lenders need to determine that the revenue is not spiraling down to zero. Three years of monthly gross collections (cash) will help you and your lender see seasonal trends and adjustments.

12. Reduced gross vs. profit: While the gross may have been down from the prior year, determine the current profit. Has the profit remained the same? If so what expenses were trimmed? Many owners have cut the “fat” from their offices.

Getting a loan for a practice takes more time than simply buying a new car. The key to insuring a good experience is in providing the lender with a complete package upfront and in getting any requested items immediately. Here a few items steps you’ll encounter in applying for the loan and in moving through the approval and funding process.
1) Sign a credit application for the lender

2) They check your personal credit.

3) They issue a proposal for the estimated terms (not an approval)

4) You sign the proposal and provide a small deposit to get to the final approval

5) Most lenders will schedule a phone interview with you. They want to make sure you understand and have the confidence and experience to be an owner.

6) Make sure the deposit is refundable if you are not approved with the terms from the proposal

7) Submit a complete package including your info and the seller’s information and signed letter of intent of purchase agreement

8) Final approval or decline usually can take up to 3 weeks. Delays are caused by incomplete packages.

9) Ask about the funding process, requirements and the timeline.

10) Your lender will check if the seller has any outstanding loans or leases. They’ll need to be paid off at closing. Getting payoffs could delay the closing.

11) Outstanding tax liens or payroll taxes by the seller might kill the transaction.

12) A decline: Ask why. A decline is not because the practice is “bad”, but that it does not fit their credit rules. Another lender might have different credit rules.

13) The approval: Read the conditions of the final approval. There are often requirements needed such as a minimum premises lease term, insurance, etc

14) Remember some requirements are rolling deadlines. For example: seller financials (P&L) not more than 90 days old are required. That means if the closing is delayed after the final approval –you’ll need to get updated financials from the seller.

Capital Gains tax hike 69% --

2010-02-16T16:31:00.000-08:00

Capital Gains tax hike 69% --

Selling your practice or commercial real estate after January 1, 2011 could result in a 69% increase in the amount of tax you pay. Federal Capital gains tax is set to go up from 15% - 20% excluding any state increases. Plus there is a proposed surtax for incomes over $500,000. While you probably earn less than $500,000 in W-2 wages -- dividends and capital gains count as income. So if the sale price your office, real estate and w-2 income add up to more than $500,000, then look out. Uncle Sam is going to take a much bigger bite from your proceeds. That could mean another $50,000 in taxes paid to the IRS.

You would have to sell you office for $75,000 or more to pay for that extra $50,000 needed in taxes. Imagine how much you would have to grow your office to justify that increase in price? Given today’s economy and the forecast for the next several years, it is not likely that one would increase the office revenue 15%- 20%.

Most offices take up to 12 months to complete a sale. Therefore, now may be a good time to make your new year’s resolution and consider a practice sale.

To maximize value, several of our sellers have opted to sell their office today and enter in a 2-4 year employment agreement with the buyer. This allows the seller to cash-out their equity and invest in more liquid investments that will provide better returns over the short term. In addition, a part time employment allows them to continue to earn an income without the liability of running a business. This also helps the buyer in transitioning the office. The only limits to this structure are the total profits from the practice. Less profitable offices have will require the seller to work fewer hours or work on a percentage of production.

For buyers, timing is also excellent. Interest rates on loans are at their lowest level in years and buyers are finding it more difficult to get the job of their choice. Both create a perfect opportunity for buyers and sellers.

Timing the sale of any business or asset is important in recognizing the highest value for that investment. Numerous factors should be considered in the sale of any business. But for those considering selling within the next 4 years, strong consideration should be taken in considering a sale in 2010 rather than waiting.

When the Going Gets Tough; The Tough Get Marketing

2009-11-12T09:52:00.000-08:00

When the Going Gets Tough; The Tough Get Marketing

When it comes to fears of reduced revenues, marketing and advertising expenses are the first to get dropped. So when revenue drops take the contrarian approach and put more effort into marketing. In the past it may have taken 3 units of effort to create a sale or find a new patient. In today’s economy it might take more like 7 units of effort. The keys are finding what works and how to develop those techniques. Here are a few boulder- size rocks that will give you a jump start to getting back your revenues.

1) Pipelining: Every day or week devote a specific amount of time to long term client building.
a) Examples:
i) Send 10-20 letters of introduction per week to referral sources.
ii) Send 10-20 letters per week to area HR managers, small business owners
iii) Drop off your card to 10 people you meet each week. (hint: Create a Glossy
business card that offers an introductory gift or offer. You can get color business
size cards )
iv) Now have your staff do the same every week

2) Network and Join a group: Either yourself or one of your more outgoing staff members
should join a group. Business networking groups are excellent. Become active
a) Chamber of commerce
b) Local business owners group
c) Any local social group you like

3) Host a monthly event at your office. Do this on a regular basis
a) Find a local artist to display their work and do a wine and cheese reception
b) Host a scrapbooking club meeting, wine tasting, book reading. Really anything that is
of interest.

4) Send out a monthly email or newsletter that provides useful info to patients, plus some new services or products in your office-even a special offer. Send 500 - 1,000 letters per month. Each letter with postage should run about 50 cents a piece.

a) Hint: Year-end flex plans are running out. Include a note in your recall cards informing patients know they can use their flex accounts for eyewear needs before they lose their spending accounts .

5) Cross market with other local retail shops including hair salons, spas, restaurants, etc. Offer to give them a “VIP” special discount card they can present to their clients.

6) Cable or radio advertising. Costs have come down dramatically and both of these mediums offer a great opportunity to reach your target audience “patients”. Combine this with a cross marketing promotion with a nearby retailer and share the costs. While this form of advertising may seem a bit pricey – Check it out first and see. Ask for terms on payments. Just remember to have a clean ad that includes specific features and benefits about you and even a promotionally offer. Or just promote a specific product or service. Also check with your suppliers. They may help in contributing with the costs of advertising.

Have you had a business health checkup lately?

2009-11-12T09:44:00.000-08:00

Have you had a business health checkup lately?

Best Practices in Financial Planning

Whether you are considering selling your office now or not – today is a great day for a practice health checkup. Financial planning and wealth building strategies start with a good foundation of regular up to date business financial record keeping.

Imagine driving somewhere without a road map or an address for your destination. Mapquest software driving directions require a starting address and ending address. Additional options let you select the fastest route, shortest distance or avoidance of highways. Now picture your business in the same way (i.e. financials, revenue and profit). How did you start? Where are you now? What products or services do you want to keep, add or avoid? And of course when do you want to finish?

Do you have P&L’s prepared every month? Do you know what P&L’s are? Do you have easy access to all revenue and expenses? Can you compare your performance with prior years? In today’s economy it is more important than ever to maintain good, up to date financial records and statistics on your office. This will improve your bottom line profits, reduce stress, make it easier to get loans and ultimately help sell your office faster when you are ready. (Every owner should treat their business as if they are always prepared and ready to sell.)

Typically, things like financials are put to the bottom of the priority list – only to be raised at the last minute when taxes are finally due. Imagine having monthly reports that allow you compare years month by month. If you had comparative reports you might find out that the month you thought was so bad was actually better than the same month last year.

The perception of patient loads might be down. If you had financial reports you might discover fewer patients with the same total revenue. Did you ever wonder which months are your best? Which months are the slowest? Only through up to date reports can you determine your financial performance and how to fix any problems before they get enormous.

Regardless of whether you are selling your office today, these are important habits to keep especially in today’s economic environment. For example, you may need a loan for working capital or new equipment. Banks today will require a current profit and loss statement that is not more than 2 months old. If your projected revenue for the year is down based on the current interim profit and loss statement it could be more difficult to get a loan. However, if your prior year’s same period figures show a similar trend (i.e. your better months may be seasonal)--the bank would certainly reconsider your loan.

Many owners rely on themselves to prepare the financials. A better solution is to hire a part time bookkeeper to maintain record. Would you pay a doctor’s wage to someone else to do accounting? How much is your time worth? If you have so much time why not see more patients? As a doctor you earn much more per hour then a bookkeeper. The cost is well worth it and delegating the job allows you to focus on the big picture.

Healthy habits will result in better business performance, improved profit and ultimately a higher value when you sell your office.

There are three keys in determining your financial plan:

(1) First determine where you were;

(2) then where you are today;

(3) finally determine where you want to go…

Before you can formalize your financial plans step 1 must be done and then step 2 must be maintained EVERY MONTH.

The following basic items should be recorded and maintained for at least 3 years:

3 years business tax returns
3 years profit and loss statements with detail breakdown of major expenses
Year end W-2 statements including separation of any owner wages (3 years)
Bank statements (3 years)
Monthly revenue and expenses for every month (3 years) (separately)
Patient numbers by month and by year. (3 years) (separate new and existing patients)
Current year-to-date profit and loss statement
P&L for the last month
Monthly physical inventory cost
Monthly patient count (new and existing)
Accounts payable list
Accounts Receivable list
Monthly wages by staff
Monthly revenue grouped by the specific service, billing code or product.

These items are part of the step 1 process. Step 2 involves maintaining this on a current monthly basis (items #7 -14)
A few simple steps to remember.

Get a part time bookkeeper.
Use Quickbooks or another software program to record your financials
Finish the profit and loss statements for the prior month by the 15th of each month.
Separate financial information for each office
Keep each month in a binder labeled by year.
Keep bank statements accessible and organized.
Keep vendor invoices organized by month and easily accessible
Keep employee payroll information organized and easily accessible
Keep revenue and expense information current for each day and month. (Daily reports)
Use a practice management software system to record every day’s revenue activity.

Commit yourself to these healthy habits every month. With the information at hand from steps 1 and two it is easy to move to step 3 and compile a financial plan.

Moving forward to step 3 includes the following:

How long do I want to practice? First determine your timeline (exit strategy or when do you want to retire or sell the practice)
What do I want short term and long term? Determine the long and short term specific objectives (from a profit standpoint)
What are some ideas to get what I want. Write down 10 ideas to reach these goals.
What’s my action list?Take each ideas and write down specific step by step actions to take to implement each one.
How much should I set aside from profit for business improvement? Allocate a percentage of profit for re-investment in the business and capital improvements.
GPS..Where am I?
Measure your progress on a monthly basis (See steps 1 and 2)
Am I off course?
Review the measurements monthly and determine if changes need to take place.

The best method for implementing and following through with these steps is to include the entire staff. Delegate as much as possible. Each person should understand their duties and measurements of performance. While it may seem like an enormous amount of work – once the systems are in place and the information is automatic (at your fingertips) running and growing your practice will seem like a piece of cake. Increased profits and equity will of course be your dessert.

What should you do when your practice is too small to sell?

2009-09-21T08:59:00.000-07:00

Well established offices that gross less than $200,000 per year often take longer to sell (if at all) for several reasons. Unless the office is a younger startup or has newer equipment and furnishings, buyers are often reluctant or simply cannot afford to purchase a small practice. This is because most buyers rely on 100% financing to purchase a practice while paying large students loans and of course earn an income for their personal expenses. As equipment technology advances the value of smaller grossing offices will continue to push downward or make them unsellable. Recently a doctor called us for advice. We thought it would be helpful to illustrate a case study and make suggestions on how to “create value” for a successful sale for these type of offices.

Example: A doctor located in a medium to large city was unable to sell his office. The doctor had owned the office for over 30 years. It was located in a strip center. The office revenue for the last 4 years averaged about $120,000 per year. Recently, some new equipment was purchased and the current debt and loan obligations were about $30,000. The owner advertised the office for $85,000. After about a year without interest he became concerned. He contacted two of the largest offices in the area – no interest.

At $120,000 the practice barely paid for the expenses and loan obligations. The owner (although working in the office part-time was making no money. He also worked elsewhere part time to earn a decent wage. However, he was just uninspired to put the energy in to re-build the practice revenue. He was faced with closing the office and defaulting on his loans.

This is a common problem for many small business owners. In these circumstances, one has to “think outside the box” to find a strategic buyer or sale situation. Here’s a few suggestions we made to this doctor that might help others in similar situations.

1. Look for another doctor nearby who is near retirement age and who might have a smaller grossing office as well. Suggest a merger of the two offices. This will reduce overhead immediately, help increase the short term profit and create a more sellable practice for a third party buyer. (i.e. two office grossing $200K combine to one office grossing $400K). We highly recommend a written agreement (merger/ partnership agreement) that outlines the relationship including how a sale to a third party is handled.
Benefit: The merged offices will be more attractive to a buyer later on. Plus you’ll both earn more profit in the short term.

2. Give away your phone and records for free. Transfer your phone, patient records and equipment for free. In exchange secure some compensation for any patients you bring over. (i.e. your compensation might be your production or some percentage.) Once your debt is paid off and you’re ready to retire give them the records.
Benefit: Your earn more while you’re working by reducing rent and expenses. The buyer has nothing to lose since they would only gain by the increase revenue and profit. If you profit they will also.

3. Same scenario as #2 but without working. Agree to sell the items for a percentage of the revenue they bring in for a period of time. (Ex: The larger the percentage the shorter the time.
Benefit: The buyer can’t lose. If no patients come then they pay nothing. Of course there must be some trust and verification in reporting the monthly revenue.

4. Hire a new associate and pay them a good daily rate. Let them grow the practice revenue by adding medical services, hours, etc. Give them an option to buy the office at a discount in three years. If they don’t buy it, sell the larger office to someone else.
Benefit: While it may cost you in the short term the medium and long term benefit should be increased gross revenue, higher profits, making some money without working and creating a more sellable practice three years down the road.

5. Why would a nearby office want to merge you into their office? There are two ways of growing revenue for any business—organically or through acquisition. In today’s economic environment it is difficult to simply grow revenue through goodwill and marketing. Acquisition is the best way to grow a business in today’s market. Whether it is a young, doctor just starting a practice or a well-established office –neither office would be able to achieve an increase of $120,000 (i.e. $10,000 per month) immediately… especially today. Even better they only pay a percentage of the actual revenue that is generated.

The key to each of these scenarios is a profitable and fair outcome for both sides. A buyer will not be interested if they have no upside. By structuring a no risk scenario for the buyer combined with profit for both sides – creates a successful strategy for selling the unsellable.

2009 Revenues, Tips

2009-08-27T16:50:00.001-07:00

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

2009-08-27T16:46:00.001-07:00

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

2009-08-27T15:50:00.001-07:00

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

2009-08-27T15:47:00.000-07:00

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.

SBA Waives loan fees

2009-06-22T13:06:00.000-07:00

By Dr. Alissa Wald and Scott Daniels
If you are looking to buy a practice there is no better time than now. With interest rates at their lowest and the recent waiver of SBA loan fees it might be time to consider that practice you’ve always wanted. On February 17th, President Obama signed into law the American Recovery and Reinvestment Act of 2009 which reduces or eliminates certain fees on 7(a) and 504 loans. For a limited time you’ll save up to 2% of your loan amount in waived fees. While these fees are generally added to the loan amount you’ll still save a lot. On a $500,000 practice loan you’ll save up to $10,000 or more. There are two types of loans. 7(a) loans are the most common and generally are variable rates. Loans can be used for real estate purchases, construction, practice purchases, refinancing existing debt, working capital expansion or new equipment. The government has also increased their guaranty of these loans to from 75% to 90%. 504 Loans are generally used for real estate and construction loans and include a first and second mortgage. The first mortgage is 50% and the second provided by the government is 40%. Ten percent either comes from a seller note or buyer down payment.
504 loans are advantageous because they offer fixed rates terms of 25 years and 20 years on each mortgage when you buy real estate. With rates running around 6% it could be a great time to buy real estate. Only certain lenders handle 504 loans and they tend to be a little more complicated because you are dealing with two banks. (The primary lender and the CDC bank, which stands for Community development center which provide the government guaranteed loan for the 40% second mortgage.
7(a) loans are more common and typically are variable with terms of 10 years for practice purchases and 25 years for real estate purchases. Most lenders will require 10% down either in the form of a seller’s note or buyer’s down payment. Some lenders such as Vision One Credit Union offer special SBA blended programs that require no down payment.
Of course conventional loans are still readily available with terms from 10 to 15 years for the practice purchase and 25 years for real estate. Conventional real estate loans often require as much as 25% down from the buyer making them out of reach for many people. Whether you decide on an SBA or conventional loan you should plan ahead and leave plenty of time to complete the banks requirements list. Lists often include such things as term life insurance, current tax returns for yourself and the seller. Since these items (especially life insurance) take time to complete –It is imperative that you plan ahead. Many buyers get life insurance prior to finding an office. So in your quest to buy your dream office it’s nice to know that rates are low and lenders are still readily offering loans (at least to doctors).

Practice Concepts works with several lendrs to assist buyer in obtaining the the best financing possible. We offer both conventional and SBA typle loans. Contact us if yo uhave questions about getting a loan to buy your practice.

What We Want Most: Buyers, Employees and Owners

2009-06-18T15:24:00.000-07:00

Our great grandparents worked 15 hour days often 6 days a week. They worked multiple jobs, night shifts – whatever was needed to care for their family. Many of the sellers we work with started their practice with nothing and built it from sweat and tears. One seller worked the third shift at the hospital in order to feed his family until the practice made enough money.

In today’s climate many are reminded of yesterday with long gas lines, double digit inflation and unemployment that was sky high. The current times echo the sentiments of what buyers, owners and employees want, but today there is a little twist. Today’s generation seems to desire a balance of play and work, whereas many of the older generation just worked. The key to balancing both sides is to ensure that we excel at work or at play.

Earning a top salary means the business must be profitable. As an owner if the expenses increase and profits decrease, then something must be cut. If an employee is not performing or contributing to the “profits” at some point they will be laid-off. Buyers, employees even owners want the same thing… They all desire the ability to earn a great wage without working 15 hours a day. In essence everyone is an entrepreneur and practice owner. Some just have more staff then others. Imagine working for yourself and leaving early or refusing to work Saturday. Imagine your rent or mortgage increasing and your salary decreasing.

Both employees and owners face the same feelings and have the same concerns during these times. Either way it is hard work. If an employee does poorly they get terminated. If an owner does poorly they terminate other people.

If you are looking for a job or are currently employed the best way to shine and stand out is to take a risk. Suggest to your employer a reduction in your salary in exchange for a share in the profit or the equity. Or suggest a new service and negotiate a production bonus on revenues from that service. Or ask for an extra week off if you hit a certain revenue goal. Regardless of your position as owner or employee there are steps we can all take to insure success through trying times and concerns of reduced profits.

Here’s a few helpful tips to stay proactive. (1) Turn off the news and stop reading newspapers. They lag about 6 months behind the “real” situation. (2) Think outside the box. Try new services, add medical procedures, learn more about billing codes, open later, try more marketing….send letters, but do something. (3) Cut expenses, but do not skimp on customer service or marketing. (4) Increase and improve customer service: offer bottled water, chocolate, mints or something to make people feel better. It does not have to cost a lot, but should have some meaning and come from the heart. (6) Find a way to stand out from the pack. As an employee discover what your employer wants most. For new grads seeking employment tell your employer you’ll work for free or at least a commission from your production. (7) Become an expert at billing and coding and learn how to maximize your services (8) Again, turn off the news and stop reading newspapers. Remember people are still buying things and the majority of the population is still employed.

While we recognize that many people have lost their jobs or their homes, it is important to realize that eventually the recession will be over. People will find jobs again, discover new services and come out stronger in the end.

Practice Concepts provides practice brokerage services and appraisals for sellers and buyers in the eyecare profession. Practice Concepts’ management team includes Dr. Alissa Wald and Mr. Scott Daniels. Dr. Wald is a graduate of the University of Houston. She has owned and operated a successful optometric practice for 18 years. Her practice includes three associate doctors and six staff personnel. Dr. Wald is also the President of Practice Concepts and provides nationwide practice sales and consulting services. Scott Daniel, her husband is a licensed broker with Practice Concepts and provides practice sales services for eye care professionals and other healthcare entrepreneurs. Mr. Daniels has over 20 years of experience in business management, financing, marketing, and negotiations. Contact them at (877) 778-2020 or www.PracticeConcepts.com. They can also be reached by email at scottd@PracticeConcepts.com.