Why You Can’t Sell Your $500,000 Practice

Can You Sell Your Small Practice?

A lot of you OD boomers are ready to slow down. You’ve spent 30 years building up a nice practice and decide it’s time to sell. But if you’ve got a small practice, which I’m going to arbitrarily call $500K or less, you may be disappointed. It may be a great practice, but is it sellable?

To answer that question, you need to look at it from the buyer’s perspective. Does the purchase price offer him a good return on his investment? Or is he better off working somewhere as an employee, or opening cold?

Seller Discretionary Earnings?

Essentially, in the sale of a business, the buyer is purchasing the ability to make a profit. Profit is what is left over after all the operating expenses are paid. These operating expenses include cost of goods, staff salaries, rent, and all the overhead necessary to run a business. The profit belongs to the owner. For the seller of a solo optometry practice, this profit is called seller discretionary earnings (SDE).

Doing The Math!

Setting the price of the practice has everything to do with SDE. After the purchase of the practice, the buyer must use the SDE for two things: 1) pay himself, and 2) pay the bank note. Therein lies the problem – a $500K practice usually doesn’t provide enough profit to do both. For a $500K practice, assuming a net of 30%, the profit (SDE) is $150,000. According to the AOA, $150,000 is the median salary of an OD owner. It is the “replacement cost” for OD labor. So after this optometric labor is paid, what’s left to pay the bank? Zero.

On the other hand, a practice grossing $800K, with the same 30% net would yield SDE of $240,000. After subtracting the OD salary of $150,000, there remains $90,000 annually ($7,500 monthly), which can be used to pay the bank. Big difference! At today’s current interest rates, that’s enough to pay off a $500,000 loan in less than seven years.

What About Potential?

Very often the seller will try to justify setting a price too high by pointing out the potential for growth. As a broker, I often hear “yes I know we only did $XX, but if an energetic young OD came in and offered more medical services, surely the practice would grow”, or “this is a great location”. My answer to them is always the same: “If it is so great, why didn’t you do more?” The prudent buyer is not, and should not, pay for potential. All he has to go by is historical performance.

But It’s Got To Be Worth Something!

So is there any hope in selling the $500K practice? Yes, but it is a challenge. The trick is finding the right buyer and offering a price that is fair and realistic. In many cases, that price may be the value of the practice’s hard assets – equipment and inventory. For a buyer that wants to live in that particular community, it may be a perfect fit. The bottom line: the price is whatever someone is willing to pay. But speaking from experience, be realistic in setting a price.

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John Scibal
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