It’s All About Your Net
“It’s not what you make, it’s what you keep.”
Too many OD’s, and all physicians, get caught up in how much they gross every year. The focus on top line performance and pay scant attention to the amount they take home.
Typical Optometry Practice Net Profit
Net profit is the amount of money available to an owner after he pays all the operating expenses of his business. In optometry, according to the Management & Business Academy (MBA) – an organization that maintains a database of key financial data gathered from over 1,500 independent optometric practices – the median practice net across the board is about 31%.
Net Profit Adds Value
As a practice appraiser, I see a lot of practices, with a wide range of net profits. While each practice is unique in its own way regarding size, location, services, and management style, there is absolutely one universal truth: the higher the net, the higher the value. This simple truth often is realized too late by the seller. There are many “mid-sized” practices (grossing in the $600K – $800K range), that provide a nice living income for the owner – but nothing else. It’s what is “left over” that adds value.
Let’s look at an example of two retiring OD’s who want to sell their practice. Dr. Green and Dr. Red live in the same community, with similar equipment and furnishings. They each have gross collected receipts of $600,000. But Dr. Green enjoys a higher net than Dr. Red (33% vs. 25%). Let’s look at how much money would be available to a new buyer.
How a Buyer Views Your Practice Value
It is important to remember what an owner is actually buying. The price he pays must allow him to pay himself a salary, and he must have money left over to pay the bank note. In our example we assume our doctors pay themselves $130,000 (average compensation per AOA 2012 Salary Survey), and have an effective tax rate of 25% of the net. As you can see, while Dr. Green’s practice has $20,000 annually available for loan financing, Dr. Red’s practice would have negative cash flow from the beginning.
Unless there are extenuating circumstances, it is pretty clear that Dr. Green’s practice should appraise for a higher value than Dr. Red’s. There a couple of lessons here. For Dr. Red as a seller, perhaps he should work on improving his net income before placing his practice on the market. For a buyer, depending on the reason why the practice net is so low, perhaps there is an opportunity here.
Real World Example
As an example, let’s say Dr. Red had a cost of goods sold (COGS) expense of 38%. The typical range for COGS for MBA practices is 24-34%. The buyer was confident he could lower the COGS with smart buying habits and better practice management. This information allows him to make an informed decision on purchasing the practice, and negotiate a good price.
Maximize Your Net for the Highest Value
The best advice, then, I can give someone to maximize their practice value, is to have the highest net possible.