7 Critical Questions When Buying a Practice
You went to optometry school to be your own boss. If you’re like most new OD’s, you’ve spent some time working for someone else – either a corporate setting or private practice. Now you’re ready for the next step, and you hear about a practice for sale. Is it the right one for you?
Buying-in versus a total buy-out is a source for another article, but for now we will assume the owner is retiring and selling you 100% of the practice.
Here are some critical questions to ask.
- Do I want to live there? The most important factor is location. There may be some great practices for sale, but if they are located in an area that you don’t want to live, who cares? If you’re dead set on practicing in a certain area, you have a choice of buying an existing practice or starting cold.
- Does it “feel right”. “Feeling right” is in the eyes of the beholder, and you are the beholder. Do you feel good about this practice? You cannot put a number on it, but does the culture of the office align with your values? Do patients/customers feel comfortable walking in the door? Would you want to be a patient there? Sure you can change things once you own it yourself, but it is much easier to start with a practice that you love immediately.
- How much is the practice worth? Probably less than the owner thinks, and more than you do! The only way to know for sure is to have an independent appraisal performed. A certified appraiser is required to provide an unbiased opinion of value, regardless of who pays for the report.
- How is the value determined? A proper business appraisal uses three approaches to determine value: asset, market, and income. Asset value looks at the hard assets of the business, such as equipment and furniture. The market approach compares actual sale prices of similar practices to the one you’re buying. The income approach looks at the cash flow of the practice. There must be enough profit available to pay the new owner a reasonable salary as well as pay the note payment on the practice. All three approaches are used to arrive at the fair market value.
- Should the old owner stay on? Oftentimes, the original owner desires to stay on as an employee to some degree. Unfortunately, in many cases they “want their cake and eat it too”. In other words, they want to receive the compensation they had as an owner. In reality, once they sell the practice they are hired hands, and should be expected to receive no more or no less than the going rate for optometrists in the area. In my opinion, the value of the owner staying on to “transition” the practice to the new owner is over-rated – three months is plenty of time.
- How should I finance it? Financing can be by the owner or a lending institution. But while your local bank will happily give you a loan for a car, or equipment (things that they can get back if you default), you will most likely need to go to firm specializing in professional practice business loans. With good cash flow and a qualified buyer with good credit, it is not as difficult to get financing as one would believe. Owner financing might be desirable if he or she offered better terms (i.e. a lower interest rate), or if a buyer does not qualify for a bank loan.
- Should I keep the same staff? In most cases, the staff is the biggest (intangible) asset the practice has to offer, and was responsible for its success. Ideally you should keep all staff members. There is always a transition period, though, when a new owner takes over. Some staff members don’t handle that well and insist on “doing it the way we’ve always done it”. Your practice is a team – your team. If employees cannot or will not except you as the new captain, it is your responsibility to replace them for the good of the practice.
I enjoy helping Optometrists work through these questions and others. Let me know when you are ready to talk about your business.