When buying a practice, trust is not enough

Article Outline

 

The most important business decision an optometrist is likely to ever make is when buying a practice.

The purchase of a house with myriad problems—from faulty plumbing, to a roof that leaks, to diseased trees in the front yard—can quickly turn one's life into a nightmare. Yet, as bad as that experience may be, and as big a money pit as it may create, chances are that the problems (unless they involve a train passing through at 3 am or psychotic neighbors) can be fixed relatively quickly and painlessly.

That is not the case when purchasing the wrong optometric practice. Buyer's regret is not a short-lived situation. Being saddled with a troubled practice can affect the buyer's livelihood forever.

So, how does a prospective buyer manage to sidestep the pitfalls of buying the wrong practice? A good place to start is by making sure that all the facts are being shared. Today, with accounting software, it is not difficult for the owner of any business to keep multiple sets of books. This means that the records presented to a prospective buyer may not in fact reflect those of the actual practice.

It is not difficult, for example, for sellers to inflate their net by decreasing their cost-of-goods sold (COGS). As with anything else in life, if the numbers seem too good to be true, they probably are. Any practice that shows a net of 50% and COGS of 10% should raise some eyebrows (because data show that COGS for most practices are in the 20% to 40% range).

Labor is another way for an owner to make a sick practice look attractive. Sellers may decrease labor costs, and in so doing inflate their profitability—even going so far as to give the excuse, “Well, I paid some people off the books.” This, of course, says something about the seller's integrity. In most parts of the country, the “rule of thumb” is that labor amounts to about 25% to 30% of gross sales. This may be higher, however, in a major metropolis where the standard of living is greater and lower in a more rural setting.

Another common ploy is altering or hiding equipment leases or additional loans. They may never appear on a profit and loss (P&L) statement if paid from another account.

Most people, of course, are honorable. Yet, most buyers would prefer to have some assurance that the practice they believe they are buying is exactly what they are getting. The best protection is to have a qualified, experienced appraiser—someone who is impartial and doesn't represent the seller.

What else in the negotiation process should immediately raise a red flag? Here are some other things to consider:


1.The seller resists timely and full disclosure of information. A red flag is flapping in the breeze whenever the seller refuses to come up with the following goods: 3 to 5 years of tax returns, banking records, P&L statements and an accounts receivables/payable history, legal documents including office and equipment lease agreements, various office documents like appointment books, and a good reason for liens or lawsuits that the buyer's research may have uncovered.


2.The practice appears to be trending down. Net income needs to be viewed as the key indicator, not gross sales. If net income has been declining, there needs to be a good reason for it. The answer that “the practitioner is spending less time on the practice” needs to be looked at closely—is it because the doctor is winding down for personal reasons or because patients are no longer there to necessitate working more hours?


3.The seller is basing the price of the practice on potential, rather than on the numbers. Suppose a practitioner paints a rosy picture of the practice, stressing that a “full-time” practitioner would make the current part time practice far more profitable. Again, the question is what came first: the decision to make it a part-time practice, which led to a reduced income, or a lack of patients and income, which led to a reduction in office hours? No one should ever pay for a business's “potential.”


4.The practice is a mediocre one that the buyer will need to upgrade. If this is the case, the buyer has to take a long and hard look at whether buying a practice is a better way to go than starting a practice. For example, if the buyer plans on a significant technology upgrade, the use of advanced equipment may not be perceived in the right way by staff or patients who have become accustomed to the old equipment. Altering a practice can be as difficult as transforming a budget hotel into a 5-star one. It is not going to happen overnight, and it just may not be worth the effort.



Buying a practice is stressful. Buying the wrong practice, however, can cause stress and unhappiness for years to come.