By John Scibal, OD, CBA
I am often hired by retiring OD’s to provide a value for their practice, or in some cases by a spouse whose husband passed away. Unfortunately, in many cases, they are smaller practices with stagnant or declining revenue, and poor cash flow.
Let’s say, for example, that a practice grosses $400,000 and has a net profit of 20%. That means after paying all the expenses there is $80,000 remaining ($400,000 X 20% = $80,000). This is known as “owner’s discretionary income”. While the owner may have become accustomed to this income, it is actually below fair market value compensation (approximately $140,000, according to the AOA). In other words, if the OD was being paid the going rate, this practice would have negative cash flow. Since there is essentially no goodwill to transfer, I typically value these practice based on the “hard assets” – how much money the equipment and inventory would make if sold on the open market.
So what are the options for the retiring OD in this situation? Basically it is to sell the assets of the practice the best you can. Equipment companies may buy your used equipment, but you are much better off if you can sell to a local colleague. Advertise in your state optometry newsletter and talk to your sales reps about potential buyers. Many OD’s have had success using eBay or optometry social media sites. Be realistic about setting a price – the longer the equipment sits there unsold, the less the value. Do the same for your frames and contact lens inventory – again you will probably get pennies on the dollar, but that is reality, and something is better than nothing.
But what about the charts. These are considered intangible assets: aren’t they worth something? And the answer of course is – yes. But the question is – how much? A review of the literature yields very little information.
In other professions – law and accounting, for example – it is fairly common for one company to buy a colleague’s records. Accounting firms routinely “absorb” competitors’ files for various reasons. One accountant told me his company bought the “low-end” records (clients whose tax returns cost below $500) from a firm that no longer wanted to handle those clients. His office would pay the seller a percentage of the collected receipts of those transferred accounts, with a range of 20% – 40%, depending on the circumstances. This appears to be a win-win situation – the more clients that transfer to the new firm, the more income is generated for both buyer and seller. And if zero percentage transfer, then the buyer owes nothing.
Would this work in optometry? Possibly, but I think it would be difficult for most OD’s to track these transactions accurately, and possibly lead to distrust by the seller that the buyer was being completely accurate and truthful.
Instead, optometric charts are usually sold for a flat rate. According to fellow consultants Jerry Hayes and John Rumpakis, the “going rate” in their experience seems to be in the $5.00 to $9.00 range per “active chart” (ie. those that have been to the office in the past 2-4 years). The price will vary based on 1) the likelihood of the patient transferring to your office, and 2) the amount of profit the buyer can expect from those transferred patients. The stronger the seller’s endorsement of the buyer though, the better for the buyer. This can take the form of letters, post cards, or emails, as well as announcements in the newspapers or social media outlets.
Let’s say Dr. A is retiring, and selling 4,000 active charts to Dr. B. They agree on a price of $7.00 per chart, or $28,000 total. If 1,000 patients (25%) transfer to the new office, and the new office averages $100 profit per patient, they enjoy an additional $72,000 profit ($100,000 in profit minus $28,000 spent on the charts). Seems like a good deal for both parties!
There is no “right way” to sell charts. Like most things, the value of charts is whatever a buyer is willing to pay. Rather than closing the doors with nothing, it makes sense to play with the numbers and make it work for both parties.
Photo: Copyright: inkaone / 123RF Stock Photo
Dr. John Scibal is the owner of Scibal Consulting, a company that is focused in both the Optometry Business Appraising and Optometry Management Consulting fields. Dr. Scibal is fully certified by the Institute of Business Appraisers (CBA). While working as a practicing optometrist for twenty-five years, Dr. Scibal developed one of the largest and most successful independent optometric practices in North Carolina. A veteran lecturer throughout the U.S., Dr. Scibal is also a prolific author who has written extensively on a wide-range of practice management topics.