by John Scibal, OD
Many of you are asking this question. More than likely you’ve spent the last 20 years or more completely wrapped up in your business. Your life is inextricably tied to the practice; it has consumed most of your time and energy whether you are at work or at home.
At a certain point, it becomes necessary to channel your thoughts into something entirely new – how to get out! Unfortunately, many practitioners put this off, and before they know it they are forced to close the business due to unexpected health or family issues.
Most doctors view their practice as a vehicle to provide income. What they forget is that it is most likely their biggest financial asset. As such, it plays an important role in retirement planning. If you’re lucky, you have invested wisely, and built a retirement nest egg that will provide enough income to live comfortably. But if you’re like most, you are counting on the proceeds from the sale of your practice to provide the necessary income to fill the “gap”.
How much can you expect from the sale of your practice? Will it fill “the gap”? Many ODs want a “ballpark” figure for their calculations. If you are years away from selling your practice, rules of thumb such as ‘one year’s gross’, ‘net plus inventory’ or ‘three times net’ may be reasonable to use. Remember, though, that rules of thumb are based on averages. All practices are different, and as such, they should be evaluated differently. There is no such thing as an “average” practice.
As you get closer to retirement, it is recommended that you get a practice appraisal. A small business is an “illiquid” or “unmarketable” asset. Unlike “marketable” assets such as shares of stock, it takes considerable time to turn your business into cash. A business appraisal provides an unbiased value of the practice, and will identify weaknesses. Getting one early in your retirement journey will give you time to address those areas and help you in your exit strategy planning.
A business appraiser will take several approaches to arrive at a fair market value. He will look at what other comparable optometry practices sold for, as well as the “hard assets” of the business, primarily the inventory and equipment.
Most importantly, though, he will look at the profitability of the business and the likelihood that those profits will continue in the future. This “income” approach is based on the fundamental principle that the value of a business is equal to the present value of the future benefits of ownership. Important considerations are demographics, revenue and expense trends, financial ratios, efficiency ratios, practice net and cash flow.
In my appraisal experience, values have ranged from a low of 16% to a high of 82% of the gross collected receipts of a practice, with the majority falling within a 40% to 70% range. Obviously, there were significant differences between the practices. Unquestionably though, high netting practices in desirable locations had higher values than less profitable practices in declining neighborhoods. The other absolute truth: the practice is worth what a buyer is willing to pay for it.
Photo: Copyright: madmaxer / 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.