As a business broker that has participated in well over 50 Optometry practice transitions in Minnesota, I have seen just about everything when it comes to buying or selling a practice. While every transition is unique in some way, each transition has some key similarities that can be planned for in advance. This article contains a recap of what I believe are the most important questions I have been asked by practice owners who want to sell their practice.
Q. When should I begin the selling process?
A. It is never too early to plan for the eventual sale. Even if you are quite a few years out from selling, you should know what your practice is worth and what steps you can take to make it more valuable and more attractive to a buyer. You should also work closely with your accountant or financial advisor to make sure you can achieve your post-ownership financial goals when you do eventually sell your practice.
Q. How long will take for my practice to sell?
A. Metro area practices tend to sell in 6 to 18 months. Out-state practices can take as long as 2 to 3 years.
Q. What are my options for selling?
A. Up until recently, a practice owner’s options were limited to either 1) an Associate O.D. at the practice buying in or purchasing the practice outright or 2) selling to another practice owner or O.D. Corporate/Private Equity buyers have entered Minnesota recently and now present a third option. Which option is right for the current owner depends on wide variety of considerations, including how soon they plan to retire soon after the sale or if they want to stay on practice for a few more years. I am always happy to speak to practices owners that want to discuss the plusses and minuses of each option.
Q. What is my practice worth?
A. This is easily the most asked question as well as the most commonly misunderstood item. Many practice owners have been told their practice will sell for some percentage of revenue (net collections) or for some combination of income, asset value, and/or capitalized income. In reality, the practice with sell for a price based on some multiple of what is referred to as Seller’s Discretionary Earnings (SDE). SDE is a true measure of the cash flow the owner receives from the business. Not only do I rely heavily on this metric when valuing a practice, banks look very closely at SDE as well in determining what they can lend to the buyer.
Q. I am currently a Sole Proprietorship. Should I incorporate under a new legal entity prior to beginning the sale process?
A. This is a great question that is best answered by an attorney and an accountant familiar with Optometry, as there are often significant advantages to being incorporated. Also, with insurance credentialing becoming more cumbersome and uncertain, re-credentialing your practice under a new legal entity provides a much more certain path to ensuring the buyer can obtain the credentialing necessary to take over the practice.
Q. Why am I being asked whether I have Occurrence Based or Claims Made malpractice insurance?
A. If you have a Claims Made insurance policy, the buyer will almost certainly require the seller to add tail insurance to that policy as a condition for the sale. This will add time and expense to the selling process and I recommend practice owners consult with an insurance professional prior to initiating the sale process so they can understand their options.
Q. Will I have to sign a non-compete agreement when I sell my practice?
A. Every transaction I have been involved with required the seller to sign a non-compete agreement. You will want to consult with your attorney to understand how this agreement will impact your ability to practice after the sale occurs.
Q. How much will I net from the sale of my practice after fees and taxes are accounted for?
A. Every situation is different, especially in terms of transaction costs and fees. But, the largest “expense” in the transaction is the income tax that will be due. I advise practice owners to make sure they have an experienced tax accountant on their team so they can review options for minimizing and/or deferring the taxes that will be owed.
Q. When is the “right time” to sell?
A. There is no universal answer. But the best piece of advice I can give is the owner should plan to sell while the practice is still performing well...don’t take the proverbial “foot off the gas” as the exit date approaches. This is something you can control. What you can’t control is the state of the market when you are ready to sell. In general, when interest rates are low and economy is doing well, it’s a favorable time to sell. But, well run and highly profitable practices will always sell regardless of market conditions.