- July 25, 2022
- Posted by: New School
- Category: General
We hear this question every day, and the answers can vary a lot based on a variety of details. Here are some of the factors that will influence the value of an optometry or ophthalmology practice.
- Cash Flow. The biggest influencer of value is typically the amount of cash flow the practice generates. For example, a practice with $1,000,000 in yearly receipts generating $150,000 in cash flow would not be worth as much as a practice with $1,000,000 in receipts generating $400,000 in cash flow. (Cash flow is simply the amount of discretionary cash the owners receive, including any salary and benefits they pay themselves). The term EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) is frequently used to describe cash flow after replacing the owner’s salary. In the current environment of Private Equity (PE) firms buying practices, the PE firms almost exclusively use EBITDA and a multiplier that can vary based on the size of the practice and other factors.
- Asset value. For some smaller practices, their value of their assets may be higher than their valuation by cash flow. For example, a practice with $250,000 in receipts may have assets of $300,000 or $400,000 if they have a lot of medical equipment (OCT, Optos, autorefractor, etc.) and a large inventory of frames and contact lenses. In this case, the assets of the practice may be worth more than the business of the practice. Keep in mind that a buyer would typically still need to depend on the business of the practice to pay for the assets after the sale is complete, which may reduce what the buyer could actually pay for the assets.
- Location. The always important factor of location can also have an impact on the practice value.A practice in a “bad” location may be worth significantly less that a practice in a “good” location that otherwise would be similar in value.
- Capacity. Some practices are operating at full capacity and don’t have the ability to improve their receipts without increasing hours or moving to another facility. This can be perceived as a negative factor in the eyes of a potential buyer. On the other hand, some practices have unused exam lanes and the ability to generate more receipts in fairly easy ways. This may be perceived as a positive opportunity by a potential buyer.
- Gross receipts. In the “old days” before the explosion of Managed Vision Care (MVC), practices were valued at essentially 100% of what they had in sales for the year. In other words a practice with $500,000 in receipts would have a sale price of $500,000. As MVC proliferated and profit margins declined for many practices, the multiplier also declined to 75%, then 60%, and then pretty much ceased to be a meaningful yardstick for practice value due to wide variations in profitability. And while it is not a good number to use exclusively, it still has an effect on valuation. A small grossing practice (say $250,000 a year) in a remote rural area will be much harder to sell than a high-grossing practice (say $1,200,000) in an urban area. The higher grossing practice will also command a higher price just due to the dollar volume and the opportunities that volume will present.
- Reputation. The reputation of a practice will also influence value, so pay attention to those on-line reviews, and work to improve your numbers! A potential buyer will be willing to pay more for a practice with 5 star google reviews and a good reputation amongst their peers than they would for a practice with 2 star reviews and a sketchy reputation among other doctors.
- Appearance. Our patients may not be good judges of our clinical skills, but they can tell what an attractive office looks like. If your practice hasn’t been updated in 30 years and has trash and weeds in the yard, this will influence the value in a negative way.
These are some of the main factors that influence the value of an optometry or ophthalmology practice. It is not exhaustive, but should give the reader a good idea of areas that will influence value, as well as a checklist of items to work on to improve value.