We published this article in the April 2014 edition of Insight, Australia's leading ophthalmic newsletter. You can see the original here (it's on page 29).
You may have spent years working long hours, developing relationships and building your practice. But what happens when you want to sell?
Planning your way out can be one of the most critical things you will do in the life your practice. The reason is simple - when the time comes to sell or retire, your practice will only be worth as much as someone is willing to pay for it. It doesn’t matter how much hard work and money goes into setting up and operating a business. If you can’t find common ground with a willing buyer, your business will be worthless. What you do therefore to plan your exit will go a long way towards helping you achieve the outcome you want, on your terms.
We see many cases where business owners have no exit strategy at all. The general plan seems to be that bridges will be crossed when the time comes, at which point the business will be sold at a healthy EBIT multiple and everyone will walk away happy. In reality, what they often find is that at this point there is no bridge to cross and it’s too late to do anything about it.
Incidentally, EBIT stands for Earnings Before Interest and Taxes. A multiple of EBIT (e.g. 2x, 3x, 4x etc.) is often used to measure the value of a business. Unfortunately, many business owners expect there to be certain EBIT multiple ‘standards’ within their particular industry, and that when the time to get out finally is at hand it’s a simple case of applying that multiple and making a clean break through a sale of the business.
The optometric industry is no exception. Many practitioners expect that an EBIT multiple of 4-5 times is more than reasonable for the amount of work that has been put in. This view may be further enhanced when looking at the value of the net assets of the practice. In reality, a straight sale of a practice often results in a multiple closer to 2 or 2.5 times, and sometimes even less. In addition, some practitioners are finding that there are very limited buyers out there to begin with.
The value of a practice can however, be significantly improved by putting a little work into developing an effective succession plan. There are a number of barriers that can get in the way of finding willing and attractive buyers. Within the practice, things like poor internal systems, a lack of documentation, having the wrong staff and other obvious weaknesses can put prospective purchasers off or reduce the price they are willing to pay. Just like selling your house or car, an important component of any succession plan is detailing – making your business look its best so that it makes a great first impression.
But that still doesn’t bring buyers to your door. One of the realities of the optometric industry is that often your largest pool of potential buyers is the next generation of optometrists, and that means negotiating with the dreaded ‘Generation Y’!
We’ve all heard the clichés about Gen Y. They’re lazy, they don’t want to commit to anything, they won’t listen and demand too much in return. In our experience, we’ve found most of these stereotypes to be untrue for young optometrists. Instead, many young practitioners are hard workers eager for an opportunity to step out into private practice. However they are often averse to long term debt and may want more immediate returns if they are to make an investment.
Ironically, despite their enthusiasm, many young optometrists are already working in practices that have no plan for succession. They are wary though of discussing a possible transition because they perceive that the current owner will want too much for the practice. In many cases, they’re right. So how can buyer and seller find common ground?
This is where the science of succession planning becomes an art form. There is no one-size-fits-all approach, but there are many different options that can reduce the gradient between buyer and seller and achieve an outstanding result for both. A gradual transition is one method. This can be vendor financed, so neither side needs necessarily to go out and borrow any money. Rather than looking for a buyer who is willing to pay a lump sum sale price, which presents a much steeper gradient to a potential purchaser, a plan is put in place for the practice to be gradually passed on, over a period of years. Payment is made through future dividends (or other share of profit). The senior optometrist is able to wind back slowly, achieving a greater work/life balance by working less hours while still maintaining an interest in the practice. At the same time, the reputation of the business is better protected by having a familiar face around to preserve relationships, educating regular customers about the changes that are coming and ensuring that everything transitions smoothly. In the eyes of a prospective buyer, this can greatly enhance the perceived value of the practice. In the meantime, the owner continues to draw both a salary and dividends which amount to far more than the original sale price would have been. There are many other benefits for both sides too.
But perhaps the best part about a plan like this is that potential buyers may be working in the practice right now. No advertising is required, no long and painful searching is necessary, and both buyer and seller are spared the awkwardness of dealing with people with whom they otherwise have no relationship.
A deliberate and creative succession plan can maximise your chances of finding willing buyers. It can also enhance the probability that buyer and seller achieve an outcome that is mutually satisfactory. Sadly the alternative is often that practice owners must work for much longer (and/or at longer hours) than they would like. In some cases they even end up closing their doors and walking away, abandoning decades of investment for lack of a willing buyer. It doesn’t have to be that way.