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Entering practice during an economic downturn
PRACTICE STRATEGIES Entering practice during an economic downturn
B
y now, just about everyone realizes that the United Statesdand much of the rest of the worlddis in the throes of one of the worst economic downturns in decades. The stock market lost more than a third of its value during 2008. Unemployment rates are up. The collapse of financial markets over the last yeardincluding the failure or near failure of some of the nation’s largest banksdhas made credit increasingly difficult to obtain. Economists warn the current downturn could extend through 2009 and into 2010.
Even amid adverse economic conditions, new optometrists can enter practice and prosper. Here is how it can be accomplished. And President Barack Obama has warned that the economy is likely to get worse before it gets better. That means that this year’s optometry school graduates are faced with entering practice under some of the most adverse economic conditions in decades. The collapse of the financial markets has made credit for practice acquisition more difficult to obtain. An overall economic slowdown could mean fewer practicesdboth corporate affiliated and traditional independentsdwill see immediate need to take on new associates. Many new practitioners might wonder whether they will be able to attract sufficient patients in the midst of an economic slowdown, even if they do secure a practice opportunity. And new optometry school graduates continue to enter practice with record levels of student debt and, in many cases, considerable credit card balances. Fortunately, optometry, like other forms of health care, remains one of the more recession-resistant segments of the economy. Patients may opt for less-expensive frames during a recession or perhaps even put off an examination for a time. However, with good sight being so important in day-to-day life, most people who experience trouble seeing will seek an examination and any necessary vision correction or eye treatment. This is especially true now that record numbers of patients are covered by third-party plans, minimizing patient out-of-pocket payment. And with the American population rapidly aging, overall demand for optometric services is likely to increase over the foreseeable future. Most important, the American Optometric Association (AOA), the American Optometric Student
Association (AOSA), schools and colleges of optometry, and state optometric associations have for decades made the successful entry of new optometrists into practice a top priority. Long before today’s economic woes became frontpage headlines, organized optometry, numerous private practice management consultancies, and other entities were developing comprehensive strategies and authoritative resources to assist new optometrists with entry into practice and help ensure an adequate supply of primary eye care providers for the nation. During the past several years, in particular, innovative strategies for the transfer of existing optometric practices have been developeddin some cases by new practitioners themselves. In many respects, new optometrists may face better prospects than many entering the workforce today. The key to success, as in many endeavors, is careful planning and preparation, according to C. Thomas Crooks, III, O.D., chair of the AOA Practice Transitions Committee. To successfully enter practice, new optometrists must have a clear idea of the type of career they desire, systematically conduct a search to find the right opportunity, effectively market themselves to practice owners or other parties, negotiate an equitable agreement for a position or practice purchase, and then accommodate any financial or legal matters that may need to be addressed. New optometrists generally have to deal with common obstacles as they enter practice. Many say they have trouble finding positions that will pay enough to cover student debt. Affordable practices for purchase can be hard to find. Financing often is perceived as difficult to obtain. However, it is important to appreciate that all small-business owners entering the market face such obstacles during good economic times and bad. And thanks to organized optometry’s longstanding efforts to assist new practitioners with entry into practice, new optometrists may actually face the current economic climate with better odds for success than many professionals.
Know what is needed It has often been said that many new optometrists do not really begin thinking about the type of practice they want (or how they will go about getting it) until their final year of optometry schooldor in some cases until after they graduate. Optometrists who are thinking about hiring an associate or selling a portion or all of their practice are also late to the party when it comes to properly assessing their needs. Fortunately, this appears to be changing a bit. This article focuses on needs assessment from the perspective of the new optometric graduate.
1529-1839/09/$ -see front matter Ó 2009 American Optometric Association. All rights reserved. doi:10.1016/j.optm.2009.02.002
198 Most optometrists graduate with at least some idea of the areas of practice they wish to emphasize (e.g., general practice, comanagement of medical conditions, contact lenses, low vision rehabilitation, vision therapy). They have probably given some thought to the mode of practice they would like to pursue (e.g., traditional independent practice, corporate-affiliated practice, multidisciplinary clinic, government service). Many have a reasonable idea of where they would like to live and practice (e.g., their hometown, a big city, the mountains). In many cases, however, they still may have not have given sufficient thought to such practical matters as whether they want to join an existing practice or start one of their own. For new optometrists to find practice opportunities that meet their needs, they first must know what their needs are, according to management expert John Rumpakis, O.D., M.B.A., of Lake Oswego, Oregon-based Practice Resource Management, Inc. Before attempting to enter practice, then, all new optometrists should conduct a formal written needs assessment to help them clarify what they really hope to achieve during their careers and then focus their energy on finding opportunities to achieve those objectives. In preparing a needs assessment, the new practitioner sets goals and objectives against which various practice options and opportunities can be assessed. The assessment should consider all of the practitioner’s needs: clinical, professional, economic, and social. Goals must be specific, measurable, achievable, and realisticdand they should come with a timetable for achieving them. The timetable should provide for both shortterm and long-term goals. Perhaps most important, the needs assessment should be complete and highly detailed. A well-done needs assessment, as outlined in Box 1, will not only help new practitioners chart a general direction for a career but also will assist in hurdling many of the obstacles that commonly prevent new practitioners from entering their desired mode of practice or successfully handling problems after taking a particular position. For example, a good needs assessment requires the new practitioner to realistically consider from the outset the level of compensation required to service debt and meet living expenses, whether practice ownership is desired, and, if it is, how financing will ultimately be secured. Such a needs assessment will not only assist the practitioner in finding good practice opportunities but also in addressing financial or legal issues down the line. New practitioners can prepare their needs assessments themselves or retain a consultant or industry professional to do it. The assessment should be reviewed and revised periodically. Most important, in preparing the needs assessment, the practitioner should be careful to distinguish between ‘‘wants’’ and ‘‘needs.’’ They are very different (although often complementary); ‘‘needs’’ are those factors that are essential as opposed to ‘‘wants,’’ which are simply desirable. Noting the distinction can be important in properly setting priorities when analyzing a specific situation. A good comprehensive needs analysis must be one of the very first steps taken by any new optometrist who is seeking a
Practice Strategies practice opportunity. It can help a practitioner determine what is really important in a career, develop a career plan that will allow the practitioner to achieve high-priority goals, and avoid wasting time with career moves that do not facilitate achieving those goals. As an optometrist’s career proceeds, it provides an important means of measuring whether progress toward important goals is being made and whether adjustments in the career plan should be considered. Needs assessment is a great way to help a practitioner realize both the tangible and intangible rewards desired in a career and can greatly facilitate good decisions and prevent remorse down the road. It requires some thought and maybe a little research. However, there are resources available to help (and many are free).
Find the right opportunity After determining the type of practice desired, the practitioner then has to find it. That means finding a realistic practice opportunity that will accommodate as many of those objectives as possibledor at least the objectives that are most important to the new optometrist. That, in turn, requires a systematic search. Fortunately, new optometrists have several readily accessible resources that can be helpful. The easiest way to conduct such a search is to register with Optometry’s Career CenterÒdthe AOA’s online matching service for new practitioners seeking practice opportunities and established practices seeking associates. Practitioners can search for career opportunities by state or by working arrangement (practices for sale, practice partnerships, employment). Practitioners can also use a keyword search to find specific types of practices (e.g., low vision rehabilitation, multidisciplinary, pediatric). New practitioners who have determined the state in which they want to practice may find it useful to simply call the state optometric association or consult the association’s newsletter to see if any members are planning to sell their practice or take on associates. Those seeking to join or purchase practices with specific types of emphasis may wish to contact the AOA Contact Lens and Cornea Section, Low Vision Rehabilitation Section, or Sports Vision Section for guidance. In general, it is good to network within the profession just about any way possible. An old saying among employment professionals holds that position seekers must ‘‘circulate to percolate.’’ Certainly, that is true of new optometrists seeking practice opportunities. However, in many cases, networking may not be enough. Many new practitioners may find it advantageous to conduct a more formal study. Once a new practitioner has determined the state(s) or general location in which practice is desired, the practitioner may wish to obtain a map of the area and then plot the location of all existing optometric practices in the area. Lists for use in such projects can be obtained from state optometric associations, state optometry boards, the Blue Book of Optometrists, or, in some cases, simply by using telephone directories. Such a map can provide 2 types of valuable information: 1) Areas in which there are no optometric practices (suggesting locations that might be appropriate
Practice Strategies Box 1
Considerations for needs assessments Clinical needs – Specialty training required – Skill set complementary or redundant with practice – Scope of practice Licensure differentials Local standards – Knowledge of technology – Third party – Community Professional needs – Association membership provided – Continuing education – Interpractice networks Economic needs – Status with practice Equity purchaser? Employee? Independent contractor? Tax/accounting implications of status with the practice – Compensation Salary Profit sharing Funding retirement Method of calculation Fixed Base plus incentive Per diem Exempt or non-exempt Additional contract provisions Right to purchase Restrictive covenant Income differentials Expectation set Social strata differences – Cost of living Housing Food Insurance Transportation Education Other – Considerations when equity in the practice is being purchased What is being purchased? How much is being purchased? When will it be purchased? Is there an option to purchase more? When? Financing options available Savings Loans
199 Specialized lender Traditional bank Relative Savings – Appraisal Who pays for it? – Buy/sell agreement Legal representation Accounting representation Using consultants Negotiation Review of agreements Social needs – Quality of life – Urban or rural environment – Family needs Spousal/partner employment opportunities Education – Lifestyle needs – Religious needs – Staff acceptance – Community acceptance – Peer acceptance
for start-up practices or new satellite offices for existing practices) and 2) existing optometric practices in desirable areas that the practitioner may wish to join or purchase. The new practitioner can then follow up by telephone to determine if those practices are seeking associates and whether the office’s objectives and areas of emphasis coincide with those of the new practitioner. Whether practitioners simply network for opportunities or systematically search lists, generally they should not jump at the first opportunity that comes along. Practitioners should consider compiling a list of practice opportunities. In many cases, it will begin with a ‘‘long list’’ of potential practice opportunities that can be narrowed to a ‘‘short list’’ of serious prospects through follow-up contacts, and then, ultimately to a list of ‘‘finalist’’ practices with whom inperson visits are appropriate. A good needs assessment will prove critical in this process. Properly used, the needs assessment will allow the new practitioner to complete the search process with a list of practice opportunities that will really meet the practitioner’s needs and provide the foundation for a successful career. For a more in-depth discussion of the search process, see the AOA Practice Strategies articles, ‘‘A primer for practice success’’ or ‘‘A case study in practice transitions,’’ which can be accessed on the AOA Web site ‘‘Entering Practice’’ page (www.aoa.org/x4802.xml).
Marketing Practice hunting is ultimately a matter of supply and demand. Not all practices are in a position to take on an
200 additional doctor. Others could use an associate, but upon receiving an inquiry from a new practitioner may not immediately see why the new practitioner in question should be considered. Even if a new practitioner opts to establish a completely new practice from scratch, the practitioner will probably have to demonstrate to potential lenders suitable practice management skill and justification for the practice. In other words, new practitioners necessarily have to know how to ‘‘sell themselves,’’ optometric practice management consultants say. The ‘‘selling’’ begins with preparing a good professional resume´. However, it also entails addressing some generational issues. Established optometrists often cite lack of experience as a concern when considering new associates. New practitioners often do not have expertise in the various management skillsdfrom personnel management to claim filingdthat are necessary to operate a practice. In addition, they simply may not understand just how much time and effort are required to maintain a practice, established practitioners frequently complain. New practitioners may understand how much they will need to make to make a living; however, they may not always understand how much new revenue the practice may require to cover a new practitioner’s salary. Work ethic often becomes an issue. Many of today’s established optometrists figured out quickly that optometry was a business and found ways to make their practices profitable, according to Joe Gibbons, Ph.D., a founding consultant of the Brooklyn, New York– based FutureWork Institute, Inc.Ò and author of the institute’s Future of the Optometric Profession report. However, younger optometrists today often do not have the same business sense, become discouraged if they are not immediately financially successful, or, in some cases, even find making money ‘‘dirty,’’ according to Gibbons. In preparing the needs assessment, new practitioners determine what they require in a practice opportunity. During the marketing function, they have to accurately assess the needs of any practices they may be thinking about joining and then explain how they can help the practice meet those needs. The new practitioner must be able to show a practicing doctor ‘‘what you bring to the table,’’ according to Bob Schultz, CEO of Vision One Credit Union. ‘‘Every new practitioner must ask: How can the practice afford me?’’ New practitioners must be able to generate enough new revenues to cover the cost of their salaries and benefitsd and be able to do so within a reasonable period of time. In an already busy practice, new practitioners might be able to easily show that they will generate additional revenue by seeing patients who are being turned away. However, in most cases, new practitioners will have to be able to demonstrate that they will attract sufficient numbers of new patients to the practice by expanding the hours of operation, opening a satellite office, or providing new services (low vision rehabilitation, vision therapy). In some cases, practitioners may be able to demonstrate that they can attract sufficient numbers of new patients through community
Practice Strategies outreach. In others, they may be able to demonstrate value to the practice by taking on administrative functions such as evaluating insurance plans or overseeing human resource functions, freeing time for the practice’s other optometrist(s) to see more patients. New practitioners who are computer savvy may prove worthwhile to a practice if they can set up and maintain electronic health records and e-prescribing systems. In some cases, established practitioners nearing retirement age may desire to cut back on their hours in the practice. A new associate can often allow an established practitioner to take more time out of the office without cutting back the practice hours or seeing corresponding losses in patient revenuesdand can therefore be of great value to the established practitioner.
Negotiating Once a new practitioner and an established practitioner are convinced that an association will be mutually beneficial, a firm agreement for employment, partnership, or practice purchase must be negotiated. Both new and established practitioners often consider detailed negotiations to represent an arduous obstacle; especially negotiations on the exact terms of a professional relationship. However, a firm understanding on all aspects of the relationship is essential in preventing problems that can ultimately lead to a failed association. Often, negotiations prove unnecessarily problematic because one or both sides in the negotiations have not clearly thought through their requirements. Once again, the needs assessment can prove useful in helping the new practitioner enter negotiations fully prepared. In some cases, both sides may not be entirely forthcoming about their intentions regarding issues such as eventual partnership status or practice purchase. In other cases, they may simply not have realistic expectations. For that reason, a new practitioner should always have any contract for employment, partnership, or practice purchase, at a minimum, reviewed by an attorney who specializes in law related to optometric practice, according to Michael G. Harris, O.D., J.D., of the University of California, Berkeley, School of Optometry. Setting down firm terms for eventual practice purchase can be a key element in such negotiations; however, that involves determining the value of the practice to be solddand that is often among the major areas of disagreement between new and established practitioners. Over the years, several rules of thumb have been commonly used for the valuation of optometric practices. As in many fields of business, optometrists in the past have commonly held that annual gross revenue represents a reasonable purchase price for a practice. Most recently, two thirds of annual gross revenue has often been accepted as a good practice purchase price. ‘‘The rule of thumb for practices with annual gross revenues of $500,000 or over, 65% would be an appropriate multiplier,’’ said Bill Nolan, a certified public accountant and vice president of the Lincoln, Nebraska–based practice management consultancy, The Williams Group. So, for a practice
Practice Strategies with $500,000 in gross revenues, $325,000 (or 65% of $500,000) might typically be considered an appropriate asking price, Nolan said. Such rules can be helpful in initiating general discussions on the purchase of a practice. However, when it comes time to actually draw up a contract for the sale of a practice or to apply for a loan to finance the practice purchase, these rules generally will not be sufficient. More complex valuation formulas are commonly used by accountants and appraisers for real estate and business purchases, and many practice management consultants insist these formulas should be applied when the fair market value of an optometric practice is being assessed. The 3 basic formal approaches used to determine the value of a professional practice are: Asset approach Income approach Market approach The asset approach provides an estimate of value for a practice by assessing the 2 primary components that contribute to practice valuedtangible and intangible assets. The income approach considers the future cash flows that a business can produce based on the good will that has been created. The market approach focuses on key practice income and expense parameters such as net-to-gross ratio, percent of staff salaries, cost of goods sold, and overhead costs, comparing these to previous sales of similar practices. Many professional appraisers and practice management consultants recommend that optometric practices be valued using all 3 methods, with the results then averaged to determine a final value. Such a 3-step appraisal process is commonly used for residential or commercial real estate. However, both Nolan and Schultz say that for optometric practices cash flow is probably the most important valuation method. That is because most commercial lenders who are seriously interested in financing optometric practices will generally base loan amounts on cash flow, Nolan and Schultz agree.
Financing Financing, in general, is another of those processes that new practitioners generally consider an obstacle to practice. Many new practitioners lack experience in the business community and are nervous about approaching bankers, Nolan acknowledges. Many believe financing for optometric practices is simply not available. Many also suspect that the recent upheaval in the financial markets have made financing for optometric practices even harder to get. New optometrists are correct is assuming that many banks, large or small, will not provide loans for health care practice purchases, Nolan confirms. In general, banks do not like to make loans for businesses ‘‘they do not understand,’’ and most banks do not understand health care practice, he notes. In addition, most banks consider loans for health care practices to be insufficiently collateralized. Banks generally prefer to make loans for tangible assets, such as real estate or equipment. In many cases,
201 intangible assets such as ‘‘good will’’ represent much of the fair market value of an optometric practice. However, financing for practice purchases is available, according to Nolan and Schultz. And the recent financial turmoil has not really impacted financing for optometric practices, Nolan adds. The financial crisis on Wall Street has reduced the number of major banks and specialized lenders actively providing loans for optometric practices. However, that has not made loans harder to get, according to Nolan. Emeryville, California–based Matsco (www.matsco.com), an operating unit of Wells Fargo & Company, provides optometric practice financing for acquisition, start-up and expansion (including equipment and real estate) as well as working capital and business loan consolidation. The company is particularly active in the financing of optometric practice start-ups, Nolan said. Originally a provider of financing for dental offices, Matsco also provides financing for veterinary medicine and ophthalmology practices. It has offered financing for optometric practices since 2004. Wells Fargo in January purchased the loan and lease receivables of GE Healthcare Financial Services, which will now be managed through its Matsco unit. GE Healthcare Financial Services, which had been the nation’s largest provider of health care practice acquisition loans and the AOA’s approved provider of practice financing services, has now left the market entirely. GE Healthcare Financial Services, in 2004, acquired HPSC, Inc, which at that time was the nation’s largest provider of health care practice financing. Bank of America, another of the nation’s leading money center banks, advertises loans for physician, dental, and veterinary practices and could represent a source of loans for optometric practices, according to Nolan. However, Bank of America often requires the U.S. Small Business Administration (SBA) act a guarantor on practices loans, meaning applicants must complete the lengthy SBA application form, he added. The Sacramento, California–based Vision One Credit Union also offers a full range of optometric practice financing for acquisition, start-up, equipment, real estate, and working capital, according to Schulz. The credit union has become a national leader in financing for optometric practice acquisition, according to Nolan. The only ‘‘optometric credit union’’ in the nation, Vision One, was formed in 1951 by a group of California Optometric Association members as financial institution specifically intended to support independent optometric practices. In addition to financial services, Vision One offers a full range of deposit services, such as checking accounts and online banking, for practices. Although established to serve California practices, Vision One has been offering financial services for practices across the nation since 2004. The credit union specializes in loans to support entry into practice, In addition to its standard loan packages, Vision One recently launched its Vision Loans program, jointly developed with Vision Service Plan (VSP), for first-time practice purchasers who might qualify for down payment financing, in addition to Vision One’s primary financing, with terms specifically
202 designed to help offset risks that may be associated with practice transition. VSP and Essilor of America have established a $20 million fund to provide practice purchase loans through the Vision Loan program. Vision One is matching that fund with another $14 million specifically designated for practice acquisition loans.
Qualifying for the loan In general, those lending institutions that do offer financing for optometric practices will consider a new practitioner as a suitable loan candidate provided the practitioner has: Two years of tax returns for the practice that show ongoing cash flow A FICO (the acronym for the Fair Isaac Corporation, which provides the nation’s most widely used consumer credit rating) score of 650 or better No history of bankruptcy or adverse court judgments A practice’s cash flow can be determined by reviewing documents filed with the practice’s Federal Tax Return, such as the Internal Revenues Service (IRS) Form 1040 Schedule C profit or loss form, shown in Figure 1 (the exact form necessary will depend on whether the practice is a corporation, partnership, or sole proprietorship). Given the proper tax documents, a new practitioner who is considering the purchase of a practice can not only determine whether the practice is profitable, but also whether the cash flow will be sufficient to cover loan payments on the practice, a salary for the new owner that will cover living expenses and student debt service, and the practice’s ongoing expenses, Schultz notes. A new practitioner who is seriously considering the purchase of a practice should expect the current owner of the practice to make pertinent tax documents available. Schultz offers several tips that can help new practitioners when they apply for practice acquisition financing. Emphasize cash flowdAlthough real estate lenders generally require extensive collateral for loans, commercial lenders tend to look for cash flow, Schultz notes. In many cases, the cash flow data for optometric practices will be favorably received, Schultz believes. Offer a sound business plandNew optometrists consistently tell the AOA they do not know how to prepare loan applications or the business plans that bankers require. The AOA, as well as many schools and colleges of optometry, now provide materials that can assist. The Williams Group and other practice management consultancies offer business plan development services for new practitioners. The SBA offers a model business plan for small businesses of all types (www.sba.gov). When seeking financing for the purchase of a successful practice, a new optometrist should not propose a business plan that would radically change the practice. Lenders today prize stability. A few necessary improvements are fine. However, any major changes in the operations of a practice could disrupt the cash flow.
Practice Strategies Have a transition plandThe retirement of an established practitioner and entry of a new practitioner can be perilous for a practice. Up to 20% of patients may choose to begin getting eye care elsewhere when an established practitioner leaves. That can result in an up to 40% decrease in net cash flow. In such cases, rebuilding the practice generally will take around 2 years, Schultz said. To prevent such problems, one should develop a formal plan for the gradual retirement of the established practitionerd and the gradual introduction of the new practitioner. That transition plan should be included with the loan application, he emphasizes, to assure lenders that the chances for cash flow disruption during this critical period will be minimized. When applying for a practice purchase loan, Schultz advises, be sure to also apply for a line of credit to ensure working capital during the critical practice transition years. Loan officers will find this a prudent move.
Seller financing Perceived lack of credit for practice purchases has prompted growth in seller financing arrangements over the last few years. Under some such arrangements, new practitioners often ‘‘work off’’ the cost of a practice purchase, receiving an interest in the practice in return for seeing patients. Often, such purchase plans involve a ‘‘salary differential’’ arrangement under which the new practitioner works at a reduced salary with the difference going toward the practice purchase. In other cases, the new practitioner is paid a market-rate salary but can exercise an option to immediately purchase stock in the practice. Accountant Nolan favors arrangements that allow new practitioners to buy into the practice using their salary dollars over the salary differential arrangements, which he believes can pose tax complications for both buyer and seller. Any such arrangements should be undertaken only with the guidance of a qualified accountant, he emphasizes. The Practice Strategies article, ‘‘A case study in practice transitions,’’ examines ‘‘work-to-purchase’’ arrangements in depth. At least 2 practice management consultanciesdthe Williams Group and Pathways to Success, the Internet-based service developed by Mark R. Wright, O.D.dprovide assistance with such arrangements. The Vision One Credit Union also offers a seller financing program.
The importance of good advice Although the steps involved in purchasing a practice are not insurmountable, they can be complex and clearly must be handled properly. For that reason, optometrists should always be assisted by a specialized team of professionals who can provide necessary advice and support, according to Dr. Harris, who specializes in optometric law. This team should include: Accountant Appraiser
Practice Strategies
203
Figure 1
Internal Revenue Service Form 1040 Schedule C Profit or Loss From Business form.
204
Practice Strategies
Figure 1
(Continued).
Practice Strategies Broker/consultant Attorney Financial institution In addition to identifying an accurate determination of the value of a practice and helping with the securing of any needed financing, such a team can be essential in drawing up a purchase contract that will include all of the necessary provisions and conducting ‘‘due diligence,’’ the legal term for a thorough investigation of an asset prior to purchase. Due diligence is a necessity for any optometrist considering a practice purchase. That step alone will require a team of specialized professionals.
205
For further information Entry into practice during even the best of times can present some challenges. The Checklist for New Practitioners, which follows in this edition of Optometry, outlines some of the steps all new practitioners should take before they see their first patient. To assist new optometrists with entry into practice, the AOA has developed a wide range of resources (see related article). In particular, the association is offering its new Practice Transitions program, a fullday course on practice acquisition. New resources will continue to be listed on the AOA Web site Entering Practice page.
B
y now, just about everyone realizes that the United Statesdand much of the rest of the worlddis in the throes of one of the worst economic downturns in decades. The stock market lost more than a third of its value during 2008. Unemployment rates are up. The collapse of financial markets over the last yeardincluding the failure or near failure of some of the nation’s largest banksdhas made credit increasingly difficult to obtain. Economists warn the current downturn could extend through 2009 and into 2010.
Even amid adverse economic conditions, new optometrists can enter practice and prosper. Here is how it can be accomplished. And President Barack Obama has warned that the economy is likely to get worse before it gets better. That means that this year’s optometry school graduates are faced with entering practice under some of the most adverse economic conditions in decades. The collapse of the financial markets has made credit for practice acquisition more difficult to obtain. An overall economic slowdown could mean fewer practicesdboth corporate affiliated and traditional independentsdwill see immediate need to take on new associates. Many new practitioners might wonder whether they will be able to attract sufficient patients in the midst of an economic slowdown, even if they do secure a practice opportunity. And new optometry school graduates continue to enter practice with record levels of student debt and, in many cases, considerable credit card balances. Fortunately, optometry, like other forms of health care, remains one of the more recession-resistant segments of the economy. Patients may opt for less-expensive frames during a recession or perhaps even put off an examination for a time. However, with good sight being so important in day-to-day life, most people who experience trouble seeing will seek an examination and any necessary vision correction or eye treatment. This is especially true now that record numbers of patients are covered by third-party plans, minimizing patient out-of-pocket payment. And with the American population rapidly aging, overall demand for optometric services is likely to increase over the foreseeable future. Most important, the American Optometric Association (AOA), the American Optometric Student
Association (AOSA), schools and colleges of optometry, and state optometric associations have for decades made the successful entry of new optometrists into practice a top priority. Long before today’s economic woes became frontpage headlines, organized optometry, numerous private practice management consultancies, and other entities were developing comprehensive strategies and authoritative resources to assist new optometrists with entry into practice and help ensure an adequate supply of primary eye care providers for the nation. During the past several years, in particular, innovative strategies for the transfer of existing optometric practices have been developeddin some cases by new practitioners themselves. In many respects, new optometrists may face better prospects than many entering the workforce today. The key to success, as in many endeavors, is careful planning and preparation, according to C. Thomas Crooks, III, O.D., chair of the AOA Practice Transitions Committee. To successfully enter practice, new optometrists must have a clear idea of the type of career they desire, systematically conduct a search to find the right opportunity, effectively market themselves to practice owners or other parties, negotiate an equitable agreement for a position or practice purchase, and then accommodate any financial or legal matters that may need to be addressed. New optometrists generally have to deal with common obstacles as they enter practice. Many say they have trouble finding positions that will pay enough to cover student debt. Affordable practices for purchase can be hard to find. Financing often is perceived as difficult to obtain. However, it is important to appreciate that all small-business owners entering the market face such obstacles during good economic times and bad. And thanks to organized optometry’s longstanding efforts to assist new practitioners with entry into practice, new optometrists may actually face the current economic climate with better odds for success than many professionals.
Know what is needed It has often been said that many new optometrists do not really begin thinking about the type of practice they want (or how they will go about getting it) until their final year of optometry schooldor in some cases until after they graduate. Optometrists who are thinking about hiring an associate or selling a portion or all of their practice are also late to the party when it comes to properly assessing their needs. Fortunately, this appears to be changing a bit. This article focuses on needs assessment from the perspective of the new optometric graduate.
1529-1839/09/$ -see front matter Ó 2009 American Optometric Association. All rights reserved. doi:10.1016/j.optm.2009.02.002
198 Most optometrists graduate with at least some idea of the areas of practice they wish to emphasize (e.g., general practice, comanagement of medical conditions, contact lenses, low vision rehabilitation, vision therapy). They have probably given some thought to the mode of practice they would like to pursue (e.g., traditional independent practice, corporate-affiliated practice, multidisciplinary clinic, government service). Many have a reasonable idea of where they would like to live and practice (e.g., their hometown, a big city, the mountains). In many cases, however, they still may have not have given sufficient thought to such practical matters as whether they want to join an existing practice or start one of their own. For new optometrists to find practice opportunities that meet their needs, they first must know what their needs are, according to management expert John Rumpakis, O.D., M.B.A., of Lake Oswego, Oregon-based Practice Resource Management, Inc. Before attempting to enter practice, then, all new optometrists should conduct a formal written needs assessment to help them clarify what they really hope to achieve during their careers and then focus their energy on finding opportunities to achieve those objectives. In preparing a needs assessment, the new practitioner sets goals and objectives against which various practice options and opportunities can be assessed. The assessment should consider all of the practitioner’s needs: clinical, professional, economic, and social. Goals must be specific, measurable, achievable, and realisticdand they should come with a timetable for achieving them. The timetable should provide for both shortterm and long-term goals. Perhaps most important, the needs assessment should be complete and highly detailed. A well-done needs assessment, as outlined in Box 1, will not only help new practitioners chart a general direction for a career but also will assist in hurdling many of the obstacles that commonly prevent new practitioners from entering their desired mode of practice or successfully handling problems after taking a particular position. For example, a good needs assessment requires the new practitioner to realistically consider from the outset the level of compensation required to service debt and meet living expenses, whether practice ownership is desired, and, if it is, how financing will ultimately be secured. Such a needs assessment will not only assist the practitioner in finding good practice opportunities but also in addressing financial or legal issues down the line. New practitioners can prepare their needs assessments themselves or retain a consultant or industry professional to do it. The assessment should be reviewed and revised periodically. Most important, in preparing the needs assessment, the practitioner should be careful to distinguish between ‘‘wants’’ and ‘‘needs.’’ They are very different (although often complementary); ‘‘needs’’ are those factors that are essential as opposed to ‘‘wants,’’ which are simply desirable. Noting the distinction can be important in properly setting priorities when analyzing a specific situation. A good comprehensive needs analysis must be one of the very first steps taken by any new optometrist who is seeking a
Practice Strategies practice opportunity. It can help a practitioner determine what is really important in a career, develop a career plan that will allow the practitioner to achieve high-priority goals, and avoid wasting time with career moves that do not facilitate achieving those goals. As an optometrist’s career proceeds, it provides an important means of measuring whether progress toward important goals is being made and whether adjustments in the career plan should be considered. Needs assessment is a great way to help a practitioner realize both the tangible and intangible rewards desired in a career and can greatly facilitate good decisions and prevent remorse down the road. It requires some thought and maybe a little research. However, there are resources available to help (and many are free).
Find the right opportunity After determining the type of practice desired, the practitioner then has to find it. That means finding a realistic practice opportunity that will accommodate as many of those objectives as possibledor at least the objectives that are most important to the new optometrist. That, in turn, requires a systematic search. Fortunately, new optometrists have several readily accessible resources that can be helpful. The easiest way to conduct such a search is to register with Optometry’s Career CenterÒdthe AOA’s online matching service for new practitioners seeking practice opportunities and established practices seeking associates. Practitioners can search for career opportunities by state or by working arrangement (practices for sale, practice partnerships, employment). Practitioners can also use a keyword search to find specific types of practices (e.g., low vision rehabilitation, multidisciplinary, pediatric). New practitioners who have determined the state in which they want to practice may find it useful to simply call the state optometric association or consult the association’s newsletter to see if any members are planning to sell their practice or take on associates. Those seeking to join or purchase practices with specific types of emphasis may wish to contact the AOA Contact Lens and Cornea Section, Low Vision Rehabilitation Section, or Sports Vision Section for guidance. In general, it is good to network within the profession just about any way possible. An old saying among employment professionals holds that position seekers must ‘‘circulate to percolate.’’ Certainly, that is true of new optometrists seeking practice opportunities. However, in many cases, networking may not be enough. Many new practitioners may find it advantageous to conduct a more formal study. Once a new practitioner has determined the state(s) or general location in which practice is desired, the practitioner may wish to obtain a map of the area and then plot the location of all existing optometric practices in the area. Lists for use in such projects can be obtained from state optometric associations, state optometry boards, the Blue Book of Optometrists, or, in some cases, simply by using telephone directories. Such a map can provide 2 types of valuable information: 1) Areas in which there are no optometric practices (suggesting locations that might be appropriate
Practice Strategies Box 1
Considerations for needs assessments Clinical needs – Specialty training required – Skill set complementary or redundant with practice – Scope of practice Licensure differentials Local standards – Knowledge of technology – Third party – Community Professional needs – Association membership provided – Continuing education – Interpractice networks Economic needs – Status with practice Equity purchaser? Employee? Independent contractor? Tax/accounting implications of status with the practice – Compensation Salary Profit sharing Funding retirement Method of calculation Fixed Base plus incentive Per diem Exempt or non-exempt Additional contract provisions Right to purchase Restrictive covenant Income differentials Expectation set Social strata differences – Cost of living Housing Food Insurance Transportation Education Other – Considerations when equity in the practice is being purchased What is being purchased? How much is being purchased? When will it be purchased? Is there an option to purchase more? When? Financing options available Savings Loans
199 Specialized lender Traditional bank Relative Savings – Appraisal Who pays for it? – Buy/sell agreement Legal representation Accounting representation Using consultants Negotiation Review of agreements Social needs – Quality of life – Urban or rural environment – Family needs Spousal/partner employment opportunities Education – Lifestyle needs – Religious needs – Staff acceptance – Community acceptance – Peer acceptance
for start-up practices or new satellite offices for existing practices) and 2) existing optometric practices in desirable areas that the practitioner may wish to join or purchase. The new practitioner can then follow up by telephone to determine if those practices are seeking associates and whether the office’s objectives and areas of emphasis coincide with those of the new practitioner. Whether practitioners simply network for opportunities or systematically search lists, generally they should not jump at the first opportunity that comes along. Practitioners should consider compiling a list of practice opportunities. In many cases, it will begin with a ‘‘long list’’ of potential practice opportunities that can be narrowed to a ‘‘short list’’ of serious prospects through follow-up contacts, and then, ultimately to a list of ‘‘finalist’’ practices with whom inperson visits are appropriate. A good needs assessment will prove critical in this process. Properly used, the needs assessment will allow the new practitioner to complete the search process with a list of practice opportunities that will really meet the practitioner’s needs and provide the foundation for a successful career. For a more in-depth discussion of the search process, see the AOA Practice Strategies articles, ‘‘A primer for practice success’’ or ‘‘A case study in practice transitions,’’ which can be accessed on the AOA Web site ‘‘Entering Practice’’ page (www.aoa.org/x4802.xml).
Marketing Practice hunting is ultimately a matter of supply and demand. Not all practices are in a position to take on an
200 additional doctor. Others could use an associate, but upon receiving an inquiry from a new practitioner may not immediately see why the new practitioner in question should be considered. Even if a new practitioner opts to establish a completely new practice from scratch, the practitioner will probably have to demonstrate to potential lenders suitable practice management skill and justification for the practice. In other words, new practitioners necessarily have to know how to ‘‘sell themselves,’’ optometric practice management consultants say. The ‘‘selling’’ begins with preparing a good professional resume´. However, it also entails addressing some generational issues. Established optometrists often cite lack of experience as a concern when considering new associates. New practitioners often do not have expertise in the various management skillsdfrom personnel management to claim filingdthat are necessary to operate a practice. In addition, they simply may not understand just how much time and effort are required to maintain a practice, established practitioners frequently complain. New practitioners may understand how much they will need to make to make a living; however, they may not always understand how much new revenue the practice may require to cover a new practitioner’s salary. Work ethic often becomes an issue. Many of today’s established optometrists figured out quickly that optometry was a business and found ways to make their practices profitable, according to Joe Gibbons, Ph.D., a founding consultant of the Brooklyn, New York– based FutureWork Institute, Inc.Ò and author of the institute’s Future of the Optometric Profession report. However, younger optometrists today often do not have the same business sense, become discouraged if they are not immediately financially successful, or, in some cases, even find making money ‘‘dirty,’’ according to Gibbons. In preparing the needs assessment, new practitioners determine what they require in a practice opportunity. During the marketing function, they have to accurately assess the needs of any practices they may be thinking about joining and then explain how they can help the practice meet those needs. The new practitioner must be able to show a practicing doctor ‘‘what you bring to the table,’’ according to Bob Schultz, CEO of Vision One Credit Union. ‘‘Every new practitioner must ask: How can the practice afford me?’’ New practitioners must be able to generate enough new revenues to cover the cost of their salaries and benefitsd and be able to do so within a reasonable period of time. In an already busy practice, new practitioners might be able to easily show that they will generate additional revenue by seeing patients who are being turned away. However, in most cases, new practitioners will have to be able to demonstrate that they will attract sufficient numbers of new patients to the practice by expanding the hours of operation, opening a satellite office, or providing new services (low vision rehabilitation, vision therapy). In some cases, practitioners may be able to demonstrate that they can attract sufficient numbers of new patients through community
Practice Strategies outreach. In others, they may be able to demonstrate value to the practice by taking on administrative functions such as evaluating insurance plans or overseeing human resource functions, freeing time for the practice’s other optometrist(s) to see more patients. New practitioners who are computer savvy may prove worthwhile to a practice if they can set up and maintain electronic health records and e-prescribing systems. In some cases, established practitioners nearing retirement age may desire to cut back on their hours in the practice. A new associate can often allow an established practitioner to take more time out of the office without cutting back the practice hours or seeing corresponding losses in patient revenuesdand can therefore be of great value to the established practitioner.
Negotiating Once a new practitioner and an established practitioner are convinced that an association will be mutually beneficial, a firm agreement for employment, partnership, or practice purchase must be negotiated. Both new and established practitioners often consider detailed negotiations to represent an arduous obstacle; especially negotiations on the exact terms of a professional relationship. However, a firm understanding on all aspects of the relationship is essential in preventing problems that can ultimately lead to a failed association. Often, negotiations prove unnecessarily problematic because one or both sides in the negotiations have not clearly thought through their requirements. Once again, the needs assessment can prove useful in helping the new practitioner enter negotiations fully prepared. In some cases, both sides may not be entirely forthcoming about their intentions regarding issues such as eventual partnership status or practice purchase. In other cases, they may simply not have realistic expectations. For that reason, a new practitioner should always have any contract for employment, partnership, or practice purchase, at a minimum, reviewed by an attorney who specializes in law related to optometric practice, according to Michael G. Harris, O.D., J.D., of the University of California, Berkeley, School of Optometry. Setting down firm terms for eventual practice purchase can be a key element in such negotiations; however, that involves determining the value of the practice to be solddand that is often among the major areas of disagreement between new and established practitioners. Over the years, several rules of thumb have been commonly used for the valuation of optometric practices. As in many fields of business, optometrists in the past have commonly held that annual gross revenue represents a reasonable purchase price for a practice. Most recently, two thirds of annual gross revenue has often been accepted as a good practice purchase price. ‘‘The rule of thumb for practices with annual gross revenues of $500,000 or over, 65% would be an appropriate multiplier,’’ said Bill Nolan, a certified public accountant and vice president of the Lincoln, Nebraska–based practice management consultancy, The Williams Group. So, for a practice
Practice Strategies with $500,000 in gross revenues, $325,000 (or 65% of $500,000) might typically be considered an appropriate asking price, Nolan said. Such rules can be helpful in initiating general discussions on the purchase of a practice. However, when it comes time to actually draw up a contract for the sale of a practice or to apply for a loan to finance the practice purchase, these rules generally will not be sufficient. More complex valuation formulas are commonly used by accountants and appraisers for real estate and business purchases, and many practice management consultants insist these formulas should be applied when the fair market value of an optometric practice is being assessed. The 3 basic formal approaches used to determine the value of a professional practice are: Asset approach Income approach Market approach The asset approach provides an estimate of value for a practice by assessing the 2 primary components that contribute to practice valuedtangible and intangible assets. The income approach considers the future cash flows that a business can produce based on the good will that has been created. The market approach focuses on key practice income and expense parameters such as net-to-gross ratio, percent of staff salaries, cost of goods sold, and overhead costs, comparing these to previous sales of similar practices. Many professional appraisers and practice management consultants recommend that optometric practices be valued using all 3 methods, with the results then averaged to determine a final value. Such a 3-step appraisal process is commonly used for residential or commercial real estate. However, both Nolan and Schultz say that for optometric practices cash flow is probably the most important valuation method. That is because most commercial lenders who are seriously interested in financing optometric practices will generally base loan amounts on cash flow, Nolan and Schultz agree.
Financing Financing, in general, is another of those processes that new practitioners generally consider an obstacle to practice. Many new practitioners lack experience in the business community and are nervous about approaching bankers, Nolan acknowledges. Many believe financing for optometric practices is simply not available. Many also suspect that the recent upheaval in the financial markets have made financing for optometric practices even harder to get. New optometrists are correct is assuming that many banks, large or small, will not provide loans for health care practice purchases, Nolan confirms. In general, banks do not like to make loans for businesses ‘‘they do not understand,’’ and most banks do not understand health care practice, he notes. In addition, most banks consider loans for health care practices to be insufficiently collateralized. Banks generally prefer to make loans for tangible assets, such as real estate or equipment. In many cases,
201 intangible assets such as ‘‘good will’’ represent much of the fair market value of an optometric practice. However, financing for practice purchases is available, according to Nolan and Schultz. And the recent financial turmoil has not really impacted financing for optometric practices, Nolan adds. The financial crisis on Wall Street has reduced the number of major banks and specialized lenders actively providing loans for optometric practices. However, that has not made loans harder to get, according to Nolan. Emeryville, California–based Matsco (www.matsco.com), an operating unit of Wells Fargo & Company, provides optometric practice financing for acquisition, start-up and expansion (including equipment and real estate) as well as working capital and business loan consolidation. The company is particularly active in the financing of optometric practice start-ups, Nolan said. Originally a provider of financing for dental offices, Matsco also provides financing for veterinary medicine and ophthalmology practices. It has offered financing for optometric practices since 2004. Wells Fargo in January purchased the loan and lease receivables of GE Healthcare Financial Services, which will now be managed through its Matsco unit. GE Healthcare Financial Services, which had been the nation’s largest provider of health care practice acquisition loans and the AOA’s approved provider of practice financing services, has now left the market entirely. GE Healthcare Financial Services, in 2004, acquired HPSC, Inc, which at that time was the nation’s largest provider of health care practice financing. Bank of America, another of the nation’s leading money center banks, advertises loans for physician, dental, and veterinary practices and could represent a source of loans for optometric practices, according to Nolan. However, Bank of America often requires the U.S. Small Business Administration (SBA) act a guarantor on practices loans, meaning applicants must complete the lengthy SBA application form, he added. The Sacramento, California–based Vision One Credit Union also offers a full range of optometric practice financing for acquisition, start-up, equipment, real estate, and working capital, according to Schulz. The credit union has become a national leader in financing for optometric practice acquisition, according to Nolan. The only ‘‘optometric credit union’’ in the nation, Vision One, was formed in 1951 by a group of California Optometric Association members as financial institution specifically intended to support independent optometric practices. In addition to financial services, Vision One offers a full range of deposit services, such as checking accounts and online banking, for practices. Although established to serve California practices, Vision One has been offering financial services for practices across the nation since 2004. The credit union specializes in loans to support entry into practice, In addition to its standard loan packages, Vision One recently launched its Vision Loans program, jointly developed with Vision Service Plan (VSP), for first-time practice purchasers who might qualify for down payment financing, in addition to Vision One’s primary financing, with terms specifically
202 designed to help offset risks that may be associated with practice transition. VSP and Essilor of America have established a $20 million fund to provide practice purchase loans through the Vision Loan program. Vision One is matching that fund with another $14 million specifically designated for practice acquisition loans.
Qualifying for the loan In general, those lending institutions that do offer financing for optometric practices will consider a new practitioner as a suitable loan candidate provided the practitioner has: Two years of tax returns for the practice that show ongoing cash flow A FICO (the acronym for the Fair Isaac Corporation, which provides the nation’s most widely used consumer credit rating) score of 650 or better No history of bankruptcy or adverse court judgments A practice’s cash flow can be determined by reviewing documents filed with the practice’s Federal Tax Return, such as the Internal Revenues Service (IRS) Form 1040 Schedule C profit or loss form, shown in Figure 1 (the exact form necessary will depend on whether the practice is a corporation, partnership, or sole proprietorship). Given the proper tax documents, a new practitioner who is considering the purchase of a practice can not only determine whether the practice is profitable, but also whether the cash flow will be sufficient to cover loan payments on the practice, a salary for the new owner that will cover living expenses and student debt service, and the practice’s ongoing expenses, Schultz notes. A new practitioner who is seriously considering the purchase of a practice should expect the current owner of the practice to make pertinent tax documents available. Schultz offers several tips that can help new practitioners when they apply for practice acquisition financing. Emphasize cash flowdAlthough real estate lenders generally require extensive collateral for loans, commercial lenders tend to look for cash flow, Schultz notes. In many cases, the cash flow data for optometric practices will be favorably received, Schultz believes. Offer a sound business plandNew optometrists consistently tell the AOA they do not know how to prepare loan applications or the business plans that bankers require. The AOA, as well as many schools and colleges of optometry, now provide materials that can assist. The Williams Group and other practice management consultancies offer business plan development services for new practitioners. The SBA offers a model business plan for small businesses of all types (www.sba.gov). When seeking financing for the purchase of a successful practice, a new optometrist should not propose a business plan that would radically change the practice. Lenders today prize stability. A few necessary improvements are fine. However, any major changes in the operations of a practice could disrupt the cash flow.
Practice Strategies Have a transition plandThe retirement of an established practitioner and entry of a new practitioner can be perilous for a practice. Up to 20% of patients may choose to begin getting eye care elsewhere when an established practitioner leaves. That can result in an up to 40% decrease in net cash flow. In such cases, rebuilding the practice generally will take around 2 years, Schultz said. To prevent such problems, one should develop a formal plan for the gradual retirement of the established practitionerd and the gradual introduction of the new practitioner. That transition plan should be included with the loan application, he emphasizes, to assure lenders that the chances for cash flow disruption during this critical period will be minimized. When applying for a practice purchase loan, Schultz advises, be sure to also apply for a line of credit to ensure working capital during the critical practice transition years. Loan officers will find this a prudent move.
Seller financing Perceived lack of credit for practice purchases has prompted growth in seller financing arrangements over the last few years. Under some such arrangements, new practitioners often ‘‘work off’’ the cost of a practice purchase, receiving an interest in the practice in return for seeing patients. Often, such purchase plans involve a ‘‘salary differential’’ arrangement under which the new practitioner works at a reduced salary with the difference going toward the practice purchase. In other cases, the new practitioner is paid a market-rate salary but can exercise an option to immediately purchase stock in the practice. Accountant Nolan favors arrangements that allow new practitioners to buy into the practice using their salary dollars over the salary differential arrangements, which he believes can pose tax complications for both buyer and seller. Any such arrangements should be undertaken only with the guidance of a qualified accountant, he emphasizes. The Practice Strategies article, ‘‘A case study in practice transitions,’’ examines ‘‘work-to-purchase’’ arrangements in depth. At least 2 practice management consultanciesdthe Williams Group and Pathways to Success, the Internet-based service developed by Mark R. Wright, O.D.dprovide assistance with such arrangements. The Vision One Credit Union also offers a seller financing program.
The importance of good advice Although the steps involved in purchasing a practice are not insurmountable, they can be complex and clearly must be handled properly. For that reason, optometrists should always be assisted by a specialized team of professionals who can provide necessary advice and support, according to Dr. Harris, who specializes in optometric law. This team should include: Accountant Appraiser
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Figure 1
Internal Revenue Service Form 1040 Schedule C Profit or Loss From Business form.
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Figure 1
(Continued).
Practice Strategies Broker/consultant Attorney Financial institution In addition to identifying an accurate determination of the value of a practice and helping with the securing of any needed financing, such a team can be essential in drawing up a purchase contract that will include all of the necessary provisions and conducting ‘‘due diligence,’’ the legal term for a thorough investigation of an asset prior to purchase. Due diligence is a necessity for any optometrist considering a practice purchase. That step alone will require a team of specialized professionals.
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For further information Entry into practice during even the best of times can present some challenges. The Checklist for New Practitioners, which follows in this edition of Optometry, outlines some of the steps all new practitioners should take before they see their first patient. To assist new optometrists with entry into practice, the AOA has developed a wide range of resources (see related article). In particular, the association is offering its new Practice Transitions program, a fullday course on practice acquisition. New resources will continue to be listed on the AOA Web site Entering Practice page.