How Much Should A Junior OD Pay For A Practice?
Dr. Beyer writes:
I am in the process of trying to purchase a practice that I have worked in as an associate for five years. I had a formal valuation of the practice and gave the senior doc an offer based on this.
However, he thinks the practice is worth more than the appraised value because it nets 40-50%. That is quite a bit more than the 30% average I see published for most practices.
I do not plan to manage the practice the way the senior doc has and therefore do not expect to net that much on a percentage basis. The office is somewhat dated and I feel that significant investments will be needed to provide standard of care for our patients.
What is a realistic way to estimate the value of this practice? Should I be considering paying above the appraised value for a 600k grossing practice due to the higher net?
I look forward to hearing back from you.
Jerry Hayes, OD responds:
Let's start with the basic assumption that every buyer wants to pay as little as possible and every seller, of course, wants to receive as much as possible.
There are many ways to value a small business... this is an art, not a science. A simplistic way for a buyer to determine a maximum offer price would be to:
• Working with an accountant, carefully determine the net you will realize as the owner of the practice once you take over. Let’s say in this case that’s 33% of $600,000 = $200,000.
• Then decide how much salary you need to justify running the practice, and to live on, until you pay off the loan. That’s your call, but let's say $110,000.
• Now look at the income available to you to pay off a loan. In this example, it is $200,000 total net income minus $110,000 for your salary which leaves $90,000 to service the loan.
Using any internet payment calculator, we find that you can repay a $500,000 loan with monthly note of $7,793 at 8% over 7 years.
Therefore, in theory, you could justify spending around $93, 516 ($7,793 x 12 months) each year to retire a $500,000 loan over 7 years at 8% interest.
Keep in mind that this is an overly simple way to explain the methodology. If you can get it at the right price, I find that buying an established practice is usually better than opening cold.
I can't stress how important it is to verify the 'true net income' of the practice. Then have your accountant and banker help you play with your salary and loan pay back numbers to make sure they work.
Before you write the check, you also have to make some important judgement calls:
• Can you maintain the same level of production when the senior doctor is gone? The bigger the annual gross income, the steeper the learning curve for the junior partner.
• If you do decide to pay a higher price because this is a high net practice, what makes you think you can maintain a 40% net profit as opposed to the average of 30%?
• Are you going to be comfortable with that much debt for next 7 years?
The final option to consider is the 'do it yourself' question: “What if you borrowed half that amount and opened your own practice somewhere else? How long would it take you to get your income up to the same level?”
My final piece of advice is, an asking price is just that. Everything is negotiable.
I hope this helps.
Disclaimer: The information and opinions contained on this site are for discussion purposes only and are NOT intended to serve as legal, accounting or investment advice. ©2009 Jerry Hayes, OD. Not to be reproduced without written permission of the author.
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A very interesting and
A very interesting and complicated subject.
After purchasing three practices in the past 10 years and many different evaluations to determine practice value the repeating value each way was 67% of collected gross +/- 4%.
One key to our success was that the senior doctor's were willing to hold the note and adjust the payment overtime to meet the practices future growth. Another key is that the junior partner must realize the persistent dedication required to work hard so we can all meet the future financial demands of the practice.
Good luck to those out there; it is always an adventure!
Your articles are always
Your articles are always interesting and informative. This latest blog is of interest to me because I would like to bring in a employee doctor working toward becoming a partner and then do this again to build a group practice. Is there a way to do this to maintain basic control of the direction of the group and my autonomy in the group?
What formula would you use for paying an employee Dr and to buy into the practice and how would we negotiate the next Dr's salary if two of us then brought the third Dr on board? Our practice gross is in the low seven figure range, our receipts are around 60% and our income ~30%.
We tried twice to bring in an associate and paid them a set dollar amount per work day. Neither Dr worked out, but I feel it was more my fault than theirs and I do not want to repeat this scenario. The opportunity is here. We need to find the right Dr and the best way to bring him/her into our practice and grow a group. What are your comments for an easy fix?
Our practice includes comprehensive visual examinations, contact lenses, orthokeratology, vision therapy (for developmental care, strabismus, amblyopia, sports vision and traumatic brain injury), pediatrics, geriatrics and low vision, glaucoma, DPAs and TPAs; and co-management of lasik, cataracts, retina, and patients we work with from cardiologists, family practice, neurology, rehab specialists, dentists, chiropractors, etc.
We try to keep our instrumentation updated and have instruments like Zernicke topography, RTA and Optovue RTA, CAM, anterior and posterior photography, Ocular Blood Flow Analyzer, Readalyzer, WAM, etc in addition to the standard instrumentation a practice should have in the office, and we are refurbishin our dispensary. The only thing we have yet to add is an EMR system since our vendor says they are still developing theirs and the other systems we looked at are inadequate.
Sincerely,
Dr. Shaw Yorizane, Jr.- Comprehensive Primary Care and Developmental Optometry
I have more articles to come
I have more articles to come on ICE (Income, Control and Equity) for practice owners like Dr Yorizane who are looking to bring in juniors partners, yet maintain automony.
Dr. Hayes, I wanted to
Dr. Hayes,
I wanted to second your advice. Valuing a practice in this way makes for a great starting point for a negotiation. The learning curve of seeing patients and managing a practice also makes it difficult for the buying doc to achieve the same net as the seller. I have seen friends pay too much buy not considering how the debt service would affect their net.
Often when purchasing a practice the buyer will want to upgrade the equipment and/or remodel the office. The buyer should also take this in consideration when setting the purchase price and calculating their total debt service.
Enjoying your blog. Thanks again
What formula(s) did the
What formula(s) did the evaluator use to arrive at the value that you have?
Did he/she not use a method that takes the high net, dated practice, old equipment, etc. into account?
Was your contribution to the value of the practice in your 5 years of employment taken into account to some degree?
An additional approach would be to have the senior Doc get his own valuation and then look for a middle ground.