Selling to a private equity affiliate seems like the activity du jour for today’s optometry practice owner. Well-recognized ODs who have partnered with optometry private equity include Drs. Neil Gailmard, Chris Quinn, Alan Glazier, Greg Ossip, Jack Schaeffer, and Ben Gaddie. In our influencer-based culture, it’s easy for a practice owner to wonder if they should cash in and sell their practice to private equity.
In this article, I’ll cover:
- How to decide whether to sell an optometry practice to a private equity-backed consolidator
- How to do an optometry practice valuation
- How to attract private equity consolidators
- How to boost your optometry practice size (and asking price!)
- How to attract a private equity consolidator when your optometry practice is small
- How to understand what private equity consolidators look for in a practice
- How to prepare your optometry practice for sale to a private equity consolidator
- How to manage situations involving multiple optometry practice owners
How to decide whether to sell an optometry practice to a private equity-backed consolidator
The reasons to sell are multifactorial and often personal, ranging from a desire to retire to a need to diversify or even liquidate. Maybe you are simply tired of managing the business! A key question to consider when thinking about selling your practice is where you see yourself in three to five years. Going through this thought exercise can solidify your decision to sell now, hold onto your practice, or take a different approach.
For instance, if you like calling the shots and have done so for a long time, selling to private equity may be difficult. You should also consider the possibility of unpleasant operational changes that could make your work environment unpleasant since you’ll almost certainly have a contractual obligation to stay on board as an employee for a predetermined retainer period, often two or more years. You will most likely also take a pay cut once you are an employee of the private equity affiliate, so make sure the following factors tip the scales clearly in your favor:
- Sale price
- Reduction in business risk
- Work schedule and patient volume
- Work environment and staffing quality post-sale
- Contingencies, should you depart before your retainer expires
When considering whether selling your optometry practice to a private equity affiliate is right for you, remember that it ultimately comes down to what you want, not what others are telling you. My feeling is that most optometrist-owners are better off holding onto their practices, although the option of selling to a private equity affiliate is a welcome addition for some.
How to do an optometry practice valuation
Appraisals are not needed in private equity-backed transactions since consolidators do not need to qualify for a loan to buy your practice. Practice valuations vary greatly, and the ultimate valuation depends on negotiation. The only way to know what your practice is worth is to test the market. Just because a private equity fund has billions of dollars allocated for practice acquisitions does not mean that a consolidator will overpay for your practice. In fact, the likelihood is that an initial offer will be low, sometimes disrespectfully so. Remember that the party that displays the least emotion often gets the best offer.
To do a practice valuation, it is useful to know that the consolidator will offer a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization). Your accountant can tell you your business EBITDA, which is a metric of your profitability. While a traditional OD-to-OD sale may go for two to three times EBITDA, a common optometric practice may go for three to six times EBITDA, and a mega practice might go for six to 10 times EBITDA. While many OD owners think of their practice value as a percentage of their gross annual revenue, the multiple of EBITDA calculation is the standard method of valuation for private equity consolidators.
And don’t forget the geographic component! A private equity consolidator will only buy your practice if they want to move into your location. In general, the first few acquisitions in a region command the greatest potential to sell at an elevated price.
While owners are often fixated on the sales price, I believe that the collective weight of the other terms of sale is more important. A non-exhaustive list of other items to consider include:
- Installment payments, including if they are subject to forfeiture
- Tax treatment of the sale
- Subsequent compensation and benefits
- Retainer period
- Restrictive covenant
- Operational changes and resulting work environment
- Implications for your employees and patients
How to attract private equity consolidators
If you want to make your practice attractive to private equity, the consolidator must smell money—that is, they must be able to foresee making money off your practice by flipping it three to five years later. To some degree, the desirability is baked into your practice, due to factors like geography, patient demographics, and general practice model. Yet you can also cultivate desirability, by increasing collections and the dominance of your practice in the region. Strategies for this are described in the next section.
Keep in mind that the current sellers’ market won’t last forever. Any efforts to make your practice attractive to private equity might not happen quickly enough to occur when private equity’s interest in eye care still remains strong.
How to boost your practice size (and asking price!)
Each private equity-backed consolidator will seek different attributes in the practices they acquire. That said, the most desirable practices for an initial entry into a market are typically mega practices that are locally dominant. For example, a single-location group doing over $10 million in revenues, or a multi-office practice of 10 locations spread around a metropolitan area. The reason for this is that the consolidators are looking to quickly build scale and there is no better way to do this than to go into a region with a “bang.”
Be that as it may, there are very few optometric practices that fit this bill. The owners of these Prarified mega-practices have almost certainly already been courted with multiple unsolicited offers to sell. For smaller optometric practices, owners can attract private equity by increasing annual collections in excess of $1 million and establishing several office locations in the vicinity. It is important to recognize that by doing so, you concurrently make it harder to sell your practice to the run-of-the-mill OD buyer. There just are not as many ODs who have the wherewithal to buy a multimillion-dollar practice.
If you foresee approaching private equity consolidators in a year’s time, that gives you a year of lead time to make efforts to increase your EBITDA. Doing so may mean deferring maintenance and trimming non-essential costs to spike your earnings. This would be analogous to a boxer slimming down to make their weigh-in. However, this strategy may be of limited value since consolidators will look at financial track history well beyond one year, usually three years of financials. Still, doing so can maximize your EBITDA and facilitate negotiating a favorable sales price.
If you are entrepreneurially minded, you could also consider banding together several practices with your own to sell to a consolidator as a package. This approach may help you negotiate a purchase price at a higher multiple of earnings. The downside is that it is not easy herding together several practice owners to behave as a single unit, given each owner’s unique personality, needs, and expectations.
Another alternative is buying practices in your area yourself and putting them under your own umbrella, before shopping off your stable of practices to a consolidator. In each of these strategies of self-aggregating practices, you will assume risk and expenditure of time, but boost your chance of a larger payout upon exiting.
How to attract a private equity consolidator when your practice is small
It’s not realistic for a practice grossing $400,000 annually to grow quickly enough to attract a private-equity consolidator within the current buying cycle. In these cases, even if you are in a metropolitan geographical area that a private equity consolidator wishes to inhabit, these smaller practices will generally get passed over.
However, once a consolidator establishes a network of practices in the vicinity, they may want to pick up these smaller practices opportunistically by buying the practice’s records, closing their locations, and shuttling the patients to a facility within the consolidator’s network. Observers may view this business behavior as predatory since the smaller practices get smothered. Yet these acquisitions can also help the owners of these small practices exist, especially when they have no other buyers and face the undesirable prospect of simply closing their doors.
How to understand what private equity consolidators look for in a practice
You might think that consolidators are looking only for the high-grossing practices with relatively low profitability. That way, it is easy for them to buy practices for a bargain price, then increase profitability through simple changes. This would be like buying a run-down home in a highly desirable area for a depressed value and then painting the walls and making easy, low-cost repairs to extract value.
While some private equity-backed consolidators seek practices where the owner is oblivious about how to easily extract value on their own, most consolidators seek the practices with high earnings and peak performance. These targeted practices with excellent cash flow permit the consolidator to take advantage of multiple arbitrages, i.e., the ability to sell the resulting network of practices for a greater multiple of earnings than the sum of what each of these practices would fetch on their own.
In other words, even if the earnings of all the practices under a consolidator’s umbrella is the same as before acquisition, the total network of practices can be sold for several multiples of earnings greater than they were purchased for. These high-performance practices are also valuable to the consolidators since the elements for high profitability can potentially be replicated and scaled elsewhere.
Still, other consolidators put a greater emphasis on controlling OD referrals to their MDs to maximize surgical revenue. Most consolidators seek operational leverage where their large-scale acquisitions allow them to cut costs by centralizing the following:
- Revenue cycle management
- Information technology
- Appointment scheduling
- Human resources
A consolidator may apply a combination of these methods to bring themselves value.
How to prepare your practice for sale to a private equity consolidator
To maximize the performance of your practice in preparation for sale, should you implement electronic medical records, hire a social media marketing company, and use a patient communication system—if you aren’t using any of this right now?
If you are looking to sell in the near term, probably not. This would be analogous to installing new cabinets in your kitchen before listing your house, only to have the new owner rip it out because it doesn’t suit their taste.
If you convert from paper to EMR, you may only find later that the consolidator wants you to change to another EMR. The better idea is to make the implementations that would enhance the cash flow of your practice, especially the ones that would allow you to significantly improve earnings and allow you to enjoy this benefit until the sale of the practice. If the improvement does not have enough track history, it will not get figured into your EBITDA, which is important in determining your sale price.
Similarly, it likely does not make sense to invest in major cosmetic improvements in your practice (e.g., remodel) right before selling the practice. If a significant remodel is in order, it’s better to negotiate that the new buyer do this as a condition of the sale.
How to manage situations involving multiple practice owners
Private equity consolidators prefer negotiating with owners who are on the same page and willing to sell quickly. For the consolidators, time is sometimes more costly to them than spending money. If two co-owners are at odds with one another, it is worth realizing that a private equity exit is not necessarily a ticket to disentanglement. The two co-owners should discuss their expectations and needs in advance of negotiating with a prospective private equity-backed consolidator.
It is also worthwhile to remember that consolidators are most interested in sellers who intend to stick around for a few years, rather than retire immediately upon the sale. In part, this is because the owner is used by the consolidator to implement changes in the practice. This often includes using a new electronic medical record. The consolidators also realize that patients are loyal to the doctor. The acquired goodwill can evaporate if the doctor leaves, causing a downturn in earnings.
Trying to make your practice attractive to private equity is a bit like putting the cart before the horse. Rather, it is important to first determine if a private equity exit is feasible (i.e., your practice has enough EBITDA and is in a geographically desirable location for consolidators). If it is, the question then becomes whether selling your optometry practice to a private equity affiliate would satisfy your needs and wants. For most ODs, it may not be worth making significant changes to the practice before the sale, since the time it would take to implement and then track the effects of these changes may take too long.
Remember that the consolidators are not there to protect your best interests, nor those of your patients and staff. Their sole directive is to make money and extract value. Even though many of them are cordial and helpful, you absolutely need strong sell-side representation to protect your interests. Don't do this alone! Speak with colleagues who have firsthand experience and retain professional guidance. You will certainly need an attorney to review transaction documents. You can also retain a practice consultant with experience negotiating with optometric private equity-backed consolidators.