Dental and Medical Counsel Blog

We recently published Things to Consider When Purchasing an Optometry Practice, Part One. We concentrated on:

• Choosing a location.
• Making a complete versus a partial purchase.
• How to value the practice.

In Part Two, we explain to you how an advisory team can assist and do most of the work for you. A team generally consists of an attorney with expertise in medical practice purchases and an accountant who is also a tax professional. All work together to assist you every step of the way.

Specifically, Part Two of Purchasing an Optometry Practice focuses on:

• Why you should seek the assistance of an advisory team and how each member of the team can help you in evaluating the practice.
• Making a smooth transition from seller to buyer.

Your Advisory Team: Accountant and Attorney

Purchasing an optometric practice will likely be the single most important investment you will make during your career as an optometrist. Your advisory team will ease the process and assist you in analyzing financial documents, evaluating legal documents, and watching for red flags.

How an Accountant Can Help

An accountant assists with conducting financial due diligence. Your accountant will obtain all financial statements and review them thoroughly. These statements should have been prepared when the optometrist listed his or her practice for sale.

If there is some hesitancy to release the documents, or if they are not readily available, this should be a red flag alert. Be cautious. The financial records for your review should go back at least three years and preferably five years.

The documents in general will show you the trend in the practice for patient retention and cash flow. You need to know how much money it takes to operate the practice, what the expenses are, what the collection rate is, and whether the practice is growing or diminishing.

Some sellers may have decided to retire and have not been as active in the practice for a while which is indicated by declining patient load and revenue. This is important information and may help you negotiate a better price for the practice than you would pay for a more flourishing practice.

Cash Flow: Income Sources and Overhead

How money flows in and of the practice is vital information. Cash flow is what provides the means to fund the expenses of operating the practice and pay the debt you incurred when you financed your purchase. You need to be sure the practice generates enough revenue to provide you a salary that meets your needs, is a good investment and can pay the practice overhead.

As with any medically related practice, you need to plan for the peaks and valleys. Cash flow analysis will show:

• When and how customers pay. Do they pay at the visit or are they sent billing statements? Do most of them have insurance that needs to be billed or do they pay themselves and are required to submit the statements to the insurance company themselves?
• What is the collection rate?
• Which procedures generate the most revenue?
• What are the routine expenses?

Accounts Receivable

This should show how much money is owed to the practice by patients and insurance companies. Beware of a high balance, or of patient credits. You do not want to get into a situation where patients are either not paying for services or are asking to be reimbursed for credits. If this appears to be the case, you want the seller to take care of these refunds prior to the final sale.

How an Attorney Can Help

An attorney can provide valuable guidance by looking over documents that already exist and drafting new ones when necessary. The attorney will make certain that you know exactly what you are purchasing. The purchase likely includes the equipment, inventory, and the lease for the practice space. It also generally includes the provision that the employees also stay with the practice if possible.

Checking patient files to determine patient retention rate is important. If there is a problem, it is important to determine why. You will not want to purchase a practice where patients are leaving unless you can identify the problem and decide if there is some action you can take to prevent that from continuing to happen.

Other documents and clauses your attorney will review and determine if they are included in the purchase include:

• Lease Agreements. Your attorney will review current lease agreements for the office and the equipment. You need to know exactly what expenses are associated with the leases and what your rights and obligations are under all agreements.
• Employment Contracts. This includes employment contracts for all staff, including associate optometrists and assistants. If there is a employee handbook, the attorney will also want to review those to see if they meet with your approval.
• Restrictive Covenants. A restrictive covenant is a clause in the purchase agreement that prevents the seller of the optometry practice from opening another practice within a certain geographical distance and for a certain period of time. Your attorney will discuss with you the advisability of having such a covenant in your purchase agreement.
• Non-Disclosure Agreements (NDAs). Sellers may include an NDA designed to protect the seller’s financial information. Such an agreement is legally binding, so you do not want to sign it unless your attorney has reviewed it and determines that you will not be prohibited from sharing financial information about the practice with your accountant and tax professional or your attorney.  
• Exclusivity Clause. An exclusivity clause in a lease agreement restricts the owner of the building from leasing space to another optometry practice in the same building. Your attorney will discuss with you if adding that clause is in your best interest.
• Relocation Clause. A relocation clause allows the landlord to relocate your business to a different area of the building. You likely do not want to agree to this.
• A Recapture Clause. Your attorney will watch out for this one. This clause allows the owner of a building to refuse to allow you to sell the practice unless turning over some of the profits to the building owner. A recapture clause may say that the owner can cancel the lease instead of allowing you to sell the practice.
• An Option to Renew. You want to be able to renew your lease if it runs out. In most cases, optometrists do not want to move to a new location, so the option to renew is important. The clause lays out the terms of when to exercise the option and how much notice you need to give the landlord if you decide not to renew your lease.

Transition Process

The transition process depends on the specific agreement between seller and buyer. Some sellers want to be completely removed from the practice and want no part of the transition process. This may be a good thing and be exactly the clean break you want, as you will be your own boss on day one.

On the other hand, you and the seller may agree to have the seller stay for a predetermined length of time after the sale is final. This may help with community relations and be a big factor on whether the established clientele remains with the practice.

Advantages of having the seller stay around for a bit may help you maintain goodwill with the community as well as the staff. Disadvantages may be that the seller disagrees with you on some issues and the staff may have more loyalty to the seller than to you, the new owner.

If you and the seller plan to have the seller stay somewhat active in the practice during the transition time, your attorney needs to make certain the purchase agreement thoroughly establishes the parameters, such as how long the seller will remain with the practice, how much involvement he or she will have in the practice, and how compensation will be determined.

Hopefully, the transition can be handled smoothly so the patients will hardly notice there is a changeover, and staff will continue in their established roles.

Conclusion

Purchasing an optometry practice can be rewarding emotionally and financially. Using professionals to assist you in making this purchase will ease the transition and allow you to be practice fully prepared on your first day as a practice owner.

At Dental & Medical Counsel, we have helped hundreds of optometrists, dentists, and other healthcare professionals with their practice purchases. Contact us to schedule a free consultation where we can discuss your needs and how we can help.