You Can Afford the Practice of Your Dreams

Optometric Management, Sep 2005 by Milburn, Timothy

Many of these questions are more important than whether the seller demands an extra $10,000 - $20,000. Here's why: An additional $20,000 might add $400 to your monthly payment, but if you walk away, you could lose $120,000 a year in potential net income! Sellers shouldn't get everything_they want, but it might be wise to accept a higher purchase price if the seller makes concessions on issues such as rent, employment, and financing.

Before you negotiate, decide how much you can afford, or better, how much debt the practice can afford. Remember your new business (not your personal finances) will repay the loan and allow you to take a somewhat reduced salary during the loan payoff period. Two factors come in to play: the projected monthly net income of your new practice and your monthly payment on the practice loan. I used an amortization calculator that I found on the Internet to structure the terms of both of my deals without help from a CPA or banker.

The first senior doc and I came to terms sitting at his kitchen table plugging numbers into his laptop computer. He agreed to finance 95% of the practice for less than $1,000 per month. The deal included a 15year amortization schedule with a balloon payment after only five years. If the practice failed, I could handle a payment of $1,000 per month. Plus, I anticipated that the practice would grow enough within five years to allow me to make the balloon payment or, worst-case scenario, I could refinance the deal. The financing and interest rate favored the seller, but this was appropriate, considering that he took on the risk of a new graduate.

We agreed to a purchase price equal to 65% of the average gross income for the practice over the last three years. Some might argue that I paid too much, but the price exceeded the value of the equipment and inventory by only a few thousand dollars. This allowed a minimal payment to the seller for the patients' charts and the goodwill in the practice.

Even though this small practice was dying, we still had cash flow the very first month. We found this to be much easier than opening cold. We joked that we had decided to open "lukewarm." Maybe we could have saved some money by opening cold, but I believe it would have cost us money in the long run because there would have been almost no cash flow during the first month.

With the second seller, we agreed to a price equal to 57% of the average gross income over the last three years. The purchase price included his newly finished office space, all inventory and equipment and a GDx nerve fiber analyzer. The deal with the second seller also included an option to purchase the office condo, a favorable rent agreement, 20% seller financing, and a work agreement with the seller.

We got a better deal on the second practice because values have fallen over the past four years. Fewer and fewer grads purchase practices right out of school and this has a negative impact on current practice valuations. A smart buyer can name the price and have pick of the best practices available,