Eyeing a Practice? How to Buy an Optometry Business in 2023
In 2021, a country-wide survey of over 1,600 optometrists found that the average annual salary of an optometrist was $180,253.1 A Bureau of Labor Statistics estimate from May 2022 pegs the annual optometrist salary at $120,7202.2 Compare these numbers against the findings of a 2023 market analysis report, which shows that the average annual income from an optometry practice is $866,000.3
Of course, a practice has other costs as well, but if growing your income by at least 4x is not enough motivation to buy your own optometry practice (as opposed to cold-starting a practice from scratch), there are the following added incentives:
- Increased cash flow: You inherit an established patient base and a steady stream of revenue, which can take years to build when starting from scratch.
- Experienced staff: You inherit a team of experienced staff members who are already familiar with the business, saving you time and money in training new employees.
- Equipment and suppliers: You get all of the equipment and suppliers that are already in place.
- Location: Buying an existing practice gives you the advantage of choosing a location that is already proven to be successful.
- Brand value: An established brand name and reputation is a valuable asset that can make it easier to attract new patients.
However, the process of buying an optometry practice is undeniably complicated. So how can you optimize the process of identifying, evaluating and buying the perfect practice for your optometrist profile? In this article, My Solutions InSight walks you through the strategic steps to take in buying an optometrist practice that is right for you.
What Does it Cost to Buy an Optometry Practice in the US?
Naturally, the first question you have when you’re seriously considering buying an optometry practice is, “how much does it cost?”
The factors that determine the revenue of an optometry practice vary widely—location, specialization, patient profile and average revenue per patient, staffing costs, leasing costs and so on. In consequence, the market value of an optometry practice also varies widely.
A ballpark estimate of the average cost of an optometry practice may be calculated using the following method:
- Calculate the average earnings before interest, taxes, depreciation and amortization (EBITDA) for an optometry practice
- Use the known Enterprise Value (EV) – EBITDA ratio for optometry in 2023 to estimate the EV
According to a macro-trends analysis, the average EBITDA for the US health-care sector in 2023 is 4.05%.4 Taking the above-cited market analysis report on average optometry annual revenue as being $866,000:
Average optometry EBITDA = $35,073 (4.05% of $866,000)
Similarly, a 2023 analysis of over 1,400 health-care firms reveals the EV: EBITDA ratio to be 8.78 for health-care services, and 24.16 for health-care products.5 Given that optometry practices combine both health-care services and products, a combined average can be used as the EV: EBITDA ratio for optometry practices in 2023, setting the ratio at 16.47. This yields:
Therefore, 16.47 × $35,073 =
Average EV or cost of optometry practice in 2023 ≅ $577,652
That said, while this average can be useful as a very rough ballpark estimate of investment needed, it isn’t necessarily indicative of what a specific practice is actually worth.
Which brings us to…
Evaluating the Real Value of an Optometry Practice in 2023
Given the magnitude of the financial decisions involved in buying a practice, you should ensure you have a thorough grasp of at least the basics of the evaluation process, even if you’ve decided to hire a professional appraiser to do it for you.
Here are the three key parameters involved in computing an accurate evaluation of an optometry practice.
Current revenue of optometry practice
Obviously, one of the primary considerations in valuation is the amount of money that a practice is currently generating. A comprehensive appraisal usually takes the revenue for the last three financial years into consideration.
In fact, most professional appraisers use a weighted averaging approach, in which the revenue for the oldest year carries the least weight, and the most recent year is weighted most heavily. This method also ensures that a practice with growing revenue is more favorably appraised, while one with declining revenue is penalized.
Using tax records to evaluate revenue rather than account books (profit and loss statement, balance sheet) provides a more accurate picture of revenue from an optometry practice. It reduces the likelihood of inflated sales figures and downplayed expense figures, since both kinds of misreporting lead to larger tax payments.
Assets and liabilities
There are two major approaches to evaluating the assets of an optometry practice:
- Tangible or physical assets only: This typically includes any premises owned by the business, vehicles, equipment (valued after appropriate depreciation) as well as inventory.
- Tangible and intangible assets: This kind of evaluation is more comprehensive, but more difficult, since it attempts to quantify the value of abstract but important aspects of a business, including its goodwill. (A business’ goodwill usually encompasses elements such as its good reputation, brand value, strong customer loyalty and excellent relations with employees.)
Liability evaluation usually takes into account the following factors:
- Debts: Outstanding loans, account payables (unpaid inventory and equipment bills), dues to employees
- Liens: Mortgages on property owned by the practice
- Litigation: Pending or ongoing cases in court against the practice
Two practices of similar size, operating in a comparable manner may differ widely in their current revenue generation as well as future potential, owing to differences in their competitiveness profiles. Although there are numerous factors that contribute to these differences, the major ones are:
- Age: In general, older practices have a stronger, local reputation, with a wider base of loyal customers. Therefore, the older a practice, the higher its commercial value.
- Location: The commercial attractiveness of an optometry practice location is determined by multiple elements, including average footfall, availability and convenience of parking, neighborhood safety and competition vs. complementarity of other establishments (for example, being on a block that has two other optometry clinics versus a clinic that regularly sends referrals).
- Specialist services and high-end equipment: Practices that can offer specialized facilities are typically in niches that command higher prices.
- Growth potential: The scope for growth also depends on multiple, widely variable factors. For example, the ease of hiring well-qualified and reliable staff in a given location, availability of inexpensive commercial space on rent, as well as access to untapped client bases (such as students, IT professionals, assembly line workers and so forth) can facilitate the expansion of a practice.
- Transfer of lease, contract and credentialing: Continuity of operations in an optometry practice depends heavily on how smoothly the transfer of ownership as well as operating rights can be effected. It is therefore crucial to evaluate how easily property and equipment leases, service and inventory as well as other contracts, and arguably most importantly, insurance credentialing can be transferred.
Approaches to Evaluating an Optometry Practice
The actual steps taken in calculating the current value of an optometry practice will depend on the amount of time and resources you have at your disposal. This section outlines three widely used approaches, going from the cursory to the most comprehensive:
This approach may be used where it is possible to obtain data on the recent sale price of similar optometry practices. A rough estimate of the price of the target optometry practice may be derived by computing either a raw or a weighted average of the prices of other, comparable practices. This method suffers from two major drawbacks:
- There are inherent differences in value across practices (see the previous section), therefore the value of one practice cannot be assumed to apply to another.
- Calculations may be led astray by misinformation, since actual sale price of other practices may be difficult to corroborate.
As outlined in the previous section, calculating the value of a practice based on its assets may rely on valuing only physical assets, or might extend to a valuation of both tangible and intangible assets. As suggested earlier, the valuation of a business’ assets may be based upon its book-keeping or tax records.
Tip: Clear descriptions of the assets owned by a practice (for example, “ZEISS CIRRUS 6000 optical coherence tomography”) make for much more precise valuation as compared to vague descriptions (such as “Optical Coherence Tomography or OCT”). A practice whose records are well-kept is therefore likely to make for a quicker, smoother transition than one with messy, vague records.
A key element while deciding whether to invest in a business is evaluating its cash flow, which is the total inflow and outflow of cash and cash equivalents during a given accounting period (such as a financial quarter or a financial year). This is why evaluating an optometry practice based upon its historical and/ or projected future income is generally considered to be a more comprehensive assessment.
There are two broad categories of income-based evaluation:
- Capitalization of Earnings: A simple way of thinking about this method is that it involves estimating the length of time required to recoup the investment made in purchasing the practice. Thus, the formula for valuing an optometry practice using this method is:
Value of Optometry Practice = Adjusted Earnings / Capitalization Rate
Capitalization Rate = Net Operating Income (NOI) / Current Market Value of Asset
Note: Adjusted earnings are calculated by summing up the profits, loss and deficiency reserves, capital gains as well as deferred liabilities of a business for a given accounting period. And since the market value of the asset (optometry practice, in this case) is unknown, the market value of a comparable practice (see the section on ‘Market Comparison’ above) is used as an estimate.
- Discounted Cash Flow (aka Revenue Stream): This method used previous years’ earnings data to make predictions about future cash flow. These projected cash flows are then converted to their present value based upon a ‘discount rate’.
Tip: The discounted cash flow method is advocated as the gold standard for property valuation by Prof. Mihir Desai of Harvard Business School, who teaches the acclaimed online course, ‘Leading with Finance’.6
Buying an Optometry Practice: Rules of Thumb and Red Flags
There are no guarantees on the long-term success of an optometry practice. Nonetheless, acquiring a practice in good financial and operational shape, and with potential for growth definitely tilts the odds in favor of your long-term success. With this in mind, the current section highlights key considerations in evaluating an optometry practice, with a view to maximizing the likelihood of identifying the ideal practice for you to own and operate.
Rules of thumb in evaluating and buying an optometry practice
Caution on Capitalization Rate
There is a widespread misconception among health-care professionals with little investment experience that they must look for a practice with an ‘optimal cap rate’. While the cap rate or capitalization rate is an important metric, with higher cap rates generally indicating higher investment risk, this consideration should be balanced against the market value, since practices with lower cap rates tend to have higher market value.
Debt Service Coverage Ratio (DSCR)
In simple terms, this index shows how much of the NOI (net operating income, aka cash flow) of a practice will be left over after loan repayments. A DSCR : NOI ratio of 1 means that all the revenue generated will go into repaying debt. Investors look for a minimum ratio of 1.3 to 1.4, while a ratio of 1.6 or higher assures you of a positive cash flow for your practice.
EBITDA – Salary Margin
As an optometrist transitioning from a salaried employee to a business owner, it is desirable to calculate the ratio of the target practice EBITDA to your current salary. Aiming for a ratio of 1.3 or higher—in other words, looking for a practice whose EBITDA represents a minimum 30% hike (or greater) over your present salary is advisable in return for the effort and challenge you are taking on.
Red flags: Warning signs when evaluating an optometry practice
Difficulty in Accessing Accounts and Documents
The owner of a practice who wishes to sell in good faith must be willing and able to furnish you with all the necessary documents needed to evaluate the practice. Any reluctance or evasiveness in responding to your requests for documentation are an immediate sign that there may be a history of mismanagement or fraud.
Lack of Transparency in Appraisal and Pricing
If the price quoted by the current owner diverges significantly from your own expert’s valuation, and if you are unable to obtain a proper report of the seller’s valuation process, this could be because:
- The seller has arrived at an arbitrary number without a professional valuation
- There are irregularities in book-keeping or other business practices
- The seller is basing the valuation on faulty reasoning likely to derail negotiations
In any of the above scenarios, it is unlikely that you will be able to arrive at a mutually satisfactory agreement with the seller.
Insurance Plans, Coding and Billing
An area that merits close scrutiny is the ratio of vision plans to medical insurance plans in the current client base. Since recent trends show declining reimbursement rates on vision insurance plans compared to medical plans8, a practice with a high proportion of the former may face stagnant or even declining revenue, despite an increase in the number of patients.
Another warning sign is finding an unusually high incidence of similar insurance codes and billing across patients. Keep in mind that even patients with a similar vision condition (for example, glaucoma) often require different work-ups and significantly different care. Therefore, high uniformity in coding and billing might be indicative of insurance fraud or malpractice.
Adverse Local Conditions
Despite having a good track record, an optometry practice may be struggling to cope with conditions that make it difficult to run the practice profitably, such as a local economic decline, staffing shortages or increased competition. A comprehensive evaluation should therefore include an informal survey of other local businesses to learn of recent operating conditions.
Congratulations on gaining the insights needed to make the big decision of buying an optometry practice. If you’re ready to take the next step and maximize your transition to owning your own optometry practice, check out how you can get ahead of the competition with expert revenue cycle assistance and staffing services.
Also, don’t miss out on our 3X Growth Playbook, which we’ve packed full of actionable marketing tactics to supercharge your optometry marketing.
- Review of Optometry. (2021, December 15). 2021 Income: Back on the playing field. Retrieved May 10, 2023, from https://www.reviewofoptometry.com/article/2021-income-back-on-the-playing-field#:~:text=Optometrists%20up%20North%20reported%20an%20average%20income%20of,most%20profitable%20place%20to%20practice%20optometry%20in%202021.
- National Industry-Specific Occupational Employment and Wage Estimates. (2022, May). U.S. Bureau of Labor Statistics. Retrieved May 10, 2023, from https://www.bls.gov/oes/current/naics5_621320.htm
- Vertical IQ. (2023). Optometry practices. Retrieved May 10, 2023, from https://verticaliq.com/product/optometry-practices/#:~:text=The%20average%20optometry%20practice%20has%20a%20single%20location%2C,6-7%20employees%2C%20and%20about%20%24866%2C000%20in%20annual%20revenue.
- Healthcare Services EBITDA Margin 2010-2023 | HCSG (2023, March 31). Retrieved May 10, 2023, from https://www.macrotrends.net/stocks/charts/HCSG/healthcare-services/ebitda-margin
- Statista Report (2023). Average EV/EBITDA multiples in the health and pharmaceuticals sector in the United States from 2019 to 2022, by industry. Retrieved May 10, 2023, from https://www.statista.com/statistics/1030072/enterprise-value-to-ebitda-in-the-health-and-pharmaceuticals-sector-in-united-states/
- Blah blah (n.d.). Retrieved March 28, 2023, from https://www.futuremarketinsights.com/reports/vision-care-products-market
- Harvard Business School Course Website (n.d.). Leading with Finance. Accessed May 10, 2023, from https://online.hbs.edu/courses/leading-with-finance/
- American Optometric Association (2020, August 17). Plans’ stagnant fee schedules undervalue primary eye care. Accessed May 10, 2023, from https://www.aoa.org/news/advocacy/third-party/vision-plan-reimbursment?sso=y