This is a sponsored post by Vision Source®, a supporter of NewGradOptometry & new graduate optometrists!
Can this generation of new graduates still successfully open a private Optometry practice?
This is a common question among new grads due to the changing landscape of healthcare along with the disruptive forces and entities putting pressure on eye care providers.
The short answer is, absolutely, yes.
We had an opportunity to talk to Walt West, O.D., Vice President of Practice Development at Vision Source®, to get his thoughts on private practice optometry.
Vice President – Practice Development
Prior to joining Vision Source®, I practiced for 27 years in Brentwood, TN, served as Chief Editor of Optometric Management, worked as an independent consultant and as a professional speaker, presenting to audiences in 16 countries across 5 continents. At Vision Source®, I provide practice management consultations to members, develop doctor and staff training, assist members in practice transitions, and search for new and innovative ways members and their staff can better serve their patients by improving the office culture and practice efficiency.
1) How much business knowledge is needed to open an optometry practice? How can you gain this business knowledge over time without the risk of failure?
Many successful ODs have opened private practices without any business knowledge.
The most basic business principle is that you need more money coming in than going out. That may sound simplistic, but I see practice owners that sit and watch their practice bleed cash and take no action to rectify the situation.
Learning from colleagues and knowing where to find information on your own from the help of others is critical.
One misconception students have is that to be successful, one must have a wealth of business knowledge. This is not necessarily the case. Don’t confuse knowledge with experience. The difference is that knowledge can be gained prior to needing it and experience is what you get just after you needed it.
A lack of business knowledge is not a reason to dismiss the possibility of practice ownership. If you don’t have enough knowledge of business practices initially, that is something you can gain through a little studying as well as acquiring it over time.
The advantage we have today is the ability to gain this knowledge from so many entities, now more than ever before with all the resources readily available to us.
- Local community colleges
- Online courses (private institutions can teach online courses from the 101 Level to the MBA level)
- Experts in our field
One way to ensure success is to create a specialized and focused team of experts who can help you. There are accountants, lawyers, and other professionals that can provide the insight and knowledge that you may not have initially.
- Identify trusted advisors within optometry. Find people who can really help you, and answer questions you may have along the way. (ie: iCareAdvisorsLLC.com)
- Understand basic accounting principles. Look up the basics of accounting. Watch some of the readily available tutorials on quickbooks.com. Make sure you understand the basics of a profit and loss (P&L) Statement.
- Recognize the impact of cost of goods (COG) on profit margin. You need to know how cost of goods (COG) can affect the profitability of your practice and how to set your retail pricing. You also need to set your professional fees appropriately. A good resource is codesafeplus.com. This is a great tool for someone starting a practice or buying a practice to ensure they have their fees set appropriately.
- Familiarize yourself with Human Resources. You should begin to understand basic employment laws in your state and start to think about the culture you want in your practice.
There will be many times you will need to ask a question of a friend. For those practices who are part of Vision Source®, there is a network that can always help you. Even if you are just thinking about starting a practice, you can contact your local Vision Source® Administrator who can guide you through the process.
2) We did a survey and found that student debt was a leading cause of why ODs did not open a practice or buy into a practice. What should we do?
How you manage your finances dictates how successful you will be. Take a look at employment opportunities when you first get started and see how you can knock out some debt.
The main thing you need to know is that you must be able to meet your financial responsibilities.
A lot of people get bogged down when it comes to student debt.
There is good debt and bad debt.
- Good debt is money borrowed that allows you to achieve things that you otherwise could not, or allows you to accelerate your income potential.
- Bad debt is consumer debt. is consumer debt. This debt does nothing to help you grow your business, and acts as a drain on your ability to make ends meet
Consumer debt is debilitating. This type of debt can take away your opportunity to amortize your student debt or eliminate your ability to borrow money for the purpose of achieve the goals of your professional career.
Another common pitfall to avoid is waiting too long to pursue a career goal in private practice.
Dr. West has often had students tell him that when they graduate, they will work as an associate or in a retail chain to pay down student debt.
Unfortunately, while many of these new graduates reduce their student debt, they add consumer debt. Cars, homes, children and other life events occur. This is not necessarily a bad thing or an end to the potential for practice ownership, but you need to have a plan in place and stick with it if you ultimately want to be a practice owner.
3) How does an optometrist buy into a practice? What are the steps, from start to finish?
From a business standpoint, there are a few key ways.
The most common include:
- Total purchase – a doctor has a practice for sale. A sale price is offered, negotiation occurs, and a selling/buying price is agreed on. Once agreed, the buyer finds financing, hands over a check, and now owns 100% of the practice.
- Fractional purchase – instead of buying the entire practice, you can buy a portion of it, say 25%. Once you amortize that debt, you have the opportunity to buy another 25%, and therefore you can become a 50% partner in the business or eventually the sole owner.
- Sweat Equity – instead of buying the entire practice, you can buy a portion of it, say 25%. Once you amortize that debt, you have the opportunity to buy another 25%, and therefore you can become a 50% partner in the business or eventually the sole owner.
Each method has pros and cons.
Fractional sales make it easier for the purchaser because it is easier to qualify for a loan. The challenge comes when the lending institution wants to develop the terms of collateral.
Lending institutions are happy to provide a loan to purchase 25% of a practice. The problem is that the bank will typically want to collateralize the loan with 100% of practice assets. This creates a problem for the seller because he/she will not want the equipment they own tied to your loan.
Dr. West recommends you check out Vision One Credit Union in Sacramento California. They are one of the only lending institutions that might be able to work around this common barrier. They’ve funded ODs exclusively since 1951 and understand the need for fractional selling and are willing to work around these challenges for both the majority and the minority owner.
How can you determine the right valuation?
When it comes to valuation, about 60% of a practice’s annual gross revenue is pretty close to what a practice typically sells for. Valuation can change depending on how successful the practice is. If you have a 1.1 million dollar practice (which is about 2x what the average private practice produces) it doesn’t make sense to use the same 60% rule of thumb for valuation.
Valuation can change depending on how successful the practice is. If you have a 1.1 million dollar practice (which is about 2x what the average private practice produces) it doesn’t make sense to use the same 60% rule of thumb for valuation.
As a practice’s gross revenue increases away from that average (600K), the value of that practice also deviates.
Similarly, if a practice’s gross revenue is much less, then a lower percentage is applied because there isn’t much free cash flow in the practice.
Cash flow is key.
One way to protect yourself as a buyer or seller is to have a professional appraisal performed on the practice you’re considering.
4) How do you evaluate whether or not an optometry practice is worth buying into? What are some numbers you should consider?
These are the things everyone should want to see:
- Gross revenue – this is probably the number one metric. A lot of OD’s identify themselves by using this metric but it doesn’t necessarily mean success. There are 2.5 million dollar gross revenue practices out there that have massive cash flow problems because of the way they spend money. You’ve got to look at the profit and loss to understand how money is being spent.
- Expenses – what does the practice have to do to come up with that gross? How you spend money is much different than how you generate money. Some practices can overspend tremendously. Even though a practice can easily generate gross revenue, the way you spend can dramatically impact the profitability of the practice.
- The bottom line – the net profit. The bottom line separates operating expenses from the profitability of the business. Profit of the business is solely the property of the business owner(s). Sometimes, practice owners will include part of their base salary “above the line” as an operating expense and draw the remainder of their “take home” out of the profit.
5) What separates successful OD practices from those who are not successful?
This depends drastically on who owns the practice and what their vision is.
Many times, people limit themselves by the way they define success. One of the greatest challenges in the beginning of practice whether buying or opening cold is cash flow.
This can create a lot of stress and anxiety. The constant concern over making both ends meet financially can be overwhelming. There will be a time you find that the practice is generating enough money to meet all of your financial obligations.
Don’t let this stop you from challenging yourself.
You should always continue to challenge yourself, and prepare for the future including retirement. Though you may be young it’s is never too early to begin preparing for retirement!
Financial security should always be a primary focus. How much financial security do you have? Are you getting in the habit of putting money away for retirement?
That is why you have some optometrists who planned well, invested well and can retire comfortably. Others are forced to practice into their 70’s and 80’s, not because they want to but because they have to.
6) Is it better to open cold or buy into an existing optometry practice?
These days, many things can make opening cold a lot more successful earlier on than ever before because of access to resources that weren’t available in the past.
Buying into a practice has some incredible advantages.
“Look at the baby boomers, those born between 1946 – 1964, most of them are turning 65 and as they do, more and more practices go up for sale.”
There is a lot of untapped potential in many of these practices for sale. A lot of senior docs who are retiring didn’t get comfortable with medical optometry, which creates an opportunity for new graduates. New grads can offer an expanded scope of practice, and create a social media presence that can increase income potential which can take the practice to the next level.
One problem many existing practices have is that they have reached a plateau and have trouble getting to the next level of growth. This requires a marked understanding of what investments you need to make to achieve this next level of growth which might include: staff, equipment, furniture, services, etc.
Vision Source® is available to help you become aware of how you can achieve these new levels of growth. They can provide marketing consultations that can show you how you can have a higher impact on social media and in google search which is a very effective way to grow your practice.
Many ODs don’t do much marketing, at least not at a sophisticated level. A lot of established docs are using community-based entities, or older methods of marketing.
Vision Source® combines a few key tools to help in this area to create Geospatial Market Analysis.
This is market analysis tool, exclusive to Vision Source® that takes a street address and then identifies market areas of a 2-mile and 5-mile radius around that address to create a heat map that shows how many eye care dollars are spent within this radius. This eye care dollar spend map is then overlaid with travel data from GPS systems which can show you where people live and to which areas they travel to spend their money.
7) What are some of the best resources for OD’s looking to start or purchase a private practice?
Some of the best resources ODs can use are consultants in the industry.
Don’t feel like just because you are independent that you have to take on this venture alone.
Vision Source® is always available to help provide resources from social media programs to showing you where to obtain information. There are a lot of other independent consultants in the industry who can also help you.
8) How can private practices be competitive in the age of disruption with e-commerce and now online refractions?
Not all of your patients are interested in e-commerce but for the patients that are, you should have an e-commerce opportunity for them
There are some incredible opportunities for practices to participate within this realm. You can participate in a sort of omni channel delivery that can boost your revenue. Why not capitalize on the e-commerce play rather than fall victim to it.
Get involved . . . it isn’t going away.
When it comes to online refractions, we are well aware that this is NOT an exam, and we should make sure our patients know this as well.
If a patient chooses an online refraction over an eye exam, they will do so at their own peril.
In the future, Dr. West anticipates that online refractions will likely become more and more accurate. We should be figuring out a way to make this one of our practice offerings as a way to initially reach patients, educate them, and bring them into our practice for higher levels of service. As the technology advances, it’s certainly something to keep an eye on.
What is most important is to find a way to keep patients involved in your business no matter what the entry point.
9) What is the single most important factor in deciding where to open an optometry practice?
The top 3 factors are location, location, and location.
You need to know the general area where you want to open your optometry practice. Before signing a lease, you should do a geospatial analysis of the market area you’re considering. You should know the traffic count on nearby streets, where the most traffic is coming from, where people are spending money, and how to best attract them with marketing.
Many young ODs think that just because a new strip center has a vacancy that it must be a good location, but oftentimes this isn’t the case.
10) How can practices utilize technology to build their brand, patient base, and grow? Is it marketing? Communication with patients?
First of all, investing in technology is a way to enhance patient perception. It gives you something you can really use to market.
You need to know however what the return on investment (ROI) is with any equipment purchase.
A new piece of diagnostic equipment, for example, can show patients the practice is advancing. This is great, but is that piece of equipment going to help you deliver a better standard of care? If so, do you have enough patients in your practice, based on epidemiology, that utilization of this equipment on a monthly basis will generate enough revenue and gross profit to pay for the cost of the equipment?
If you segment your patient base using diagnostic codes, you can determine your potential utilization and gross revenue for any new piece of diagnostic equipment.
The utilization of a new instrument must be enough to pay for itself, but also generate a profit.
In growing a practice sometimes you must use a “field of dreams” approach. If you want more people to come, you have got to deliver more services, but you NEED to communicate your added services and expanded scope of practice to existing patients and your market area.
When you add technology, you MUST also market with an appropriate marketing campaign. Your patients and your community need to know what you are doing.
You should have a marketing plan.
How and what you market depends on the demographic of your patients and market area. Older patients may respond better to print ads, and younger patients are typically more responsive to social media ads.
With marketing, it’s important that you quantify your return on investment. Continue with what works and dump what doesn’t.
Never underestimate the impact of your marketing and when it’s going to have its effect. People may think of you today because of an ad you ran years ago.