How To Buy a Practice: 12-Step Guide

Introduction & Overview

Introduction

Navigating the complexities of practice acquisitions is a formidable task for an OD, whether you’re buying or selling. There are 3 main pathways for purchasing a practice:

(1) Buy Out – practice is purchased in full by one or multiple ODs

(2) Buy In – a portion of a practice (equity share) is purchased by an OD, thus making that OD a partner.

Minority Stake Partnership – The OD buys less than 50% of the practice, thus earning equity but not control of a company.
Majority Stake Partnership – The OD buys more than 50% of the practice, thus earning control of the company and primary decision-making ability.
Equal Partnership – The OD buys exactly 50% of the practice, thus becoming an equally controlling owner as their counterpart.

(3) Private Equity/Corporate Acquisition – an entity purchases a practice in full and puts it under the control of a larger corporation. The seller is normally compensated through an earn-out, traditionally structured over a 3-year period – a certain amount of the purchase price may be presented up front, and compensation may be with cash or stock options.

Types of Purchases

Practice purchases can happen in one of two ways:

(1) Asset sale – buyer buys assets of a company and can therefore specify liabilities that they want to assume – thus making this option more advantageous to the buyer.

(2) Stock sale – the company is sold in full and the buyer assumes all liabilities, including unknowns, thus making this option more advantageous to the seller.

*Note that most practice sales take place as asset sales.

The 12 Step Guide to Buying a Practice

Quick Jump to Steps

(1) Determine which practice you wish to purchase

The decision to purchase your own practice, whether it’s your first or tenth, entails weighing the benefits of ownership, such as higher compensation and autonomy, against the financial and operational responsibilities it brings. Practice ownership is a journey of lifelong learning, demanding energy, tenacity, and discipline to manage organizational skills and workload effectively.

Creating a list of criteria for your ideal practice is crucial, with factors like location, ease of commute, steady growth, reputation, culture, profitability, and returning patients being important considerations. Location plays a significant role, with rural practices often offering advantages like lower costs and higher profitability despite lower doctor compensation.

Conducting thorough geo-spatial analysis to understand the demographics and growth trends of potential patient populations is essential in choosing the right location. When considering practices for purchase, it’s vital to view them as businesses rather than just jobs or careers, aiming ideally for practices generating at least one million in annual revenue to support growth and sustainability. Practices below this revenue threshold may require supplementary income sources until they can adequately support staff wages and expenses.

From a financial perspective, location is your number one deciding factor when it comes to net income. Rural practices will normally have lower occupancy/real estate, staff costs, and, in some instances, the cost of goods. This, in turn, will allow for higher net incomes and doctor compensation vs. urban counterparts.

(2) Initiate Discussions

Contact the current owner to discuss the possibility of purchasing. Remember to use tact when approaching an owner, especially if they might not be definitively selling and you are cold-suggesting a sale.

When searching for an optometry practice to purchase, it’s crucial to identify serious sellers who have clear motivations for selling, whether it’s retirement, health issues, divorce, or financial concerns. Understanding the Seller’s motivations can provide valuable insights for negotiation.

There are a few red flags to watch out for when dealing with Sellers:

Lack of understanding of the practice’s value.
Unwillingness to commit to a realistic timeline for the deal.
Uncertainty about life after the sale.
Reluctance to negotiate.
Attempts to prolong the deal unnecessarily.
Constantly changing terms or a focus solely on “winning” rather than reaching a fair agreement.

(3) Conduct Initial Due Diligence:

Serious Sellers typically require potential Buyers to sign a Non-Disclosure Agreement (NDA) to ensure confidentiality when sharing information about the practice. An NDA protects both parties and allows for the exchange of sensitive data. You’ll likely need to sign a Non-Disclosure Agreement (NDA) to obtain:

The last three years of Profit & Loss statements and tax returns.
Employee roster and salaries.
Current inventory (equipment, frames/lenses, contact lenses).
Lease agreement.
Practice Metrics: patient volume, revenue per patient, patient demographics, etc.

Alternatively, Sellers may provide a Confidential Information Memorandum (CIM) or a Broker’s/Appraisal Summary, outlining key details about the practice:

Business overview (location, years in business, staff count, etc.)
Revenue trends (growth or decline)
Gross profit consistency
Operating expenses management
Working capital status
Accounts receivable aging
Practice debt
Services offered
Key office metrics

Gathering more information through asking questions allows for a deeper understanding of the practice, facilitating the creation of a comprehensive financial forecast, also known as a Pro Forma. For effective questioning, it’s recommended to have a second or third meeting with the seller in person at their practice.

During this visit, pay attention to both external and internal aspects of the practice, including visibility, parking, traffic flow, building appearance, signage, neighboring businesses, cleanliness, odors, layout of reception area and exam rooms, potential for expansion, patient flow, equipment analysis, and adequacy of ancillary testing space for desired diagnostics. This thorough examination helps in making informed decisions regarding the potential purchase of the practice.

When analyzing a practice, you’re assessing its value, which comprises tangible and intangible assets. Intangible assets include the seller’s reputation, patient records, non-compete agreements, brand recognition, office systems, and more. Tangible assets primarily consist of equipment necessary for patient care, valued either by book value or replacement value. Book value reflects depreciation over time, while replacement value considers the actual cost to replace equipment on the market. Additionally, factors like frame inventory and display aesthetics are essential, as they contribute to the overall valuation of the practice and should align with your preferences as the potential owner.

(4) Understand the Valuation

Valuing an optometry practice involves considering both tangible and intangible assets. Tangible assets include equipment, while intangible assets encompass reputation, patient records, and brand recognition. Understanding the practice’s key performance indicators (KPIs) is vital for evaluation.

Lease considerations, competition assessment, and insurance contracts are essential aspects of due diligence. Evaluating practice debt, accounts receivable, and Seller transition plans are also crucial. Furthermore, assessing the practice’s culture and human resource considerations is key to the success of the acquisition.

By systematically analyzing these factors, potential buyers can make informed decisions about purchasing an optometry practice, gaining insights into its current state and future prospects.

Reviewing a practice’s financials is crucial when considering a purchase. Don’t hesitate to ask the seller for these documents, as they are essential for both your own due diligence and for securing financing. Understanding key performance indicators (KPIs) such as revenue per exam, exam capture rate, frame capture rate, lens pairs capture rate, average eyewear sale, contact lens sales, exams per doctor hour, and revenue per doctor hour is vital. These metrics help assess the practice’s financial health and determine its worth, as well as influencing lending decisions.

When evaluating a potential optometry practice purchase, there are several key considerations to keep in mind:

Office Lease: Review the current lease terms, including rental rate and remaining years. Consider negotiating improvements or rent adjustments if necessary. Also, explore whether a purchase of the existing space is feasible, or if another commercial real estate purchase in which you can move the practice into is a possibility.
Assessing Competition: Understand competitive elements in the area but focus on developing a clear strategy for your practice’s products, services, and patient care.
Insurance Contracts: Evaluate which insurance companies the office is contracted with to understand patient demographics and volume.
Practice Debt and Leases: Clarify whether you’ll be assuming any long-term debts or leases from the seller.
Accounts Receivable: Determine whether accounts receivable will be included in the sale and consider their collection potential.
Seller Transition Plans: Discuss the seller’s role post-sale, such as employment or consulting arrangements – this should include length of time, compensation and of course non-compete clauses.
Practice Culture and HR Considerations: Assess the practice culture and staff turnover, as it can significantly impact patient experience and business flow. Specifically look at how much gross revenue is generated per employee. Traditional metrics show that efficient practices will generate a minimum of $150,000 per full time employee equivalent.

By systematically addressing these factors, you can gather the necessary data to make an informed decision about the purchase and forecast the future outlook of the practice.

How do I value a practice?

Ultimately, hiring a 3rd party valuation specialist will give you the most accurate and non-biased valuation. We offer various detailed appraisal methods at an affordable fee, get Started Here.

Also, you can run a practice valuation yourself. It’s a great exercise to help you understand what gives a practice value and how you can add value once you become an owner.

(5) Make an Offer

Based on practice valuation, it’s now time to make an offer by crafting a Letter of Intent (LOI). Remember that your offer number doesn’t necessarily need to be the valuation number; however, the further off you land, the more likely there will be back-and-forth negotiation.

Crafting a Letter of Intent (LOI) is akin to proposing marriage in the business world—it’s a non-binding document indicating your intention to purchase a practice. Here’s what your LOI should include:

Letter of Intent (LOI)

Parties Involved: Names of the buyer and seller.
Description of Sale: Details of what is being sold, including location.
Price: A specific amount to be paid at closing, any contingency payments, and how debt and working capital will be handled.
Terms and Conditions: Outline of sale terms, financing conditions, and lease terms.
Type of Sale: Specify whether it’s an asset purchase or stock sale.
Anticipated Closing Date: Proposed date for completing the transaction.
Excluded Assets: Any assets not included in the sale.
Post-Closing Transition: Expectations for both buyer and seller during the transition period.
Exclusivity Agreement: Seller agrees not to entertain other offers for a specified period.
Non-Compete/Non-Solicitation Clause: Details on restrictions preventing the seller from competing or soliciting after closing.
Approvals Required: Any necessary approvals for the sale to proceed.
Holdbacks: Percentage of funds held for a specified period.
Representations and Warranties: Legal promises regarding past and future performance.
Due Diligence Time Period: Duration for the buyer to conduct investigations.
Employment Agreement Overview: Outline of post-closing employment considerations.
Other Legal Jargon: Non-disclosure, non-binding language, governing law, etc.

Collaborate with your attorney to ensure all critical details are included. While flexibility is important, stand firm on key points and be open to negotiation in less critical areas.

(6) Start the Funding process

Self-funded – Easy, you use your own money

Seller-funded – Seller creates a financing plan in which the buyer sends monthly payments to the seller to cover the sale price. This can be structured in numerous ways, including a standard terms and interest agreement based on a set sale price or a nominal amount paid out over a period of years based on production or profit.

Bank/3rd Party funded – A financial institution, such as Bank of America, provides a loan to the buyer with terms and interest rates. Most often, these will either be offered as a conventional or an SBA loan. Conventional loans tend to have better terms; either loan normally has a term of 20

Most ODs will go the route of getting bank funding due to ease of access and benefits to both parties (better terms + seller gets cash up front), check out the list of recommended practice financing partners for the lowest rates and best terms.

(7) Establish a Business Entity

When facilitating the purchase you will want to establish an entity to own the practice (owning a business under your own name without a business entity is a risky affair with considerable liability).

While each state will have its own laws on which types of business entities can be used to house optometry practices, here is a quick breakdown of major entities as well as their pros and cons:

Sole Proprietorship (don’t do this, just here for completion):

Pros: Simple and easy to establish, full control by owner, minimal regulatory requirements, direct tax reporting (profits and losses reported on owner’s tax return).
Cons: Unlimited personal liability for business debts and obligations, limited access to capital, potential difficulty in attracting investors or partners.

Partnership (General Partnership and Limited Partnership):

Pros: Shared decision-making and workload, shared financial resources, potential tax benefits (profits and losses passed through to partners’ individual tax returns).
Cons: General Partnerships have unlimited personal liability for business debts and obligations, potential for disputes among partners, Limited Partnerships require at least one general partner with unlimited liability.

Limited Liability Company (LLC):

Pros: Limited personal liability for owners, flexible management structure, pass-through taxation (profits and losses reported on owners’ tax returns), fewer regulatory requirements compared to corporations.
Cons: More complex and costly to establish compared to sole proprietorships and partnerships, potential for self-employment taxes, limited ability to raise capital through equity financing.

Corporation (C Corporation and S Corporation):

Pros: Limited personal liability for shareholders, separate legal entity, easier access to capital through issuance of stock, potential tax advantages (C Corporations can deduct certain expenses, S Corporations have pass-through taxation).
Cons: More complex and costly to establish and maintain compared to other business entities, double taxation for C Corporations (taxation at corporate level and again at individual level on dividends), stricter regulatory requirements.

Each business entity type offers different levels of liability protection, tax implications, and management structures, so it’s essential to carefully consider your specific business needs, goals, and circumstances when choosing the most suitable entity for your venture.

(8) Draft a Formal Asset Purchase Agreement (APA):

The Asset Purchase Agreement (APA) is a formal document that outlines the exact terms and agreements of a sale. The document is signed/countersigned by both buyer and seller, and represents a formal agreement to engage in the sale process

Key Resource

Attorney – will write APA or ensure that APA written by another source is accurate and protects you

Broker – will write APA (at a lower fee than a lawyer). Note that a broker does not have to be used; however, most practice sales will be represented by a broker, and a broker-written APA will be cheaper to produce than an attorney’s

(9) Offer Accepted

Celebrate briefly, then get back to work.

(10) Place an Earnest Money Deposit (EMD)

An Earnest Money Deposit (EMD) is to demonstrate commitment

This is non-refundable and shows that the buyer has fully committed to the purchase process
This is usually 10% of the purchase price or $10,000 (but could vary)
This money will count towards the purchase
The EMD is deposited into an escrow account, thus starting the process of escrow

(11) Complete the Escrow Gauntlet

IMPORTANT NOTE: Escrow is defined as a legal arrangement in which a third party temporarily holds money or property until a particular condition has been met – such as the fulfillment of a purchase agreement

Please complete the necessary steps to obtain funding

If self-funding – ensure money is in an account and a check is issued

If seller financing – ensure all terms are agreed upon, including payment method

If bank financing – complete all necessary paperwork + provide necessary documentation to begin the underwriting process. This usually includes (but is not limited to):

(1) Personal Financial Statement (PFS) – this is a document that shows all your assets and liabilities, as well as cash in the bank
(2) All due diligence documentation mentioned in Step 3
(3)Personal tax + W2/1099/paystub info
(4) Business Plan

Go through the Complete Escrow Checklist to ensure a smooth practice transition

Complete Escrow Checklist

(1) The seller must immediately designate the buyer as an Associate on all third-party plans, initiating the process for the buyer’s empanelment. However, do not disclose that the Associate is the new owner of the practice yet.
(2) If the seller is providing financing, either partially or in full, you’re required to supply a current credit report. Obtain this from any free credit report service available to individuals. Fax or email this to Practice Consultants, ensuring it includes your FICO score, reports from any of the three agencies (Experian, Equifax, TransUnion), and the full report, not just scores.
(3) Begin the due diligence process.
(4) Formally introduce the new owner to the staff.
(5) If not specified in the purchase agreement, compile a list of items you intend to remove from the business.
(6) Upon receiving formal documents from escrow, review and sign them promptly. Any potential amendments can be addressed later; it’s crucial to forward the executed documents to escrow without delay. Follow the escrow firm’s instructions for signing and returning documents meticulously. Do not wait for responses from lenders or similar parties.
(7) Open discussions with the landlord. Note any time limitations on your contingencies
(8) Provide information to escrow about all outstanding lease or purchase obligations, as these will need to be paid off through escrow unless other specific arrangements have been made.This applies only to obligations that are related to the business.
(9) If the purchase agreement does not already list them, review the items the seller plans to remove from the business.
(10) Apply to provider panels for insurance Credentialing (Vision/Medical) using services like Knack RCM to speed up the process (~4-6 weeks)
(11) If your purchase contract calls for seller financing, there is a contingency that such financing is subject to your approval of the buyer’s financial standing. Practice Consultants will give you that information as soon as it’s available; after review, provide us with a statement that Buyer’s financial standing is acceptable.
(12) The purchase agreement requires you to list ongoing commitments (e.g., Yellow Pages contracts, janitorial services). Ensure this list is provided to the buyer within two weeks post-signing.
(13) If the business includes sellable inventory, carefully plan the final inventory level. Revisit the purchase agreement to confirm the agreed inventory amount to be transferred.
(14) In cases of seller financing, the promissory note should be made payable to the seller as an individual, by the buyer as an individual, regardless of any corporate structure formed by the buyer.
(15) If the buyer is a corporation, a corporate resolution authorizing the purchase must be submitted to escrow. Your broker such as Practice Consultants can provide a sample for reference.
(16) If Seller is a corporation, submit to escrow a corporate resolution authorizing the sale.
(17) Itemize any deposits to be refunded to you, either by the holder or by the buyer in case of account transfers. This includes deposits for leases, equipment, utilities, contracts, workers’ compensation, etc..
(18) Confirm that the lease contingency has been met with a statement to your broker such as Practice Consultants
(19) Prepare for any deposits and/or prorated expenses payable through escrow, such as lease deposits, prorated lease payments, service contracts, etc.
(20) Open new bank accounts and establish credit card processing like ODoF Merchant Services (1.73% + FREE POS).
(21) If utilizing a Fictitious Business Name (FBN), ensure compliance with state board regulations. In some states, like California, this can be handled through escrow. Otherwise, apply as soon as possible. If acquiring an existing FBN, the seller must abandon the name to allow the buyer to acquire it; this should be coordinated to ensure continuity.
(22) Ensure all equipment is in working order, addressing any necessary repairs immediately.
(23) Initiate or transfer bookkeeping, accounting services, and business insurance.
(24) Discuss the forwarding of accounts receivable to the seller. The buyer is obliged to forward funds but is not responsible for collections on overdue receivables unless agreed otherwise.
(25) Confirm whether due diligence has been completed OR if the contingency is waived with a statement to your broker such as Practice Consultants.
(26) If additional funds are to be deposited into escrow by you, plan this carefully. Wire transfers should be completed one business day before closing, and certified checks must be delivered to escrow three business days prior.
(27) Prepare to reimburse the buyer for certain prorated expenses, such as accrued vacation pay. Options for handling these expenses should be discussed with your broker.
(28) Anticipate initial costs, such as the first month’s rent, payroll, and other immediate expenses.
(29) Draft a notification letter for patients and/or referral sources, with templates available from your broker such as Practice Consultants if needed.
(30) If life insurance is a requirement for the buyer (typically for financing purposes), start this process early. Seller financing may allow for a waiver of this requirement for substantial corporate entities, at the seller’s discretion.
(31) Initiate governmental requirements as applicable, such as Federal Employer Identification Number, applicable state and local identifiers, local business license, sales tax license, etc. Don’t forget the State Board location license, if applicable.
(32) Ensure you address all contingencies in the purchase contract related to due diligence and the Buyer’s lease. If you have other contingencies to fulfill, actively work towards meeting these requirements.
(33) Confirm you have suitable professional liability tail coverage, which might be part of your existing policy or may require a new, separate policy.
(34) For any contingencies specified in the Specific Terms of your purchase contract, it is imperative to notify your broker as such as Practice Consultants in writing (email suffices) once each contingency is resolved.
(35) Proactively deposit additional funds into escrow. It is important not to rely on escrow to prompt you for fund deposits. Ensure you deposit enough to cover the remaining purchase deposit, escrow fees, and any prorated expenses. It’s better to over deposit and receive a refund than to fall short, potentially delaying escrow closure.
(36) Initiate new vendor accounts or transition existing ones as per vendor policies.
(37) Set up new utility accounts or transfer current ones based on provider requirements. Remember to include the internet service account transfer.
(38) If your transaction includes a clause in the Specific Terms stating, “Inventory value will be definitively determined shortly before close of escrow, and Price will be adjusted accordingly,” ensure you finalize the inventory value through a comprehensive count, spot-check, or agreement. This applies to all sellable goods owned, such as frames, plano sunglasses, lens blanks, etc. If this clause is absent or if inventory value is predefined in the Price, inventory counting is unnecessary. See Note 3 below for further guidance.
(39) If relevant, furnish your broker such as Practice Consultants with a statement of the agreed-upon inventory value.
(40) If you prefer wire transfer for your funds, submit the necessary documentation to escrow.
(41) Prepare patient and referral notification letters for distribution.
(42) Discuss the continuation or termination of employee benefits with the new owner, ensuring the approach to communicating these changes to the staff is well-planned. Consider how altering benefits, particularly health insurance and vacation accrual, might impact staff retention.
(43) Inform all third-party plans about the “Associate’s” decision to purchase the practice.
(44) If the Seller is a corporation with a name similar to the business, and the purchase contract includes a clause for a corporate name change, initiate this process. If your corporate name is your personal name, this requirement may not apply.
(45) Near the closing, expect escrow to present a closing amendment detailing the fulfillment of contingencies, among other last-minute documents from lenders. Review, initial, and sign these documents as instructed, returning them via fax, DocuSign, or overnight mail as required.
(46) Upon finalizing the transaction, notify all relevant parties, including vendors, the state board, utilities, and EDD.

(12) Complete The Closing Checklist

(1) Ensure you have the necessary documents, including the bill of sale, promissory note (if applicable), security agreement, assignment and assumption agreements, settlement statement, and bank loan documents. Meeting at the office can be symbolic and rewarding.

(2) Confirm the inventory and accounts receivable to ensure accuracy. Verify the frame inventory and accounts receivable, printing out reports for inclusion in closing binders. Transfer office keys and obtain all necessary login credentials for software and website access.

(3) Transfer any funds owed to the seller, which may involve wire transfers or certified checks, depending on lender requirements. Celebrate your success and begin your journey as the new owner of the practice.

**To ensure a successful launch of your optometry practice, follow these key steps within the first 30 days**

Handoff Meeting with Seller: If necessary, have a meeting with the seller to tie up any loose ends and ensure a smooth transition.
Training on Office Systems: Familiarize yourself with any office systems or processes to ensure efficient operations.
Notify Patients: Inform patients of the ownership change through marketing campaigns, emails, letters, or direct mail, emphasizing your commitment to their care.
Notify Vendors: Inform vendors of the ownership change to update account details and ensure seamless service continuation.
Change Utility Accounts: Transfer utility accounts (phones, internet, gas, electric, water, sewer, etc.) into your name to avoid disruption.
Update Website and Domain Names: Change website domain names and web hosting to reflect your ownership for online presence continuity.
Record Title Documents: If applicable, record title documents such as vehicle titles, patents, trademarks, and copyrights with assistance from your attorney.
Obtain Licenses or Permits: Obtain any necessary licenses or permits required by state, county, or town regulations to operate your business legally.

By completing these tasks promptly, you can ensure a smooth transition and set the foundation for a successful launch of your optometry practice.

Something to consider: you are purchasing a living and breathing business. It may be tempting to make changes right away, however you should let the practice run as you found it for at least 3 months.

Here’s the reason. There may be reasons certain operations are in place, and the endpoint of those operations might not show a fiscal or practice reason until later on. On the flipside, 3 months gives you enough time to see if operations are inefficient. When it’s time to make changes, ensure that you are enacting them one at a time, communicating thoroughly with staff and allowing a 3-6 months refractory period to judge if the change is conducive to better productivity.

Summary

Congratulations, you have officially purchased an optometry practice! Now build it up to its max potential. Hint, here’s a good place to start to check out all the practice resources from CPA, bookkeeper, 401K, and finally lowest pricing on equipment and goods.

KEY RESOURCE: Recommended PM Resources & Equipment Deals

Did that all seem a little crazy and daunting? Well, you’re not alone. Purchasing a practice is one of the biggest financial decisions many ODs make, and with plenty of complicated steps strewn across a stressful timeline, sometimes the journey is just too much to go alone. We are here to help!

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