As part of your due diligence, a buyer must determine an estimate of the value of the optometric practice they are buying. Business performance and return on investment (ROI), plus the value of tangible and intangible assets like; fixtures, equipment, computer systems, inventory, location, appearance of practice, quality and quantity of customers, local business climate and competition are all considered when valuing an optometric practice.
The Gross Income Multiplier
One of the simplest methods but the most subjective is the percentage of gross income multiplier method. Take the gross annual earnings of the practice from their tax return and times it by the common rule of thumb for Optometry practices, which is between .60 and .75. However, when comparing practices using this method you must take into account the quality of net earnings, (are they rising or falling?) the age of the equipment and if they have an electronic health record system in place. If you compare the following two practices, you will see what I mean.
- Practice A: gross annual income $400k, net income 200k, and rising, equipment is new, electronic health record system used.
- Practice B: gross annual income $400k, net income 100k, and falling, equipment is old, electronic health record system not used.
As you can see both businesses have the same gross income, yet they are very different. For practice A use .75 x $400,000 = $300,000 ballpark asking price for this business. For practice B use .60 x $300,000 = $240,000 ballpark asking price for this business. With this method, you can quickly choose or eliminate which business to pursue further. For example, if practice A was asking $250,000 you would see that is a good price. However, if practice B were asking $300,000 you would see they are asking too much.
Adding Fixed Assets and Net Income Together
The two things to measure are the fair market value of the equipment AND net earnings. How do you do this? You will need a list of all the inventory, equipment, furniture and fixtures. You will need to get it all looked at by someone who deals with buying and selling these types of assets. Then add this figure to the actual net annual earnings from the business’s tax return.
The drawback to this method is it does not take into consideration intangibles like goodwill. But you can easily calculate how much they are asking for good will be subtracting from their asking price the value of their assets and their annual net earnings and determine from there if you think the value of the goodwill is worth it.
The Multiple of Net Earnings
When valuing any business, earnings are the foundation and the easiest and most objective aspect to work off. Optometric practice's often are a type of business appraised on their earnings. Once you understand what goes into the net earned income of a practice you can then figure out if buying that business makes sense for you. As a buyer, you will analyze the market, the competition, perceived patient retention, and the efficiencies that you plan on implementing to estimate what impact your ownership will have on the net earnings.
Optometry businesses have discretionary earnings. These earnings are a modified version of net income reported as business income on the 1040 from schedule C profit and loss form. You take this figure as a starting place and add back in the following expenses:
- The Salary of the Owner(s)
- Expenses that are non-recurring, an expense that only occurred once
- Expenses that are not a normal part of the operation or when an owners pays a personal bill and writes it off of the business
Add back all these expenses to the net income reported on the tax return and multiply it by between 1.75 and 3 depending on the quality of the earnings, if they are rising or falling, the state of the equipment, the systems used in the administration, location and competition. The better these things are the higher the multiple.