Optometry Practice Valuation

Many optometrists are interested in obtaining an optometry practice valuation before buying or selling a practice because they don’t want to leave cash on the negotiating table.  However, an optometry practice appraisal can be used for much more than buying or selling your practice.

A valuation can also be used for issues like buying in or out of a partnership in a practice,  estate planning, income tax planning, litigation, transferring the practice to a key employee or family member, or preparing for your retirement.

Regardless of the reason you’re interested in learning the value of your practice, having an accurate figure allows you to successfully outline your present situation and map out your future business plans.

If you want to learn more about the process of optometry practice valuation, keep reading this page to find valuable information you can use for your business.

The Basics of Optometry Practice Valuation

Because your optometry clinic is a professional practice, the most valuable aspect of your business may not be the equipment or supplies—rather it’s the intangible assets of your business that will often provide the most value to your firm.

As business appraisers, we always remember in our analysis that physical assets are generally secondary for a prospective buyer; what a buyer is most interested in purchasing is a steady stream of future income.

Your intangible assets, specifically goodwill, are what will truly differentiate you from other practices as they typically make up a large portion of the practice’s cash flow.

But make no mistake: well-maintained equipment, office supplies, premises and other tangible assets are essential to running a successful practice and contribute substantial value to your practice as well—especially when you consider tools like a slit lamp or an exam chair cost thousands of dollars!

Goodwill

It’s often counterintuitive to think that one of the most important factors for most optometry practice appraisals is something you can’t even touch.

Goodwill is the summation of what makes your practice unique and special; it includes factors like your reputation, book of clientele, word of mouth, skill and experience of your staff, and many other key pieces that take years of hard work to establish.

Your tangible assets are probably very similar to other optometry practices, but your intangible assets are what bring people and profit to your office.

Rules of Thumb for Optometry Practice Valuation

There are rules of thumb for optometry practices that establish broad ranges of value for businesses across your industry. Rules of thumb are straightforward and simple, but ignore every aspect of your practice that makes you unique from your competition.

These values are determined by assuming that every optometry practice is the same save for a single variable (typically something like gross revenue or earnings before interest, taxes, depreciation, and amortization).

That said, rules of thumb can still serve as a good reference point. You can take a look at the industry multiples listed below used by Tom West, author of the Business Reference Guide.

Optometry Practice Valuation Rules of Thumb1

• 50% of annual revenues plus inventory
• 2 times SDE plus inventory
• 2.5 times EBIT
• 2 – 3 times EBITDA

Always remember that rules of thumb do not account for any specifics of your practice, so the ultimate value of your practice will usually be much higher or lower than what the formulas tell you.

Key Value Factors for Optometry Practice Valuation

Using optometry practice valuation formulas will paint you a general picture of the value of your practice, but if you want a figure that more accurately reflects your actual value you need to analyze the specifics.

For examples on the roles that specifics play, look at some of key value drivers that influence an optometry practice valuation.

• Specialization – Whether you specifically target segments of the market (e.g. children, the elderly, sports eye care) or you focus on general practice will influence the value of your business and how easy it can be sold. Practices with a specialization may have fewer potential purchasers and tend to be harder to sell.
• Proximity – Your office’s distance to shopping traffic, health insurance providers, and/or dispensers is very important. Competition is high for desirable locations and can be a large asset for your business.
• Referral Network – Having an established referral network from optical dispensers, HMO’s and doctors that contribute to your sales will be a key value factor for your practice.
• Payment (managed care vs. private insurance) – Individuals with private health insurance covering optical care generally spend more on optometry and dispensing services than those with managed care, and doctors receive more revenue from the patients with private insurance. 2
• Demographic – Demand is affected by demographic factors such as the amount of people working with computers in the service industry and in office positions, as well as individuals 45 and over, because they are more likely to develop eye and vision problems. 3
• Customer relations – Having a loyal customer base is another very valuable asset. High retention rates and clientele that are confident in your services  are intangible assets that will significantly factor into the value of your business
• Colocation - Some optometrists offer retail services as well as eye care in an integrated operation. It not only provides customers a one stop shop for prescriptions and treatments but it also adds value to your practice.

Every optometry practice appraisal should be especially mindful of these elements and analyze them objectively from the perspective of a third party buyer. For optometrists who have grown their businesses over many years, this is an instance where their familiarity with the practice can actually detract from conducting an accurate valuation.

Approaches for Realizing your Practice’s Value

There is no single valuation method that can be used for every optometry practice. No two practices are the same, so valuation experts will often choose between three different approaches when valuing your practice.

The methodologies that valuation experts use all stem from these three core approaches.

• Income Approach: Methodologies centered on this approach fix value to your practice by anticipating your future income-producing capabilities.
• Asset Approach: When the assets of your practice count towards a significant portion of your its value, this perspective is commonly employed.
• Market Approach: This approach focuses on comparing your practice to similar practices that have been sold. However, compiling this data for the comparisons can be difficult in some areas.

Optometry practice valuation is a tricky balance of art and science—methodologies and judgments may differ between valuation experts so ten different experts may arrive at ten slightly different values. However, a valuation performed by a credentialed appraiser who has experience in your industry will provide you with a well-reasoned report that stands up to IRS scrutiny and third-party review.

Looking Forward in the Optometry Industry

Optometry practices can anticipate continued, steady growth as corrective eyewear is worn or needed by 70% of the population and an increase in an aging population with deteriorating vision will further demand for services. 4 Additionally, an improvement in health care coverage by programs such as Medicare may also spur further growth.

Optometrists that are planning their exit options are in an excellent position to capitalize through early preparation for the day when they want to transfer ownership. So whether you want to sell your practice in the immediate future, or further down the road, understanding what you have can help you grow your business and maximize the benefits you’ll receive when you do decide to hand the keys over to somebody else.

Choose a Valuation You Can Trust

An optometry practice is more than an assessment of the walls that surround it or the equipment and inventory inside of it. We recognize that your professional practice is an extension of you, your employees, and your patients. Using an experienced and credentialed valuation firm will ensure that all the unique aspects of your business factor into the valuation analysis and get you a precise and accurate figure.

Just as you have helped your patients with your expertise, let a valuation expert help you understand your situation and walk you through the options that lay ahead.

You can use our contact form to let us know what you’re interested in and we’ll give you the best advice we can offer. You can also call (800) 895-4100 and one of our Value Advisors can help you right away.

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1 West, Thomas L. 2010 Business Reference Guide: the Essential Guide to Pricing Businesses and Franchises. [Worcester, MA]: Business Brokerage, 2010.
2 IBISWorld. (201o, January). Optometrists in the US. Retrieved from IBISWorld Industry Market Research database.
3 Id.
4 Id.