Figuring out how much an eye care business is worth can be complicated. There are lots of ways to look at the value, and different buyers and sellers will have their own ideas about what makes a practice valuable. In this article, we’ll go over some common ways people decide on a practice’s worth. We’ll also talk about what buyers and sellers should keep in mind to make smarter choices. By the end, you’ll have a better idea of how to think about the value of an eye care business, whether you’re looking to buy one or sell one.
Why Valuation is Complex: Different Approaches and Buyer-Seller Dynamics
Approaches to Valuation
Valuations aren’t a one-size-fits-all metric, particularly in the optometry industry. The two common methodologies you’re most likely to encounter are:
Cash-Flow-Based Valuation: This method takes into account the practice’s historical and projected cash flows, discounted to present value. This is often seen as a “baseline” valuation method that provides a financial snapshot of the business.
Strategic Buyer Valuation: Here, the practice is valued not just on its financials but on its strategic fit into a buyer’s existing business. This can often lead to higher valuations as buyers may be willing to pay a premium for practices that bring along synergistic benefits, such as a particular niche in eye care or a valuable geographic location.
In the optometry industry, cash-flow-based valuations are commonly used for straightforward transactions. However, strategic valuations come into play when the buyer or seller is part of a larger network or chain of practices or when the practice has unique attributes that make it particularly valuable.
Types of Buyers and Sellers
For every business, there’s a different type of owner. Some bring unique experiences or unfair advantages, and some are merely keenly focused on practice-wide competency. It’s helpful to consider what strengths a practice has and how it impacts the success of the company and its valuation. Here are two examples of different types of owners (buyers and/or sellers).
Operational Experts: Some buyers excel at streamlining operations and may look for practices that need operational improvements. These buyers see untapped potential in practices that have excellent clinical services but may lack operational efficiency.
Marketing Pros: Other buyers may possess a knack for branding and customer engagement. These buyers seek out practices that offer excellent service but perhaps suffer from low visibility or poor marketing.
Sellers also vary:
Immediate Sellers: These are individuals looking for a quick exit, possibly due to personal reasons like retirement or health issues. They might prioritize the speed of the transaction and, therefor, be willing to negotiate more on the price.
Casual Sellers: These sellers are more opportunistic and will sell if the right offer comes along. They might not be actively looking but are open to reasonable proposals.
The Fluidity of Valuation
Ultimately, valuation is not a static figure engraved in stone. It’s fluid, impacted by a multitude of factors ranging from the skill set of a potential buyer to the urgency level of the seller. So, while there may be standard approaches to gauging a practice’s worth, be aware that ‘market value’ is often what someone is willing to pay for it. Therefore, by understanding your own strengths and weaknesses—and those of your potential counterpart—you can better position your practice to be more appealing to the right buyer, thereby potentially impacting the final valuation.
Traditional Valuation Methods in Optometry
When considering the sale or purchase of an optometry practice, understanding the different valuation methods people may suggest is crucial. This is important because these different methods may provide different results, which will set the stage for negotiation and final sale prices.
Revenue Stream Method
The Revenue Stream Method is commonly used in the optometry industry. Here, the business is valued based on its total annual revenue, perhaps adjusted for factors like location, customer base, or the practice’s growth trajectory. Essentially, the value of the practice is calculated as a multiple of its revenue. Using this method, multiples of revenue are often between 0.43-0.75, meaning a practice with $1,000,000 in revenue would be worth between $ 430k and $ 750k.
Why is this method preferred?
It offers simplicity and is easily understandable. Optometry practices typically have stable, predictable revenue streams, making this method particularly useful.
Capitalization of Earnings
This method is less commonly used but still relevant. It focuses on the practice’s ability to generate earnings or profits. Here, the earnings are “capitalized,” meaning they’re adjusted based on perceived future risks or advantages to arrive at a valuation. This method offers a deeper look into the practice’s profitability but is often more complex to compute.
EBITDA-Based Valuation
EBITDA-based valuation considers “Earnings Before Interest, Taxes, Depreciation, and Amortization.” This method is sometimes used as it offers a ‘clean’ look at operational efficiency, stripping out many variable costs. In this method, the earnings are what’s important, not total revenue. And with that lower number, the multiples are usually higher, averaging 2.97x – 4.06x for eye care clinics. The example here could be an office with one million in revenue may only have $200k in earnings. And thus, its valuation would be between $594,000 and $812,000.
While there are several ways you can determine a baseline value, each method has its pros and cons. The right choice often depends on specific circumstances surrounding the sale or purchase of the practice, the individual details of a practice, or the preferences of either the buyer or the seller. But in the end, all of these are merely justifications for a number. The two parties still need to determine if they can agree on one.
The Strategic Importance of Business Process Outsourcing (BPO) on Optometry Practice Valuation
The valuation of an optometry practice is substantially influenced by its operational efficiency. One way to significantly enhance efficiency is through using a Business Process Outsourcing (BPO) company. Outsourcing tasks like billing, scheduling, and administrative work enables a practice to focus more of its energy on patient care. This shift in focus often leads to improved customer satisfaction, which leads to a higher revenue stream, which contributes positively to the overall health and valuation of the business.
Implementing a BPO doesn’t just enhance the financial aspects of a practice; it also broadens its appeal to various types of buyers, whether it’s a strategic buyer looking to quickly integrate an asset or a marketing expert less interested in operational workflows, a BPO-enabled practice caters to a diverse set of acquisition strategies.
On the buyer’s end, the current use or potential for BPO in a practice is an essential consideration. Indicators like a lack of standard operating procedures or an overburdened staff can signal opportunities for quick operational improvements post-acquisition. Incorporating a BPO strategy in such instances can significantly enhance the practice’s profitability, making the acquisition more worthwhile.
Scaling with a BPO is usually easier than making in-house adjustments, a factor that further elevates a practice’s valuation. Instead of worrying about the intricacies of hiring, training, or terminating in-house staff, adjustments to the level of BPO services can be made much easier. This ease in scalability offers peace of mind to buyers, as it signifies a more manageable and, therefore, more attractive investment.
Lastly, while the benefits of BPO are considerable, both buyers and sellers should proceed with caution. Integrating outsourced services comes with its own set of challenges, including time commitments and upfront costs. Moreover, the effectiveness of a BPO service can vary, making it essential to choose the right partner. Despite these caveats, when effectively implemented, BPO serves as a potent lever for elevating a practice’s market valuation.
Elevating Practice Valuation Through Buyer and Seller Lenses
For sellers, the focus often lies in the unique strengths of the optometric practice. Whether it’s a robust patient list, a high-performing team, or specialized eye care services, identifying and amplifying these assets can elevate your practice valuation. For instance, if a practice excels in patient care and has an established reputation in the community, those factors can appeal to certain types of buyers who may be willing to pay a premium for a practice that aligns well with their goals.
On the flip side, buyers bring their own expertise and strategies into the equation. A prospective buyer skilled in practice management may seek out an optometry business with operational inefficiencies. These are opportunities for quick improvements and rapid increases in practice value. Alternatively, a buyer with a portfolio of existing practices might look for an acquisition that complements their current assets. Whether it’s through improving profit margins, financial performance, or patient care, knowing your strengths as a buyer can help you identify practices that are undervalued but offer high potential for growth.
Caveats exist, of course. Sellers must recognize that the attributes enhancing their practice’s valuation might not align with every buyer’s objectives. Similarly, buyers should be wary of assuming that every operational challenge can be easily resolved. In both cases, making an informed decision involves a comprehensive understanding of various valuation methods, from earnings method to capitalization rate, and how tangible and intangible assets contribute to the overall value.
Final Thoughts on Valuing Optometry Practices
Valuing an optometry practice is a complex process influenced not just by financial metrics but also by the unique strengths and strategies of both buyers and sellers. Sellers can elevate their practice’s worth by highlighting specialized services or strong patient relationships, attracting buyers who see specific value in these attributes. Buyers, equipped with expertise in areas like operations or portfolio management, aim to identify practices with untapped growth potential. However, both parties should exercise caution; sellers should recognize that their practice’s niche appeal may not be universal, and buyers must consider the complexities of integrating a new acquisition.
The valuation is not a static figure but a dynamic one molded by market trends and individual competencies. Understanding these financial, operational, and human factors helps ensure a valuation that truly reflects the practice’s value. The objective for both parties is to align their respective strengths and opportunities, offering a pathway to an agreed-upon valuation.
