Resources for buy in evaluation

[saildawg]

Hello everyone,

I am in my second year at a small Ophthalmology practice, 1 other MD (sole owner) and an optometrist (employee).  We previous set forth the buy in process before I joined.  The practice evaluation is basically accounts receivable (can be purchased post tax)  and fixed assets (pre tax), and will not include good will.  I was wondering if anyone has any experience or resources on evaluating "how much a practice is worth"?  Right now the amount of collections I generate do not make buying in particularly attractive at this time, but hopefully in 1 year (as my practice grows) it would make more sense.  I wanted to do some research ahead of time to understand how a small office should be evaluated for buy in purposes.  Thanks for any help

[jfoxcpacfp]

saildawg wrote:

Hello everyone,

I am in my second year at a small Ophthalmology practice, 1 other MD (sole owner) and an optometrist (employee).  We previous set forth the buy in process before I joined.  The practice evaluation is basically accounts receivable (can be purchased post tax)  and fixed assets (pre tax), and will not include good will.  I was wondering if anyone has any experience or resources on evaluating “how much a practice is worth”?  Right now the amount of collections I generate do not make buying in particularly attractive at this time, but hopefully in 1 year (as my practice grows) it would make more sense.  I wanted to do some research ahead of time to understand how a small office should be evaluated for buy in purposes.  Thanks for any help

Click to expand...

You might want to have a valuation appraisal conducted by an accredited appraiser who specializes in medical practices, but it will be expensive. This article might help.

[saildawg]

Thank you,

I am hoping to avoid an expensive process, but sometimes it is necessary, I guess.

[eyeballboy]

Keep in mind that there may be a bunch of aged accounts receivables that will never be paid and have never been written off of the books. Also, keep in mind that what gets paid and what is billed is significantly different (about 1/2 in many cases). You don't want to be paying for Accounts Receivable that you will never collect on. I'm in ophthalmology so I am familiar with my as well as several other practice buy-in costs. I've seen buy-in amounts in the $175k-$250 range with an average take home pay of around $300-500k (includes 401k and profit share). These buy-ins do not include real estate, surgical center or optical. The buy-in for high volume refractive (LASIK) can easily go north of $1milliom given the high expense of equipment and "goodwill" in all the marketing they've spent to get their name out there.

[saildawg]

Thanks eyeballboy,

On the AR we take into account our historical collection percent, and remove >120 day collections.  I have to look into evaluation of fixed assets as they do not correlate with bluebook value.  I am  sure how most practices value fixed assets.  What has been your experience?

[eyeballboy]

It sounds like your potential partner is being fair with how he/she is valuing the accounts receivables.  As far as fixed assets, yes, the book value is going to be very different from the actual or replacement value.  BV is usually written down as fast as possible for tax purposes, so the buy-in asset valuation will probably be significantly more than the BV--hard assets should be valued essentially at used replacement value.   You will also want to make sure that whatever hard asset value you have takes into account any debt that the company has.  If the valuation is realistic accounts receivables (marked down as you suggested) + used replacement value of the hard assets - debts, then I think your partner is being extremely fair.  Unless he/she doesn't have any patients coming through the door and the entire community thinks he is a hack, then there really is a significant "goodwill" value to the practice for which you are not being charged for.  If you were to start your own practice, it would essentially cost the same amount as what he is charging you (probably more since it is often hard to fill an entire office with good used equipment for sale, you are going to get the money from accounts receivable back presumeably over the next couple of months after buy-in), but you wouldn't have any patients showing up on day 1.

Another highly important issue to the value of the practice is the efficiency of the practice.  A typical general ophthalmology private practice will have overhead in the 60-65% range.  Anything higher than that gets concerning (if LASIK-centered, the overhead will likely be higher), anything less than that, you are looking at a more valuable situation.  Generally speaking, if your expected total pay (salary, bonus, 401k, profit share, safe harbor, cash balance) in your first year of ownership is more than the buy-in, you're probably not getting ripped off.  If the buy-in is 75% or less, then it's probably a pretty good deal.  I'm sure it varies significantly in different areas of the country--the less desirable of a location, the cheaper the practice and vice versa.

[saildawg]

Thank you so much for those insights.  They are very useful to me as I move forward.  I think the main factor will be determining if the expected pay compared to the buy in amount.  I will have to crunch the numbers.  I think the main factor will be how fast my practice continues to grow and how much revenue I can generate.

Now onto the optical evaluation....

Thanks immensely for your help

[eyeballboy]

Good luck!  Optical buy-in is a bit easier.  The easiest big picture approach is to look at the yearly dividends over the past 3-5 years.  If they are stable/growing and are 20+% of the buy-in amount, then you will probably be okay.  Just look at it as any passive investment--expected annual return on capital invested.  Don't expect the optical stock value to increase when you sell, it is solely based on the dividends paid each year.  You just need to make sure that the ophthalmology practice is not artificially inflating the optical dividends by covering optical employee costs, rent, etc.  Also, make sure they aren't holding on to a bunch of old, outdated inventory that they will never sell but are including in the valuation.

[saildawg]

Great thanks again,  I may PM you as time gets closer.  Really useful info

[eyeballboy]

I'd be happy to discuss further through PM.

[Hanson]

Hi, was wondering if I could jump in on this thread (a year or two later now!) and ask a question about ophthalmology partnership buy in...

 

I am buying into a practice hopefully January 1st and I am just trying to wrap my head around the whole accounts receivable.

What is the normal way to deal with your personal accounts receivable during transition from employee to partner: ie the money generated when you are an employee 2018 that actually comes in as revenue to the practice in 2019 when you are now partner. What is the normal way of handling these receipts?

[Tim]

The practice evaluation is basically accounts receivable (can be purchased post tax) and fixed assets (pre tax),

Are you buying the entity or these two assets? The reason is the specification of “no goodwill”

AR- I assume post tax means he has paid income taxes.
This is you paying cash and need to collect it. If it’s old, exclude it. You really would agree to AR with recourse, being able to return it for cash. Older AR will turn you into being a collection agency, deep discount needed. There is a problem it’s not paid. Don’t buy the problems.
You could loan him the amount for 60 days to allow him to collect what he can.
FA- You want a detail list of everything you are purchasing. Fair market value is your baseline.
Compare it to the fixed asset list. Everything from office equipment, leasehold improvements, furniture & fixtures. Some you will need help with, like an appraisal.
If you are buy supplies and inventory, what are they worth. Don’t buy unneeded items.

That’s how you buy the assets, fair market value.
Is it worth it? That is reviewing the existing business,
and projecting how profitable it will be “with changes you make”. Put a non-compete in it.

Start with ballpark numbers and as you go thru due diligence agree on adjustments. You make find lease obligations that are problems with change of ownership, or insurance or contingencies.

A good sale will protect the buyer and seller.

[ENT Doc]

The AR analyses above seem reasonable and are how I would evaluate things. Same thing with the used replacement value of fixed assets. In terms of if the buy in is worth it this depends on how income is divvyed up and how allocation of fixed and variable expenses are allocated. Keep in mind you’ll be expected to buy him out in the future (I imagine) so be sure to calculate that and think about whether you’ll be hiring more people or being stable.