How to Maximize the Value of Your Optometry Practice

Erik Ferjentsik: When a seller comes and I see the decline and I say, what’s the reason for the decline? They say, oh, well, I just took more vacation, reduced my schedule. But five years ago, I was all the way up at this number. And they think that that’s where the value should be based. And that’s just not how it works.

Bethany Fishbein: Hi, this is Bethany Fishbein. I am the CEO of The Power Practice, host of The Power Hour Optometry podcast, and looking forward to a great conversation today about practice value. My guest is Erik Ferjentsik. He’s the owner of Visionary Practice Group, which is a consulting group specializing in practice sales purchases and appraisals. And he’s been a guest on the podcast before, I think still might hold the record for the highest number of downloads in the first week. So, Erik, maybe today we’ll break your previous record.

Erik Ferjentsik: Hey, thanks for having me back again. I’m looking forward to it.

Bethany Fishbein: Yeah. So I want to talk about the value of a practice because I feel like it’s something that people aren’t thinking enough about and they should be. Typically, what we see is that practice owners start to think about how much their practice might be worth when they’re getting ready to sell it. And in my opinion, that’s way too late. Share some thoughts on that. When do you think someone should start thinking about their practice as like an asset with value?

Erik Ferjentsik: I mean, I think right away, once you become the owner, that’s the best time, because a lot of the linkage between practice value and ownership success are they’re connected. Right? So the higher the value of your practice, generally the better you’re going to be doing as a practice owner. So they kind of go hand in hand. There are definitely some idiosyncrasies about practice value that are a little bit different than income streams while you’re owning the practice. But in my opinion, it’s never too early.

Bethany Fishbein: So for a brand new practice, I mean, thinking about somebody who’s just cold started, just opened, that practice in those first months doesn’t really have a positive value, right? Because they’ve borrowed all this money. They’re not seeing enough patients in the beginning. Like when does a practice start to recognize some value?

Erik Ferjentsik: Yeah, great question. I mean, yeah, startups are unique because you really have to reach a kind of a critical mass point. I would say that a good number for most practices to aim for is $650,000 in revenue or more. It’s really hard to sell a practice grossing less than $650,000, mainly because conventional lenders aren’t really loaning or approving loans easily for less than $650,000. And then if you think about the buyer’s market, the majority of the buyer’s market is going to be first-time practice buyers, especially at that revenue range, that $650,000 at that mark.

So first-time practice buyers are going to need a loan to buy the practice. And they’re probably going to be licensed for two to 10 years would be the bulk of that market. They probably have $250,000 to $350,000 in school loan debt. They may already have a mortgage, auto loans. And if you think about that financial profile of that buyer, it’s going to be very difficult for them to get approved for a loan. So if you want to appeal to the bulk of the market, which is those first time buyers, you have to have a discretionary net income level that would be high enough to warrant them leaving their job where they’re getting paid, you know, 90 to 120,000 a year, let’s say, and take out a loan to buy your practice, be able to pay off that loan and then still make some money beyond what they’re currently making as an employee to kind of incentivize them to leave the job where they punch in and punch out, take on the risk of owning a business and all the managerial tasks that are associated with it. So I’d say $650,000 would be that threshold to aim for.

Bethany Fishbein: So maybe this is a dumb question, but when we’re talking about that potential practice owner, it feels like if you had a smaller practice, it would be worth less and like less money that they had to borrow. But you’re saying that it’s easier for them to get a bigger loan than a smaller one. Explain that one more time.

Erik Ferjentsik: So there’s kind of a cutoff, right? So there’s definitely going to be a max that the bank is willing to loan based on the buyer’s financial profile. And that’s connected to their, their debt structure and their credit score and all the things that banks look at in underwriting. But there is also a drop-off point. So if you think, you know, the average discretionary net income, which I can define for you later, if you’d like, well, I’ll define it now. Mainly it’s the net income that a practice owner earns without taking any money out of the business to pay themselves or taking any distributions.

So only direct business expenses to pay off your, your employees, your rent, your general expenses. And then what is left in raw net profit for you before you enter any discretionary expenses, things that are really not fundamental to the continued operations of the business. For example, your personal cell phone, life insurance is another example. You don’t need that. It may be good to have, but it’s not fundamental to the operations of the business. So excluding all those discretionary expenses, you know, what’s left for you as the owner, the standard or the optimal range, probably 30 to 35% for discretionary net income as a percentage of gross sales.

There are definitely practices that can get up to 50%, but that can actually backfire. We can go over that later too, if we have time and then there’s plenty of practices below 30%. And for those, I would say you really should look at your cost structure and figure out ways to get it up to that 30 to 35% range as a goal. But if you look, you know, let’s take a 500,000 grossing practice and let’s say they’re at 30% discretionary net, that’s only $150,000 leftover for the owner of that practice.

Now a 65 year old owner of the practice who graduated with 30,000 in school loan debt, or maybe none, they’re fine with that maybe, but you take a newer grad and let’s say that $500,000 practice is worth $300,000 for a random round number. Well the annual debt service on that to buy that practice on a standard 10 year loan is going to be, let’s say 35,000, probably more with today’s interest rates, but 35,000, let’s say a year. So you take 150 minus the 35 and you’re at 115 that buyer who’s looking at that practice who may be making 115 already as an employee, what would be the incentive for them to leave their job, to go make exactly what they’re making as an owner with all the headaches and the risks.

There’s not much incentive there. On top of that, the banks usually want to see, you know, 15% or 20% improvement in their wages from where they were in their wages to where they’ll be as the owner of that practice to give a buffer. So in case something goes on in their personal life where they need a little extra money or something happens in the practice where that discretionary net goes down, they’re not going to default on the loans.

Bethany Fishbein: So I mean the general concepts, and I guess this makes sense with what you said to start out of increasing gross collected revenue and then increasing the percentage of net profit are healthy things that you can do that are going to increase the value of your practice and make it more attractive to a buyer.

Erik Ferjentsik: Single best thing you can do is improve the discretionary net income. Generally that’s correlated to revenue, but not always, right? I see a lot of practices that think they’re doing great as they grow revenue, but they’re usually growing wages alongside that. And if you’re hiring so many people to support that revenue increase that your nets aren’t improving, that’s a problem, especially if it’s connected to wages because wages is the hardest problem to solve.

So for example, if I’m a buyer and I’m looking at a practice that has really good gross but not so great net because wages are high, somebody might say the seller or the seller’s broker might say, well, it’s easy, just lower wages. It’s not easy to do. There’s a culture in that office that’s used to that number of employees doing that amount of work and getting paid that amount of money. The only real way around that is to reduce wages, which will probably lead to people leaving or employee turnover, terminate people and then make the other people work harder, pick up the slack, which they’re not going to be used to. So any way you look at it, redesigning an employee culture to reduce wages expense is very difficult. Even the PE groups don’t want to have anything to do with it except for maybe a few that will come in and actually move to fire people right away to lower wages. But they have the resources and a model that I guess supports that. But yeah, most buyers in the market are not going to want to deal with that.

Another culprit I see for high expenses while we’re on the subject is cost of goods sold. Wages and cost of goods sold are usually the two highest as percentage of sales in a practice. And they’re usually the culprits for bringing discretionary net down. Cost of goods sold as being high is a very easy one to fix comparatively to wages. The main things you can look at for reducing cost of goods sold is am I pricing correctly with the market? So, you know, just for a random quick number, three to 3.5 times wholesale would be in the range. It’s going to vary based on the brand and type of frame, but that, you know, I’ve, I’ve seen people that are still at two times wholesale. They’ve kept it there since the eighties or whatever. And they never knew everyone, you know, and they were offering the cheapest frames around and nobody knew it because you’re not advertising it. Number one, number two patients come in and whether the frames are $230 or, or the set or whatever is, is 230 versus 270. They don’t know any difference cause they’re not shopping for it daily like they are gas or milk.

So, you know, making sure your pricing is correct, making sure not over promoting, making sure there’s no theft by employees and patients. I’ve had some practices that I’ve evaluated where we found that, you know, a manager or optician was taking 10 frames a week out of inventory, selling it on eBay. And that, that ends up being six-figure losses for some practices. So, and then the final one is making sure you’re a member of a good buying group. And those are ways to bring cost of goods down. So, so yeah, discretionary net income, probably the most important thing, looking at your expense structure, making sure your expenses are down as low as they can be without jeopardizing your business and paying close attention to those two expense categories, wages and costs of goods sold. It probably would be first on my list to look at. I do have a kind of another like a hot list of items that I can rattle off real quick for people to improve the value of their practice other than what we’ve already spoken about. So one thing that’s becoming more and more important is online presence. So Google your business every now and then make sure you’ve got four or more stars, especially on Google, check out the other ones, Zocdocs, Yelp, see where people are reviewing you. And if you see any that are lower than ideal, there’s services that can help you out with this, or you can, you know, encourage your own patients that, you know, are going to give you good reviews to kind of dilute out those negative ones. That’s really important.

Building ownership or long-term lease is important. So if you can move into building ownership three plus years before you sell, that’s excellent because the chances of you selling it to the practice buyer are high as long as it’s not a huge building multi-unit. You can also keep it and rent it, but that’s usually not advised if you’re of retirement age for various reasons. But that building ownership, there’s a whole contingent of buyers in my database that won’t look at practices for sale unless they also include real estate. If you can’t do that, make sure you get the equivalent of a long-term lease. It doesn’t mean you have to have 10-year terms, but you want renewal options plus your existing term equaling nine or more years. Otherwise, chance of bank denial is high.

Limit employee turnover, especially within three to five years of sale, but without raising wages too much like we discussed before.

Bethany Fishbein: How often do you recommend that a practice is looking at that discretionary net income number?

Erik Ferjentsik: They don’t very often. So they seem to focus on sales a lot. Probably the best way to do it is export your P&L to Excel. You can just Google it. It’s really easy. You just export your P&L to Excel and then you create a column next to all of your expenses. And then you do a simple formula in the column next to your expenses. You write equals, you click on the expense cell and then use the slash sign for divide. And then you click on the gross revenue cell. And then if we’re getting technical, then you press F4, which will freeze the gross revenue cell. And then you can pull and drag that formula down for all the other expenses and it will automatically do the same ratio division of that expense divided by your total sales. And now you know what percentage of your revenue you’re spending on advertising, what percentage you’re spending on cost of goods, wages. And you can look up industry standards.

You know, ideally probably cost of goods sold would be 23 to 25% is a good range to aim for. Wages varies, but if you can get it down to around 20 to 25% great, some can go lower than that, but you can research it and then you can have goals and you can look at it monthly. You can look at it quarterly, but seeing where you are, I forget who put out a report. They wish they still did it. I’m blanking on the name, but somebody put out an industry standards report years ago and they used to do it almost every year.

Bethany Fishbein: Yeah. It used to be the MBA program. Was it the Esler MBA?

Erik Ferjentsik: And then I think Jobson did it also for a while.

Bethany Fishbein: When you do that, and this is something, I mean, we’re looking at with, with our clients, we’re looking at it monthly. We’re looking at it quarterly obviously, because you can have a bad month or a great month. And so we want to average it out. So when you get to that net income number mentally, what’s the calculation to be able to say, okay, I have this. My practice is worth about that.

Erik Ferjentsik: Yeah. So this is a tough one because even when I talk with a client for the first time, they’re like, what is my practice worth? Give me an idea. What I always tell them is it’s like asking me that question after we’ve spoken for an hour, half hour on the phone, it’s kind of like a patient filling out a triage form for you. They give you the triage form. They’re like, all right, what’s my prescription and diagnosis? You have to go through the complete examination process before you feel comfortable giving them a diagnosis and a prescription.

So the same goes true for the appraisal. I could spend 40 to 60 hours doing an appraisal and I know folks want an easy way to value a practice. And you’ll read articles out there all the time. Oh, it’s worth 65% of gross, which is the worst thing you could do. Please don’t listen to those people who just give you a ratio of gross, because it could mislead you. Gross is really not very important when it comes to an overall valuation. Net is very important, but there’s different ranges. There’s different ratings. There’s the tangible asset value that has to be considered.

So I hate to leave you and your audience hanging, but I’m probably not going to give you like a simple multiplier because I feel like I would be doing a disservice. If you want a quick, dirty way, I would do a large range. Could be, you know, 55 to a hundred percent of gross. And that’s the easiest way in that sense to get a quick, dirty valuation. It could be anywhere in that range. It could even be over a hundred in some cases and it could be below 55% too, but that’s probably somewhere where it will land. And then maybe, you know, more likely in the 65 to 85% range of gross, but it’s all really going to depend on a lot of other variables that go into a, you know, 40 hour long process and 70 plus page report.

Bethany Fishbein: You mentioned tangible assets. And I think that’s something that is confusing to people. Like if you’re thinking about selling and you buy a $70,000 piece of equipment, does that increase the value of the practice $70,000? And sometimes in some appraisal methods I’ve seen it does and some appraisal methods I’ve seen, it doesn’t change the value at all. Can you talk about that a little bit more?

Erik Ferjentsik: With my group anyways, when we appraise a practice, we include a tangible asset valuation. A lot of others don’t, they primarily base it on just cash flows, nets, things like that. But it’s important because two identical practices in revenue and cash flow, but one with twice as much inventory, retail inventory and brand new equipment, it shouldn’t be worth the same as the other one. A lot of people say, well, should I buy new stuff and how will that affect the value?

Ultimately, again, if you’re dealing with a group that values on tangible assets, then the useful life value of that asset will be included in your valuation. I wouldn’t go crazy buying all new stuff, but generally speaking, if you can keep the average age of your equipment combined within about five to eight years of age, that’s a good place to be. You don’t want everything to be 25 plus years old and probably not the best investment to have it all be brand new because eventually you’ll hit that critical mass, similar to what I said with the net percentages, where no matter if you buy more equipment, it’s not really going to improve the value of your business. So basically fix things that are broken, replace things that are out of date. And if you work with a good company that values that, you will get the right value. Investing in things that can improve the gross and nets is even better. So, you know, Optos will give you the whole spiel. You can charge for the photos, you can speed up your exam time. And if you can do all that, that’s a great investment. It’s not only adding asset value, but now you’re adding potential overall value to your practice because you’re improving gross and nets.

Bethany Fishbein: So you have to kind of think about, okay, I’m looking at the net. I don’t know exactly how net translates into the value of this asset, but I do know that the higher the net is, the more valuable the asset will be, right?

Erik Ferjentsik: Yes. Until you get to like 37.5 or 40% as discretionary net. And then once you get above that, what the banks and even the private equity groups start to do is they say, well, let’s look at all our other practices. Let’s say the bank does this. They look at all their other borrowers and they’re like, okay, they’re in the 25 to 35% net range. And this practice is at 45%. What could they possibly be doing differently to gain that much more net? And usually it’s the owner is seeing, you know, 30 patients a day. And so the next question the bank will ask is the borrowers, how many patients did you see a day at your old practice or the one you’re working at now? And they’ll say 15 to 20. And then the bank will say, nope, we can’t allow you. We don’t know if you can, you can take on that many patients. They may not, but it’s something they’re certainly going to look at.

The other thing is that it’s probably understaffed. The bank will worry, well, does the seller have a spouse that’s doing a bunch of work, but is not being paid wages. And then as soon as this buyer takes over, they’re going to have to hire somebody. So what banks and PE groups and certain buyers will do is they’ll say, okay, good for them for getting up to 45% discretionary net, but we’re going to make them an offer based on where the normalized nets should be around 30 to 35%.

My sellers who have achieved that, whenever I tell them that they’re like, man, it feels like I’m getting penalized for creating a very profitable business. And really that that’s the case kind of, it’s unfortunate that, that that’s the way it works. Now, if you find an independently wealthy buyer that doesn’t need bank financing or have, you know, have to deal with a third party, then maybe they’ll give you the full value. But unfortunately, with banks involved, or if you’re trying to sell the private equity, they’re probably going to normalize it. So yeah, try to maximize your, either way, you know, if you, if you operate at 45% for 12 years before you sell, you’re going to make a lot more in income than you’re going to get an improved value. Because we’re only looking at three years in evaluation anyways, typically. So good for you. You’ve made a bunch of money, you know, don’t be too upset if you don’t get the full multiplier on that higher net percentage.

But generally speaking, yes, improved discretionary net is the single best thing you can do. And then also connected to that is growth trends. So that’s something we can segue into if you want to is, is, you know, what a lot of people do as they’re younger or newer in practice is they’re growing consistently. And then when they head towards retirement, they sunset into retirement, right? They, they stopped working as hard. They stopped seeing as many patients. And that is the worst thing you can do because again, we’re relying on these third parties. So most often if it’s a smaller single location practice, if it’s made basically 1.5 million gross or less, you’re probably selling to the OD market. Who’s going to need financing from a bank. And most banks are going to deny a loan if there’s a 5% or more decline in revenue or net in the three years under review, which would be the, usually the three latest tax years.

This year we eliminated 2020 because of COVID. So it’s 2019, 21 and 22. But anyways, in any of those time periods. So if they look at 20, you know, 2019 versus 2021, 2019 versus 2022, in any direction, if there’s a 5% or more decline, worse being obviously in the more recent years, then they’re more likely to deny the loan. So what I could leave your audience with, if they’re thinking of selling is don’t sunset. If you start to have health problems or you’re just getting burnt out, then hire an associate. And there are some challenges and risks with that, but it’s way better to hire an associate to keep your production revenue and net around the same, at least around the same, you know, consistent year over year, but definitely not any more than that 5% or more decline. That’s huge in preserving and improving the value of your practice.

Bethany Fishbein: That’s such a good point, Erik, because I mean, obviously we, we see that as well far too often that, you know, somebody they do, they get older and they don’t want to work as much and they feel like they’ve earned additional vacation and they’ve earned the right to schedule the way they want to. And they absolutely have. And at the same time, then they go to sell and then they’re like, Oh, but you could go back to a five-day work week, or you could, I only work 46 weeks a year. You could work 52 and you would do that. And people think about that associate as a way to make more money, but it’s, there’s something to be said for what you’re saying of, even if all they’re doing is keeping the net stable and not declining the opportunity to have a stronger sale price can be multiples of, of their salary. I mean, it’s really, that’s a big point here.

Erik Ferjentsik: Well, so a couple of things there is when, let’s say it’s traditionally a single doctor, full-time practice. When we value a practice, we’re usually doing it with a methodology from the perspective of a single buyer, buying it and taking over full-time duties, right? It can be done different ways. The multipliers just change, but that’s traditionally how we do it. So let’s say in this case, single doctor practice, doctor’s getting burnt out rather than reducing the schedule and not hiring an associate, you can hire an associate, keep the production at least the same, or maybe even better with the younger, more vibrant associates, who’s not burnt out. And then the thought that your listeners might have as well, isn’t that going to lower my necks and have wages, payroll taxes, benefits going out the door to this associate? And the answer is no, because I, as the appraiser, I’m going to normalize all wages for a single full-time practice buyer or owner.

So all those wages, benefits, payroll tax that go out to the associate actually get added back into the discretionary net for my valuation. And they become a non-expense from that angle, from the valuation angle. So there will be no penalty for that money going out the door, but there will be for reduction in nets without those wages. And then to your point about, I hear this constantly when, you know, a seller comes in and I see the decline and I said, what’s the reason for the decline? They say, Oh, well, I just, you know, took more vacation, reduced my schedule. But five years ago, I was all the way up at this number. And they think that that’s where the value should be based. And that’s just not how it works. It’s the three most recent years. That’s what the bank underwriters look at. That’s what appraisers look at. And then, you know, it’s not like you can just snap your fingers, open up the schedule. And all of a sudden all those patients will come flocking through the door.

If you’re booked out three months, you can make that case two months, you can make the case. But there’s also another case that could be made, which is that as you’ve reduced your schedule, as you’ve taken more vacation, patients who couldn’t make appointments or patients had to wait the two months because there’s a two-month wait, have gone to another practice. And there is no argument or no response to that, that I can give, that a seller can give that will prove that that didn’t happen. We could say, Oh, they didn’t come in to pick up their records or, you know, we can talk about all the points, but there really is no way to prove that patient attrition hasn’t occurred because of a reduction in the seller’s schedule.

So yeah, if you’re getting to the point where you want to see less patients, ideally you don’t because there are some issues bringing in associates, especially towards the end. You know, if you’ve had one for a while, you know, years before you want to sell, then not that big of a deal. But if you add an associate, like within the last year, you’ve just affected the goodwill nature of the business. Patients have under undergone one doctor change and now they’re going to have to go through another because if, again, if it’s a full time equivalent practice, let’s say the owner works three days, the associate works two days, the bank is going to mandate that the incoming buyer take over all five days of the schedule. So out goes the seller, out goes the associate. And now those patients have just gone through two doctor changes and there’s great concern of patient attrition in that case because, you know, generally speaking, patients don’t want to switch doctors multiple times in a short, short period of time.

Bethany Fishbein: So, I mean, in that case, somebody bringing in that associate is probably hoping that that associates going to have interest in buying the practice, which then that negates at least half of that goodwill kind of concern for an owner who’s bringing in an associate thinking, okay, this is my exit strategy. What are the things that they can do with that associate to increase ultimately the likelihood that they’re going to buy it, the amount that they’re going to buy it for and the ease of that transition?

Erik Ferjentsik: So this is a tough one because I don’t have data on this, but I can tell from experience that more often than not, the associate doesn’t become the buyer.

Bethany Fishbein: You said that before, Erik. Like, it’s something that we’ve talked about, even to the degree that you don’t like to go into a relationship with a practice owner and an associate where the associate’s intending to buy, but you’ve been really open about that. What happens?

Erik Ferjentsik: So, I mean, if, again, if they’re there for years and it’s a larger practice like yours, multi-location, much easier, right? Especially if there’s a revolving door of senior partners leaving and selling shares to junior partners who’ve worked their way up, that’s much easier. But I’m generally referring to the single private practice owner that’s worked full-time that doesn’t have a beyond full-time practice. Bringing in an associate in that situation is quite risky.

Again, unless there’s like health issues or something that’s preventing you from working that full-time schedule, but you’re changing the dynamic of the practice, that person will come in and they’ll probably see things about it. So that they don’t agree with that they would want to do differently. There might be some head-butting. They may not like some of the staff.

For instance, when we’re selling a practice that doesn’t have an associate, sometimes the buyer will ask, can I come work there for a month or two before I end up buying it? And there’s a reason why we don’t allow that to happen. I mean, there’s, there’s confidentiality matters and there’s all sorts of issues with it from a legal standpoint. But one of the main reasons we don’t allow that is because the chances are that they’ll become very skeptical about the business. They’ll find something they don’t like and no matter what business they go into there, it’s not going to be perfect. Right. But the more time they have to kind of dwell on what they see, usually the less chances are they’re going to follow through on the purchase.

Bethany Fishbein: It’s not a financial matter where both the selling doc and the associate want this transaction to happen. And it doesn’t. It’s that the associate that’s brought in with best intent starts to see things they don’t like and realize that maybe they’d be better starting something on their own or, you know, continuing to work somewhere else.

Erik Ferjentsik: Or they see that it’s a lot of work and that they’re not cut out for it. You know, no offense to the younger generations, but you know, they’re timid. They tend to get cold feet more so than buyers did a decade or more ago. So you kind of, as a seller, don’t want to give them any more reasons than they can think of naturally to not want to proceed. And then there’s the other issue, you know, that what are the chances that that one person doesn’t buy the business? I don’t, I can’t tell you because again, the stat, you know, how do you get that data? I don’t really know. But I think it’s pretty high, right? From what I’ve heard, because every time a seller calls me, I have hired this associate. I thought they were going to buy me out and they’re not.

Now what do I do? So now let’s look at the ramifications of that. What do you do with that associate? How do you, how do you deal with it in relation to sale of your practice? Now, again, if it’s recent, you have a recent doctor change and now you’re going to try to sell again. That’s one problem we already mentioned. Other things I see that are common is the employment agreements are not written well with these associates. Let’s say you’re hoping the associate buys it, but we list the practice for sale. We introduced it to the associate while we’re also marketing to the general public, that associate doesn’t want to buy it. And they say, okay, well, I know you’re going to sell it to somebody else, so I’m going to leave and they resign. Now what if you can’t go fill in that schedule? And now there’s been a major change to the structure of the business right before a transition, what lawyers would call material adverse change, which can compel the actual buyer’s market that’s interested to no longer be interested.

If your employment agreement doesn’t have a notification clause in it, which I see a lot or not a long enough one, then that associate can leave. And if you have, if you’re not able to fill in the gap and you have a couple months before the closing occurs of those patients not being seen, then your production goes down. Banks and buyers are going to look at your financials all the way up until closing. And if there’s a 5% or more decline in revenue or net in any time period leading up to closing, that is grounds for withdrawal, no penalty from the transaction. So if you do have an associate, don’t count on them buying, I guess is my best advice.

Make sure you have a strong employment agreement with the following in it. Ideally a 90 day notification of resignation clause. You’d have to look at your state law, talk to a lawyer. Some states will require reciprocity. So if you want them to give 90 days, then you have to be willing to give 90 days. And then you might want to bring it down to 60. I don’t know. That’s up to you. But ideally the longer the better, because if and when they find out you’re selling and if they determine they don’t want to buy, then they’re going to start looking for an alternative job, assuming they’re not going to keep theirs. And you need them to stay as long as they can until ideally until the closing.

Bethany Fishbein: So this is how they get into those crazy situations that I know terrifies long-term associates out there because they’ve been through it and they’ve heard of others who’ve been through it, where they find out that their practice is being sold the day after it’s happened or the day of. And that’s, I mean, that’s hard to think about. I know as you’re saying this, I get it and I think, okay, that’s why that happens. But yeah, that, that scares people.

Erik Ferjentsik: Totally. So in that case, what I suggest that a seller do, if they don’t want to inform the, well, if there’s a notification clause and you can notify them prior to closing, but then you run the risk of everyone else finding out prematurely. So like one recent example, my client is going to give a severance to that associate. So let’s say there’s a 30 day notification. They would just pay them the 30 days payroll after informing them on the closing date, they can pay them that out of sale proceeds. It’s not the end of the world. And then they’ve preserved confidentiality all the way through to closing, which is critical to having a successful closing.

Before I forget the two other components that you really want to focus on in the employment agreement are a very sturdy non-compete within state law. So, you know, three to five years with a certain mile radius that’s reasonable based on where you are, whether you’re suburban Metro, whatever type of practice you are, again, consult with a lawyer about that. And then you want a strong non-solicitation clause in there so that that associate can’t bring patients along with them to another practice if they don’t end up being the buyer. And this also kind of exemplifies a lot of the risks of bringing an associate in, right? Because there’s a reason we have to have all these clauses in the legal agreements because they can eventually, you can basically cultivate your own competitor by bringing them in. And then if they leave, the buyer is going to say, well, you know, this associate, where are they going to go? And are patients going to follow them?

Even if they go outside of the competitive radius, that’s going to be a concern of theirs. So you have to keep in mind that these are all concerns for the buyer’s market. So non-solicitation, non-compete. And the other one is a custodial rights of records clause in the employment agreement. So it should be clear that the practice owner retains custodial rights of those records, even if the associate goes somewhere else. And so again, rely on a good lawyer for that, that understands healthcare law.

Bethany Fishbein: I mean, I have to ask on behalf of all the hopeful associates out there, if you’re an associate in a practice and you’re planning to buy in, you’re in somewhere that you enjoy, you like the environment, you like the patients and the plan is that you’re going to partner-buy, how do you preserve the likelihood that that’s actually going to happen? Because from what you’re describing, it sounds like the associate changes their mind and leaves, but I’ve seen it with practice owners where they suddenly get either an appraisal that’s higher than they thought it was going to be. They get not so much these days, but in the past an invitation to a dinner with a PE company and somebody else is interested. And now they’re looking in another direction.

Erik Ferjentsik: Yeah, it’s a tough one. I mean, my advice completely changes if it’s the associate asking me for advice, I would tell them, keep showing interest, keep asking, when do you think the day will come where I can ideally buy you out? Unless it’s again, unless it’s a large practice that has a history of partnerships buying in and buying out, it’s difficult. Like the progressive sellout, I don’t usually recommend meaning a seller selling a portion, continuing working, selling another portion. If it’s just one seller, one associate that that system doesn’t tend to work out. There’s a lot of legal hurdles and challenges and costs. And so anyways, yeah, just keep showing interest and keep your financial profile healthy. Don’t put yourself in too much debt, keep your credit score high. So that when you’re given that opportunity, you have a good chance of getting approved for financing.

It’s the seller’s responsibility to perform the first appraisal, let it, you know, ask them for a valuation. And then as the associate, you can get a second opinion on that if you’d like. And then moving forward, if you’re an associate and can move forward without buyer competition, obviously that’s great for you. Then the seller calls me and asks me the same question I would say, just like any other market, whether you’re selling a car or real estate, you don’t put all your eggs in one basket. It’s like, you know, if you own a home and you have a roommate and you’re going to sell that home, maybe you’ll offer it to your roommate, but are you only going to offer it to your roommate? No, you’re going to put it in the open market, maybe give, you know, give your roommate a good shot at it, but you want the whole market to compete to buy your home or your car or whatever it is you’re selling.

So as a seller, you should put your practice up for sale in the open market. And if that associate becomes the buyer, great. But if not, then you have to have a contingency plan. And that’s what the, you know, employment agreement we just talked about. It’s also having a, you know, a good consultant or broker on your side who can advise when and how to inform the associate and then when and how to inform the buyer’s market and what order. And you obviously don’t want to estrange your associate by giving them less of an advantage to compete. But at the same time, you don’t want to inform them too early that the buyer’s market doesn’t have time to respond or find the listing. It’s a very sensitive process that you have to take seriously if you do have an associate. But there are definitely ways to get to the finish line with the associate without it that are hopefully going to work for all parties.

Bethany Fishbein: Erik, thank you. In 40 minutes or so, this is a tremendous amount of information and leads to more questions. I hope, I know we’ve talked about it before, but I hope that at some point we can do a whole other conversation on partnership structures. I know you’ve got strong feelings on that from your experience and things that you’ve seen, but this is a lot to think about, you know, starting to build up that collected income, trying to hit a level where your practice does become sellable, keeping it realistically sellable by increasing the net revenue. Talked about some great ways to do that, decreasing your expenses by reducing cost of goods and staff costs. I think tracking the net comparatively, quarter after quarter, year after year is important so that you’re aware of your own practice trends. I see so many practices that come in and aren’t. They might know what it was this most recent tax year, but they don’t know how that compares and they don’t have goals set around that. And thinking about all of the potential opportunities for buyers to buy the practice and not being fully attached to one way because life doesn’t always work out the way you plan.

Erik Ferjentsik: Yeah. Yeah. And that’s why, you know, if a lot of practice owners don’t have the desire to even look at financial statements. So I believe power practice has a good program where they’ll manage that stuff for you, try to optimize all the expense structures. So, you know, it’s always good to have, if it’s not in you or even, even still is to have a party that’s keeping tabs on all of that for you and then that can advise you.

Bethany Fishbein: You gave so much information and obviously plenty more to come. So Erik, thank you so much for your time. Thank you for sharing your knowledge. Thank you for giving me and our listeners tons of things to think about, even from the early days of their practice, starting with the end in mind. I appreciate you doing this.

Erik Ferjentsik: Yeah, it’s my pleasure. It’s always my pleasure to be on your show. Thanks for having me.

Bethany Fishbein: Thank you. And you know, for our listeners, part of what we do at the power practice is work to provide that business clarity that helps you understand how the decisions that you’re making now are impacting your practice in the future, both from a standpoint of financial success, but also from a standpoint of just enjoyment of life and how you’re spending your time. So if we can help you out, please reach out to us at powerpractice.com