What steps can you take today to maximize your practice value in the future? For many of us, our business is our most valuable asset, and yet we often overlook important opportunities to realize its full potential.
Join Bethany and Erik Ferjentsik, owner of Visionary Practice Group, as they dive deep into a discussion of practice valuation and why what your practice is worth goes far beyond the numbers on your P&L.
Explore the role that tangible assets, online presence, and employee turnover have on practice value, discover what you can be doing today that will provide lasting growth for the value of your business, and learn some of the most common pitfalls that have kept successful practice owners from realizing the true potential of their most valuable asset.
September 13, 2023
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Becca Starks: We have the ear with the students to hear what they’re looking for. They’re very, very few students that we’re working with, with the class of 2023 that will even consider an opportunity that is not private practice.
Dr. Bethany Fishbein: Hey, I am Bethany Fishbein. I am the CEO of The Power Practice and Host of The Power Hour Optometry Podcast. And I just want to first congratulate all of the new optometrists graduating this week from the optometry schools across the country. It’s such an exciting time. It doesn’t feel like that long ago since I and my classmates at New England College of Optometry in 1997 graduated. It goes fast. It’s really an exciting time. So congratulations, first of all, and this show is inspired by and dedicated to you and all of the people that you are hoping will hire you. Once you get your licenses and get out there into the world. So I’ve invited a guest, I have Becca Starks, Becca handles Enterprise Accounts and Operations for KMK Careers. And she’s here to help me sort out some of the things that today’s optometry students are looking for, and help educate some of the optometrists who are looking to hire young optometrists about misconceptions they may have or differing perceptions of this graduating class. So, Becca, thanks for doing this your second podcast ever. That’s awesome.
Becca Starks: Yes, thank you for having me. This is exciting.
Dr. Bethany Fishbein: Yeah, thank you. It’s an interesting time because we work with mostly established optometric practice owners. So most of the people that I’m speaking to day to day are employers of young optometrists, and they have this vision of what today’s graduates are like, and then I get the opportunity to speak with optometry students and recent grads and they’re not necessarily like that perception at all. So hopefully, you can help us bridge the gap a little bit.
Becca Starks: Yeah, absolutely.
Dr.Bethany Fishbein: So, talk about yourself for a minute here. I want you to just talk about KMK and KMK Careers because when I want to data on students, I knew you were the one to go to. And so I want all of my listeners to understand your involvement with young optometrists today.
Becca Starks: Yeah, absolutely. So KMK for those that don’t know KMK’s foundation is the KMK board review, which was started 18 years ago by Dr. Kyle Cheatham. And now fast forward 18 years we are inside of all of the 23 optometry schools nationwide. We have a team of optometrist instructors that traveled to all of the schools and we have a relationship with both third and fourth-year optometry students and 98, This is a big number to remember 98% of optometry students utilize KMK to pass their boards. So essentially we have a relationship with almost every single optometry student nationwide from the board’s perspective. And so we now have a new division of KMK specifically on careers which is just a natural extension of supporting those same students and finding their first career.
Dr.Bethany Fishbein: So you’re initially talking to these students when they’re students studying for boards. And then they hopefully pass boards and you know, move on and take more boards and pass those and move on. So what are the services that you’re providing for these students once they’ve graduated as doctors?
Becca Starks: Yeah, so it’s really fun. Personally, I am mostly an employee you’re facing so those that are looking for these candidates. However, we have a team of career advisors and all day long, they’re the luckiest ones in the world. They get to speak to these upcoming grads. So right now they are around the clock talking to those that are about to graduate here and a couple of weeks or maybe have graduated just recently. And uncovering what they’re looking for in a practice is really it’s a one-on-one relationship, so it’s totally free to students. They sign up to get a career advisor. They have calls with that career advisor to uncover what are they looking for what type of practice is it specific specialties, just anything that may be the true motivating factor as to why they want to go to a certain practice. And then essentially we play matchmaker so the career advisors speak to students all day long. I speak to employers all day long, and then we come together and get to build a bridge between the two and hopefully connect great candidates with a great opportunity.
Dr.Bethany Fishbein: Maybe it’ll be the next Netflix show after Indian matchmaking, Jewish matchmaking. It’ll be optometric career matchmaking. And be a celebrity.
Becca Starks: I think some of us would watch that, at least your listeners would probably enjoy that.
Dr.Bethany Fishbein: My husband and I would watch it so
Becca Starks: same.
Dr.Bethany Fishbein: So I mean, you’ve got a line of sight into exactly who today’s optometrists or today’s graduating class, today’s brand new optometrists are, can you give some facts and figures of what that class looks like?
Becca Starks: Yeah, so essentially, from a demographic perspective, it’s highly female. The data is showing 70% female and 30% Male.
Dr.Bethany Fishbein: 70?
Becca Starks: 70 Percent.
Dr.Bethany Fishbein: Wow.
Becca Starks: Yes. And there’s information I believe you are going to be able to put in the show notes. But there is a really robust report. I believe it’s lots and lots of pages. I don’t remember how many but there are highlights within that on pages nine and 10 that give a really good but really quick summary of demographics of this class, within gender within race. There’s even financial information about how many needed to have financial aid, that sort of thing, and some really detailed information even about by school breakdown.
Dr.Bethany Fishbein: Are you able to roll through some of the things in there that kind of stood out to you?
Becca Starks: So the biggest thing that stands out to me is female and how as you it shows kind of year over year how that transition has changed from much more female than male as it was in the past. Same thing with race, I believe I don’t remember how many years ago it was but just not too long ago. It was predominantly white for professionals graduating and now that’s shifted to highly other races, whether it’s Asian or black or other races that are included in that.
Dr.Bethany Fishbein: And what about the financial piece? Because I feel like that’s such a big topic for new doctors. Is this need to pay back student loans? Do you have any stats on the amount of debt that students are graduating with?
Becca Starks: Yeah, so the report itself shows 85% of students are utilizing some type of support financial aid, loans, and the average for a graduate right now graduating is about $200,000 in debt. So definitely it is.
Dr.Bethany Fishbein: That’s just from optometry school or that’s including undergrad debt?
Becca Starks: That’s actually a good question. We just get the stat of 200,000 and I assumed it was just optometry school. But that’s a good question.
Dr.Bethany Fishbein: So young, female, and any change in like age demographic? Or is it typically right out of college a year or two out of college starting into Optometry?
Becca Starks: Yeah, So typically, it is kind of a typical route straight out of undergrad and to optometry school. There is about of the 16-1700 graduates there are about 150 of those that are considered you know, like other avenues whether that would be part-time or returning back in at a later point in time.
Dr.Bethany Fishbein: Okay, so out of 1500 you’re talking about? Very typically, right? 1000 young, female, probably non-white doctors.
Becca Starks: Yeah.
Dr.Bethany Fishbein: If you had to say this is what’s typical. This is the majority.
Becca Starks: Yeah.
Dr.Bethany Fishbein: With debt?
Becca Starks: Yes. A lot of it.
Dr.Bethany Fishbein: Okay. So, when you talk to this typical doctor and are getting into the field of matching into a career of their dreams, what are they telling you that they want?
Becca Starks: Yeah. So it’s been interesting to learn that so the things that I came into this thinking people would want my background was actually at LinkedIn for five years before coming on to help launch this division of KMK and I thought it would be very different. I would think pay would exceed everything else. But, interestingly, location is the top deciding factor for these new graduates in determining which practice they want. Obviously, that is the hardest answer because no one can do anything about the location of their practice. But we can touch on this later. Kind of some ideas and tips for those to try to recruit folks into harder locations but definitely the location. Again, before and above pay even this work-life balance coming into play that is much more of a topic. Then I think it has been in years past. Not necessarily meaning, Hey, I want to come in and I want to never work. But this generation is much more just passionate about having that work-life balance of the work to live not live to work mentality. And so location, work-life balance, obviously pay, and structuring pay in a way that is understood to the candidate as well too. So being very upfront about what that pay is so that they know before even applying and putting that in a way that they understand what they actually can make because sometimes it can be hard with percent of production, knowing what that means.
Dr.Bethany Fishbein: So let’s go into those a little bit more and I want to just go back one to work-life balance because I think that’s probably the biggest misunderstanding between a doc maybe in their 50s and a doc in their 20s. This idea of working to live instead of living to work and it’s respectable and it’s necessary and mental health is important and it’s and life has to work for you. But these older docs, that was not their world. And so when I hear it, it’s complaints. They won’t work weekends, they don’t want to put in 40 hours. They’re asking for a four-day workweek. They’re like it’s coming across as we’re lazy. We’re not dedicated to the practice. We don’t want to be here we’re not going to work as hard as you and it. It creates a disconnect from the start like somebody interviewing, who says I don’t want to work every weekend. All of a sudden has all these judgments thrown on them that they probably don’t deserve. Do you see that with the docs that you’re talking to and you’re matching?
Becca Starks: Oh, absolutely. Yeah, it’s the same thing I hear to have. You know, that’s typically the demographic of employers that I’m talking to all day long to have, you know, they came out and maybe cold started or they came out and bought a practice and they’ve been doing it for 20-30 years and like. What?
Dr.Bethany Fishbein: Right and they remember, or maybe they’re still working 70 hours a week and they’re there, you know, every day in the practice and their day off there when the cleaning themselves because that’s what the owners do. How do you coach of 50-something and 60-something-year-old practice owners into understanding that it’s not laziness and it’s not to they don’t want to work?
Becca Starks: Yeah, so that is it is a big misconception of the students that it is laziness, and specifically, most students are expecting to work at least one to two Saturdays a month. So it’s not that they’re coming in and saying I only want four-day workweeks, and I’ll never work a weekend. They are expecting a true full work week and one or two Saturdays per month. To your question about how to coach an owner in that situation. I think it’s just taking a step back and looking really high level at your practice as a business and I’ve had this conversation with many owners of I don’t know why we are open Saturdays, honestly, we’ve just always done it and so determined are we doing this because it’s just always been done or when determining this because it is a true business need. And so same thing with later hours or that sort of thing. If it is a true business need 100% voicing that to a candidate that’s a friend and that’s that’s great, but there may be situations where again, it’s just we’re doing this because it’s been done forever. And actually, our patients wouldn’t mind if we didn’t have a late night or we had a late night instead of a Saturday or vice versa.
Dr.Bethany Fishbein: Do you think docs have like a little bit of that? It’s like that hazy mentality? Like I went through it I put in my time therefore you you need to.
Becca Starks: I think it could be a little of that. Me not being an optometrist. I have to tread lightly because I have not earned my dues. But in the conversations that I’ve had, I think it is a little bit of that at least.
Dr.Bethany Fishbein: Yeah, I worked weekends for 23 years. I’ve never missed it Saturday. I’ve never called out sick. And now I’m going to change my whole practice because this 24-year-old kid doesn’t want to work, like there’s that so what are the students are the new grads thinking about these practice owners, doctors who are in a different demographic from them because there’s got to be misconceptions going that way also.
Becca Starks: Yeah, I don’t get to hear a ton of the misconceptions from the student side. But I think there’s just both sides can teach each other something right like maybe that student can come in and show this business owner who’s been doing this forever, like, wow, I could totally do this differently. And, wow, I’m kind of relieved that you came in and brought up the idea of work-life balance because I as the business owner, really needed that, and wow, my life is different because of it and vice versa. There’s obviously so much that the practice owner can teach and pour into these new grad optometrists. But as far as misconceptions from them, I haven’t heard any to be honest.
Dr.Bethany Fishbein: I hear that they look at a private practice. They think they’re not going to be paid as much. So they’re thinking that not necessarily that the owner is cheap, but that it’s not. It’s not as profitable, therefore there’s not as much money in it for them. You didn’t mention the mode of practice. You talked about location, work-life balance, and pay. Are students coming out looking for commercial opportunities? Are they looking for private practice or looking for MD offices? I mean, obviously, students are looking for each of those, but what are you seeing most frequently?
Becca Starks: Yeah, great question. So motor practice is very important and private practice remains. Top of the list for I’d say close to 90% of the new grads.
Dr.Bethany Fishbein: Serious?
Becca Starks: Yeah, because I hear the same thing. I hear a lot from private practice owners that say that almost come to the call with me very nervous, like “Becca, what’s going on? Why might all the new grads want private equity and why do they want retail? And can I really afford to hire them? Because it sounds like they’re throwing all the money in the world with them.” And then it’s interesting because we have that ear with the students to hear what they’re looking for. They’re very, very few students that we’re working with, with the class of 2023 that will even consider an opportunity that is not private practice. So there’s just a handful of folks that have said all maybe look at private equity or retail, but the vast majority say I truly, truly, truly want to private practice and there’s even a really good group that says, “Not only do I only one a private practice, but I already know that someday I want to partner slash buy this practice as well.”
Dr.Bethany Fishbein: Do you think though that it’s, it’s like self-selecting a little bit because retail opportunities are so easy to come by? That they might not even consider needing to work with a company like yours? They just need to go on Ziprecruiter, Indeed, and type in optometrists job and the geography they want and they have their choice. Are you talking to them before they’re job-seeking?
Becca Starks: Yeah, so we actually start a process with them a year before they graduate. And so we have them fill out a profile with us it looks just like a LinkedIn profile, but it’s specifically for KMK, and go in and select all of the different types of practices that they’re open to. And so, we have both from the data from what they input on their profile and then they all have a one-on-one call with a career advisor as well. And so that’s where those points come from, both in the data they enter and then the conversations they have with a career advisor.
Dr.Bethany Fishbein: And is that when a student should be starting their job search is early in fourth year?
Becca Starks: Yeah, so we were really surprised in the timeline as well that a lot of students start having conversations about the fall before they graduate. So this class of 2023 they were starting interviews, October timeframe, and then a lot of them were during their Christmas break, timeframe holiday break, going on visits to practice owners. And then as soon as the New Year transitioned over there were many that were in contract. So definitely, Fall time is like you can feel good. About yourself being ahead of the game, wintertime is still very safe, you still have a lot of opportunity to be reaching out to candidates, and then as we enter into more of the springtime, a lot of I’d say probably half if not more of those that we’re working with are 100% in contract ready to go.
Dr.Bethany Fishbein: When you start working with them. Is there any issue with students who are starting the search and still haven’t passed their boards or won’t have the credentials to work when they graduate?
Becca Starks: Yeah, Yep. There is information from ASCO also about passage rates. And it goes into detail even of school by school, but it essentially shows year over year the decrease in passage rates, and I think we’re at about 70% passage rate, right now. 73%. And so there’s a huge population of students that don’t pass typically it’s part one where the struggle is and so there are some students that will even graduate and still have not passed boards. And another misconception there is, “Oh, these students are lazy or they’re not understanding the information, and I don’t want those students because they won’t be good doctors”. And completely not true. Those are students that could either be not very good test takers. These are also the population that came into optometry school right in the heart of COVID. There are some that have just had really rough life events around the time that it is to take boards and so but they are all great people that will be great doctors, they simply just need to pass this test. Many of them have had really great GPAs some of them have other degrees that help them with the practice management side and so it’s just a matter of getting past that one test or many of them.
Dr.Bethany Fishbein: And how does, how did they navigate that with the job contract like, will an employer sign something with a student who hasn’t yet passed boards?
Becca Starks: Yes, we are running into that actually part one. Board scores were just released this past week. And it was a lot of that there was a lot of celebration and there was a lot of sadness around those that didn’t pass. And the good news is, I don’t know that I’ve come across a single employer partner that we work with that isn’t at least open to the idea of bringing on someone that’s graduated in kind of a super tech role. It’s kind of how we position it to practice under that optometrist owner until they graduate and we even have some that say, “Hey KMK I know that you, as an organization, do great at coaching them and helping them after they fail boards.” I will even invest in that side of the house to ensure that they can pass boards not only to show that, hey, I believe in you and the hardest time in your life student but also that gains them a really loyal employee that again, is going to be a great doctor has just had trouble taking this one test.
Dr.Bethany Fishbein: Coming in as a super tech though, obviously, they’re coming in at a lower pay scale and they would come in as an optometrist, and they have those student loans. So let’s talk about compensation of obviously it’s going to vary around the country and regionally and how many hours and all of that but what is it that a new OD is looking for as far as the ability to earn money?
Becca Starks: Yeah, good question. So, specifically with this new grad population, the way that I kind of coach, the employer partners that we work with private practice owners is, a lot of times they’ll come into the call and say why pay 16% of production, but with this new grad population, they aren’t able to really wrap their brains around what that is, you could have a $1.5 million, your practice and they still just don’t, they can’t really understand that. And so the recommendation that we give is to at least have some sort of salary and we have information and concrete data on specific areas of the nation. So by all means, if, if we can support you in any way with that, I’m happy to to make sure that you’re competitive, but having some type of salary listed up front is what’s going to entice these new grad population because they can wrap their brains around 140,000. They can’t necessarily wrap their brains around 16% of production. And so totally understand, then obviously the argument private practice owner, I hear you what’s going on in your head is. “Well, I need to motivate them to work hard. Like if I just give them a salary, then what’s the motivation to work hard”, and so there’s been kind of this really nice avenue that we’ve taken with a lot of partners that’s worked well in that advertising a salary a little higher than you probably would have normally, but then decreasing to a really low percent of production, so that there’s some salaries that’s there that’s enticing to a new grad, but a lower percent of production. So for the first year only, so year one higher salary and lower percent of production, and then having that shift for year two and year beyond your two to a lower salary, higher percent of production. And so what that does is again, entices this new grad to apply, and even want to learn more about your practice because there’s a salary, but that little bit of percent of production will get them to realize in their first year of working well. I’m doing the math, and if I would have went on the percent of production, I probably would have made more than my salary. This is making sense this is motivating me to work harder. And then again, you can even have it in the contract that upon year two that shifts to a lower salary that’s guaranteed and a higher percent of production. So as they’ve gotten their feet wet, they’ve learned they’ve been mentored that first year shifting then into percent of production.
Dr.Bethany Fishbein: So you’re coaching your doctors to do a salary plus a percent of production?
Becca Starks: Yeah, that’s pretty typical.
Dr.Bethany Fishbein: And what about benefits and stuff like that is that important? Yes, it is important. Is that something that a brand new grad is going to give enough importance to that it’s going to help them decide one place versus another?
Becca Starks: Yeah, such a good question. So I’ll give both sides just agree very important. I would say the majority of private practice owners that we’re working with are offering some sort of benefits, whatever that might look like. Some are very comprehensive, some are very “Hey, we will pay 50% of your medical and leave it at that.” But now that we are in this lane of there is competition from private equity and from retail. Those are just a no-brainer. In those avenues. And so to remain competitive from that regard. They will get a full package of 401K’s with matching with benefits with PTO, all of those things, if they’re considering a retailer or a private equity opportunity in comparison to your private practice opportunity. And so, again, I think most I talked to very few that say “Hey, I’m just percent of production and I don’t give any days off you just you if you’re here you make money if you’re not, you don’t but you can take whatever days you want type of thing”. I have a handful of those but for the most part, most private practices are offering the salary with percent of production, at least something towards medical, and then most do have a 401K whether there’s a match or not with that.
Dr.Bethany Fishbein: Are there other intangible benefits, other things that would make a practice more attractive?
Becca Starks: Yeah. So I think the thing that’s so such a great opportunity with all of the listeners that would have that are trying to hire than our private practice owners that have been doing this for years to a new grad specifically is mentorship. And so those that are willing to do that are excited about that. Well, maybe “Hey, I haven’t really even thought about that. But I’m gonna share over the last 20 years, I really have learned a lot that I could pour into this next upcoming generation”. And so being very vocal with that, even in a job description, or whatever it is that you’re creating, to entice candidates to come your way and some people put a really extensive plan behind, “Hey, we have a weekly meeting, and you get lunch hour with me every week and we will cover XYZ and some it’s kind of informal of just “Hey, I’m going to be with you I’m alongside you. You can call me when you want”, whatever that looks like, or even if you haven’t, some team members that are fairly recent grads, being able to vocalize that to have hey, we’ve got folks that I brought on board as new grads and couple years later looking them go and so the mentorship side is again that intangible free opportunity that I think a lot of people don’t even necessarily recognize they have the ability to give.
Dr.Bethany Fishbein: Is it mostly clinical mentorship they’re looking for? is it practice ownership? like when you say mentorship, what are they hoping to learn from you?
Becca Starks: Yeah, definitely medical at the top of that, but there are again, those those candidates that just know that they know that they want to be very involved in the practice management, the business side of the house. And so for those candidates that are interested in it, being willing to say “Hey, here’s I’ll show you all of our programs and all of our software and how I design the day and this is how I designed the business side of the house”, and so in those situations for folks that are interested in that side, I think it’s important to have just kind of an open door policy of “I’ll show you all that. I’ll show you that number. So I’ll let you in on this.”
Dr.Bethany Fishbein: So for practice in a particular geographic area, if you can get your salary and benefits close, but they don’t necessarily have to be higher. They just have to be within range and you can kind of check off all the other boxes. Is there a type of practice like heavy medical versus refractive versus specialty that people are looking for?
Becca Starks: Yeah, so definitely looking at highly medical. And then what I would also say is kind of another somewhat intangible, but if practice owners are open to new specialties that maybe you don’t have in your practice right now. But hey, if there’s somebody who comes in and is passionate about whatever it may be, and they want to bring that into my practice, that’s a really enticing thing for a candidate to really see themselves. They’re in the long haul of “Wow, I’m passionate about myopia management and this practice says, by all means bringing that on.” That’s such a great thing to be able to offer to a candidate and so definitely, medical and specialties are really where the candidates are wrapping their brains around of how do I see myself there.
Dr.Bethany Fishbein: And what if you’re in rural Wisconsin, where there’s just not a huge population of optometrists looking to settle? What’s the best way for a practice like that to set themselves up to find somebody to join because so many of those are great opportunities to become part of a community to ultimately partner buy a practice have a really low cost of living like it’s how do they make themselves attractive or show how attractive they are I guess I should say.
Becca Starks: Yeah, and I think that so often because I get the luxury of talking to these practice owners in some of these more rural areas. And every time I’m just like, Wow, if I could just record this and let all of these candidates see this owner care about the type of patients they get to see a lot of times it’s the smaller communities that because there’s not a nearby ophthalmology or another office like those are the most medically focused practices.
Dr.Bethany Fishbein: Absolutely.
Becca Starks: Yeah. And so, so often I feel better. Oh my gosh, if I could just package this up and get a candidate to truly wrap their head around it. So one of the things that we do on the candidate side is our current advisors do as soon as a student comes in and says, “I only want Miami in New York and LA”, we try to mentor as well and show your kind of cost of living and let’s truly take a look at this and let’s look at your lifestyle and look at
Dr.Bethany Fishbein: Miami, LA, how about rural Wisconsin?
Becca Starks: Right? Yep.
Dr.Bethany Fishbein: And consider Minnesota.
Becca Starks: Exactly. We play that game all day long. Yep. And then to the practice owners, a lot of what I tell them is, they’ll tell me I say they get to brag. So give me your brag book, when they come on as a partner to me, tell me what’s so great about your practice. And then they’re typically ready to end the call and I say, “Okay, based on your area, we also want you to brag on the geographic location just as much as the opportunity and so getting a candidate to truly understand what their life is going to be like, not just when they’re at work with you all day, but once they leave work, and what does this community look like and what can I do there? Is it great for hiking, is it great for the music scene, and the art scene? Is it great to raise a family and maybe I’m not thinking about that right now. But in the next couple of years, I will be.” And so I always say “Somewhere in your job description, however, you want to do it. It’s a post that you’re putting on to kind of an Indeed or an AOA. Having information, just typed information about your geographic area and what makes it so great. And then also, the other added thing you can do is you can always create videos.” Videos are I feel like that’s kind of how we’re all digesting content at this point. And especially this generation of these new grads, and so if you can even do a quick it doesn’t have to be professionally shot but videos of you just speaking informally, almost as if you’re speaking to a candidate who wouldn’t be right in front of you talking about again, envisioning their life there, the more that a practice owner can make a job description or job post about the candidate instead of themselves. The better that that’s going to relay to the candidates have just really getting to understand “Okay, this isn’t what I thought I was thinking Miami, but now I can kind of envision how my life could be in Wisconsin.”
Dr.Bethany Fishbein: That’s a really strong and valid point. Because when I think about a job ad, it’s all about what we need and what we want. We’re looking for an optometrist to work these hours to do this and when I’m interviewing candidates for Associate optometrist, but really for any position I’m always sensitive to an applicant, who all they’re telling me is what this job is going to do for them. Right. So I’m very critical of it as an employer when they’re like, I’m looking to build my clinical confidence in myopia. I’m looking into, you know, whatever. And I think what are you going to do for me? But in the ad, maybe it should be the other way off, Here’s what I’m going to do for you so that they’re interested and intrigued by the post enough to then come in and want to tell me what they are going to do for me so
Becca Starks: Absolutely
Dr.Bethany Fishbein: Cool.
Becca Starks: We even have one it’s a Power Practice member that wrote a personalized it looks just like a letter you would receive from your grandma in the mail and it was so different and so eye-catching and so engaging. It was truly just a personalized letter, Dear Candidate, and then it just spoke really informally like, Hey, I get it. Words are hard, school is hard, but here’s what it would be like living here. Imagine if you could leave work and go out and do this, this, and this and your two hours within this big city so you can go catch a basketball game and be back home at night. And so it was just very, again trying to get that candidate to envision their life not only with that practice but in that geographical location. And so that was an incredible example.
Dr.Bethany Fishbein: Did it work?
Becca Starks: We’ve gotten some interest. We don’t have anybody signed on yet, but it has enticed interest.
Dr.Bethany Fishbein: And talked about KMK a little bit again, just before we close. So if a practice owner is looking for an associate, they can reach out to you or how do they go about tapping into this database network matching service that you guys have?
Becca Starks: Yeah, absolutely. Yep. I would be the point of contact Becca Starks. And I’m sure you can put my email in the show notes, but it’s just Becca@kmkodcareers.com. And yeah, we typically just do a really informal introductory call and learn about the practice, learn about what they’re looking for. And then go over kind of our offerings. We’ve got two different offerings to choose from, just depending on what the practice owner is looking for. And then yeah, we just go from there. It’s really simple. It’s free to be in agreement with us and having us promote a practice. And so basically, we get that agreement going and then our current adviser starts promoting any of our partners that we’re working with. And then essentially once we have a student that is a great fit, we play the matchmaking game.
Dr.Bethany Fishbein: I love it. Thank you. I think this is valuable information for new grads to help them understand what they’re going out into and some of the misconceptions they might be facing. But hopefully, we did our part today to try and reduce some of those and really give today’s employers a more real picture of new grads who are looking for jobs. So thank you so much for taking the time to do this and give this service to all of the optometrists out there.
Becca Starks: Absolutely. My pleasure, Bethany. Thank you. So much.
Dr.Bethany Fishbein: Thank you
Read the Transcription
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