Thinking About Selling Your Practice?

Erik Ferjentsik: You start with a top-line offer. They give you this nice shiny price but after you add everything else together, the numbers get a lot closer together.

Dr.Bethany Fishbein: Hi! I am Bethany Fishbein, the CEO of the Power Practice and host of the Power Hour Optometry podcast. And our aim is really to bring information to optometrists, independent optometrists at the time they need it. One of the inquiries that we’re getting from doctors a lot is about the sale of their practice. And so I invited Eric Ferjentsik to have a conversation today. Eric is the President and Founder of the Visionary Practice Group, which is a group that specializes in Practice Brokerage and Transitions. They’ve helped thousands of practice owners transition their practices. So he is an expert and I’m looking forward to talking with him more today. So Eric, thank you so much for agreeing to do this.

Erik Ferjentsik: Hi Bethany! Thank you so much for having me. I’m really excited about it.

Dr.Bethany Fishbein: Yeah, thank you. I mean, do you find the same thing that the number of people that are calling you and asking about selling is up from what it was even a couple of years ago?

Erik Ferjentsik: Absolutely. I mean, it started with the baby boomer generation that was retiring. And now with a lot of things going on in the world that are unusual, it seems that there is a contingent that are moving to sell earlier than they might have thought they were going to. And then others that are also still retiring. So yeah, it’s a very active market and that’s great for buyers and sellers alike. It seems that there’s quite a bit of action going on.

Dr.Bethany Fishbein: I feel like there are kind of two kinds of sellers, right? Sometimes there’s planned sellers. They’re getting to a certain age. It’s been their exit strategy from the beginning to transition their practice either to an associate or to another entity. And they’ve been preparing for it, and kind of moving towards it, and then the time comes. And then I feel like some of the inquiries are from the kind of surprise sellers that have a really disastrous day or a terrible week and all of a sudden it’s like, “Let me just sell.” But if we’re doing this the right way, when should a practice owner start thinking about or preparing for actually selling their practice?

Erik Ferjentsik: Yeah, good question. So what I usually say is, it’s really never too early to start preparing. A lot of the preparation you do is just good business practice anyways. But I would say within five years of your expected exit, is when you really want to have things tightened up. And there’s a lot of steps that you can take to prepare yourself well for not only optimized value but a smooth transition, a quicker path to closing, and so many other benefits by doing a few things that will really help you in your practice sale.

Dr.Bethany Fishbein: I get the never too early and people who listen to all of these have heard this story before. But you know, I remember thinking about opening a practice, and the consultant we were working with at the time who was Gary Gerber right after asking what we were hoping to create. This was in our imaginations at that point. He goes, “Okay, and how do you want to get rid of that?” His thing was exit strategy from the beginning. 

Erik Ferjentsik: Yeah.

Dr.Bethany Fishbein: But when you start to have that inkling, you said there are so many things you can kind of tighten up. Talk a little bit more about that. What do you mean tighten up?

Erik Ferjentsik: Yeah, I’ll go over a number of the most important ones. There’s a very long list. But one of the things I see often is sellers kind of sunsetting into their practice sale. And by that I mean, as you’re heading towards retirement, you naturally want to slow things down. You don’t want to see as many patients per hour. You may hire more staff than you usually would otherwise which is going to increase your cost structure. So I advise against that. You shouldn’t be changing your normal business practices as you head towards closing even though it may seem counterintuitive. You want to keep the business running the same as it always has expense-wise and revenue-wise. You want those revenues and nets to be stable or growing, and certainly no 5% reduction or more. If you have a 5% or more reduction in production revenues and Net Income, banks will be hesitant to loan to buyers, and buyers will be hesitant to buy. Another thing that you’d want to do is earmark Discretionary Expenses. Everybody does it. Everybody is going to be expensing as much as they possibly can in order to minimize their tax burden. So get away with whatever your account will let you get away with. But as an appraiser in the industry, my job is to maximize your Discretionary Net Income, which will in turn maximize your valuation. So to make my job easier and your job because we’re working together to get to this valuation, you should have Discretionary Items earmarked. So for example, if you have your cell phone bill, combined with your business telephone, either have those itemized as two separate accounts in QuickBooks. So you can call it Telephone A and Telephone B or Cell Phone versus Business Phone. Those are obvious but there’s some less obvious. So for example, Disability and Life Insurance would be considered discretionary. It’s not fundamental to the continued operations of the business whereas Malpractice and Liability Insurance is. So instead of clumping that all together on your Insurance expense, have a Business Insurance expense, and then have a Discretionary Insurance expense account category in your QuickBooks. Or just have them all labeled exactly what they are Life, Disability, Liability, and Malpractice. To me the more itemization the better when I’m analyzing the financials. So the other parts like Discretionaryis a bit subjective. There’s a lot of other items that I’ll find that you might not think are Discretionary and vice versa. So if you think that it’s not necessary for the continued operations of the business, better to earmark it anyways. Because if I asked you to go rummaging through financials for three to five years back, it’s a lot harder to do it if you didn’t earmark it. And then the last thing on this kind of financial side of things is Asset Expensing. So your accountant will probably tell you up to a certain amount, you can just expense an asset purchase. For example, if you buy new monitors for the office or computers, and it’s totally legal with the IRS. The problem there is that that purchase is actually an asset purchase. It shouldn’t be reducing your Net Income being entered as an expense. Also, if you’re expensing it, it’s not getting added to your Balance Sheet or your Depreciation Schedule. So we don’t see that it’s an asset. So it’s kind of a double negative, right? If your Net Income is lower, that’s going to lower your valuation. And if your Asset Structure looks lower, that’s also going to lower your valuation. So those would be the financial kind of entries that you want to pay attention to. Some other things that you would want to do is continue purchasing assets as normal. What I see a lot of retiring sellers do is just they wouldn’t replace an old piece of equipment or one that’s not working properly because they think they’re going to sell soon. Or they don’t remodel because they think they’re on their way up to selling. It’s just like in real estate, right? It’s harder to sell a home that hasn’t been remodeled. It’s a little bit different in this industry. But if you’re not spending money to keep the practice up and running, buyers will notice that and they’ll be worried that that has kind of tarnished the image of the practice in the eyes of patients. And a good appraiser will factor in the Tangible Asset Value into their Practice Appraisal. I see a lot of places that don’t include that but if you buy a new OCT or an Optos, that value will be included in your Practice Valuation. So you don’t have to be worried that just because you spend money on equipment, you’re going to lose money on that. And even if you have it for a couple of years, it’ll be depreciated slightly on your useful life or your use of that over a useful life scale. But you’re still getting what you paid for and you’re getting out of it, the remaining value.

Dr.Bethany Fishbein: A couple of interesting things from what you’re saying. It makes sense that as you separate out these Discretionary Purchases or Discretionary things, we’ve seen people have their child modeling on the payroll and they’re, you know, on Facebook every once in a while with a cute frame. I mean, there’s all kinds of stuff. So you take that out and that increases the net of the business which increases the valuation. The reason that you put it in there to begin with was to decrease your taxes? 

Erik Ferjentsik: Correct. Yeah. 

Dr.Bethany Fishbein: As you’re doing this, like you go through your whole career kind of trying to decrease taxes, but then you have to change those things to get a higher valuation.

Erik Ferjentsik: Well, I would still keep expensing them if your account allows you to. The key though is that it’s earmarked so that it’s easy for someone like me who’s not involved in the daily operations to identify those adjustments and make the adjustments in the appraisal and give you credit. So you still get the Tax Benefit but then you also get the Valuation Benefit from me. 

Dr.Bethany Fishbein: Oh! Got it. 

Erik Ferjentsik: But if they’re buried in there, it’s really tough for either the seller or myself to find

Dr.Bethany Fishbein: Gotcha. So it’s not necessarily that you have to stop doing it, you just have to be able to easily find where you’re doing it. 

Erik Ferjentsik: Exactly. 

Dr.Bethany Fishbein: And then to a buyer, is that an appropriate explanation, “Oh, yeah. I’m paying my kid $12,000 to model.” and they go, “Oh, okay.” Is it accepted? Because they have to kind of just believe you?

Erik Ferjentsik: Well, if it’s done by a qualified appraiser, and it’s identified in the Appraisal Report, and it’s explained in detail, then it shouldn’t be a big deal. If there is a ton of Discretionary Expenditures and a lot of them are sketchy, that could affect the buyer’s perception of just the way that business has been run. 

Dr.Bethany Fishbein: Right. 

Erik Ferjentsik: So that’s really kind of a judgment call on the seller’s part. What’s more valuable? Remember you’re selling your practice once. So that’s one time where you get improved value. If you can expense something for 20 years as the owner and get that 33% to 35% Tax Benefit, that aggregate value might actually be more. But you want to be able to sell your practice and you want to get the optimal value. So we’ve seen some crazy things like Country Club memberships and as long as it’s explained well in the appraisal, the buyer should accept it and the bank should accept it. It’s very common, especially in small businesses, small private businesses like this. 

Dr.Bethany Fishbein: Yeah, we see that.

Erik Ferjentsik: I just had a couple more recommendations before I forget.

Dr.Bethany Fishbein: Go for it. 

Erik Ferjentsik: EMR is important. A lot of the older generations have been holding out. So if you can implement EMR, do it. No buyer wants to take over the practice and have that responsibility. If you’re still with one exam lane and you’re still years away from selling, go ahead and put in the second exam lane or if you can get another space in that complex to build out. I can’t tell you how important it is for the buyer’s market to have two fully equipped exam lanes. If you can, great! I know it’s a big undertaking. So if you’re a year away from retirement, maybe not worth it, but something to consider. Location is another consideration. If you’re located in a traditional mall or converted residential building or in like a two-door setting with an optician or optical that owns that section. I’ll go back to that. I want to make a recommendation there or corporate affiliated, you’re located in a Walmart. Those are all very undesirable practices and very difficult to sell. So if you have enough time and you can move out of those settings, you’ll have a much easier time selling. You’ll get a lot more for your practice. The name of the practice is important. Keep it a neutral name or change it to a neutral name. So if you’re John Doe OD right now, I’d highly suggest switching it to the city you’re in and Eye Care,  Vision Care, Family Eye Care, or whatever. Or the county if the city’s already taken. Something neutral. It’s a lot easier for the buyer to take that over. If they know the name is going to disappear, they’re concerned that the brand identity is going along with it and then patient attrition will follow. Two more things. Avoid staff transitions near your exit. So try to not fire a bunch of people and try to limit staff exiting. It’s good to have staff that have been there for a while. I know it’s really difficult especially these days with what’s going on, with the great resignation, and hiring and all that. But you definitely don’t want too much and especially if you have associates working there. The associate OD’s are really attached to the Goodwill Value of your practice, which is a large portion of the value of your practice. So you don’t want too many shifts in that because they’re connected to that goodwill with patients and that can really affect the buyer’s and the bank’s perception of value. In the final one which is really important is the lease. If you don’t own the building, the bank is going to require a nine-year tenure-mandated protected term. So it doesn’t have to be a 10-year lease. But if it’s let’s say your five-year terms, they’ll want to see a five-year lease with a five-year extension. If you’re on the last year of your five-year lease, there will hopefully be two extensions in there. That would be a total of 11 years. So make sure you’re covered with 10-plus years of protected lease terms with the existing term and renewal options. Because if we get to the very end of the transaction, which is usually when we’re contacting landlords and they get the sense that they control your destiny, right? They have to agree to this extension and this paperwork in order for you to sell your business. Suddenly, they can become difficult to work with, and even some that I’ve seen trying to get a piece of the pie in that situation. It’s just so easy when you’re at a renewal term, just ask your landlord for two renewal options. It’s no sweat for them because they still can renegotiate the rate at that time but at least you have the option to renew and therefore the buyer will have that option when you assign the lease over to them.

Dr.Bethany Fishbein: That all makes sense. There’s so much information. Thank you. So I’m jumping back a little bit. 

Erik Ferjentsik: Sure. 

Dr.Bethany Fishbein: As we were talking about the financials and increasing the net and that increases the value and then you mentioned equipment and how new equipment or new assets increase the value. For most of us, it’s been since Optometry school we had a Practice Management course that went over the Methods of Appraisal while we were trying to study all the disease stuff for boards and you don’t think about it. But when a practice is appraised, what are the things they look at to figure out the value? Because it feels like if you buy a new piece of equipment, it should count. Some people say it doesn’t. Some people are only basing it on Cash Flow. You hear EBITDA talk about it all the time. What do people need to know? We’re not all going to become Professional Appraisers on this podcast. But what do people need to know about how value is determined?

Erik Ferjentsik: Yeah, so it’s really a pretty complex process. My appraisals usually end up being about 100 pages long. So beyond the scope of this podcast, for sure. And I mentioned it also because I get that call from a lot of optometrists, “Oh, I already know what my practice is worth, Eric. Can you just help me sell it?” And I ask them, “How do you know what it’s worth?” They’d say, “Oh, I read an article it’s about 65% of gross.” and that’s hard for me to hear because it’s a very complex process. The example I give is boiling the value of a practice down to a simple multiplier metric like that would be like a patient coming into your practice giving you the triage or intake form and then saying, “I know what my prescription and my diagnosis is. You don’t have to go through the rest of the process.”

Dr.Bethany Fishbein: That happens to us all day long. I’m just saying.

Erik Ferjentsik: What goes into it? A lot goes into it. So usually there’s three different methodologies used that the math and the formula is behind that. I won’t get into that level of granularity but we’re looking at different things. We’re looking at the top line. We’re looking at the bottom line. When I say bottom line, it’s usually that Discretionary Net Income. EBITDA has tossed around a lot. That’s Earnings Before Interest, Taxes, Depreciation, and Amortization is what that acronym is and that’s used by private equity groups. Discretionary Net Income is from the owner’s perspective. So if you own a practice, “What do I make entirely after business expenses and before paying myself any money?” So it’s your true bottom line profit. Whatever you decide to take out through the year in wages or draw doesn’t matter. It’s what is available to you if you wanted to take all of the profit out. That’s owner Discretionary Net Income and that’s a very important number in the valuation process. EBITDA is that number minus whatever the group buying you is going to pay you in salary. So that’s an important distinguishing factor there. Tangible assets, as I mentioned before is another factor. As I mentioned, I see a lot of appraisals that don’t include that. Which means if you have two identical practices next to each other with the same revenue and cash flow, but one has a 40-year-old remodel, and yellow-colored plastic equipment, and no retail inventory for sale. And then you’ve got the other one with a brand new remodel, a thousand frames in stock and brand new equipment Optos, and everything else. Those two practices would be worth exactly the same if you didn’t value Tangible Assets. So keep the practice updated as you can. It’s not like real estate though, where if you go build a new kitchen and a bathroom you can actually get more money than you invested in overall value. That doesn’t happen in this industry. You’re gonna get a value that you’ve paid minus whatever you’ve used for that Tangible Asset. Then another number of elements come in Qualitative Factors so the appraisal will rate the practice or they should. I have a proprietary rating system that I use where we’ll look at so many different aspects, trends of the financials, online presence, and so many factors. So we’re taking all of these kinds of quantitative and qualitative elements. We combine them into usually three different methodologies. Then we wait for them. For example, we’re waiting the most recent year more than three years ago because that’s more indicative of what the buyer is going to experience in terms of revenue, expenses, and net. After all of that Outcomes Evaluation, we actually are doing two separate valuations. Now we’re doing an Optometrist Buyer Valuation and then an Institutional Buyer Valuation. Because really unlike any other industry, this market is divided. Optometrists can and will only pay so much money. A lot of that is because they are restricted from borrowing. And you would think it’s the bank’s fault but it’s actually the school’s fault. The school loans are just out of control. They’re every year increasing the inflation rate of schools and education costs are insane. And so because these kids are graduating with $350,000 school loan debt now, the banks just won’t loan any more than a certain amount of money to them. And that’s what’s kept the prices down if you sell to an OD. If you sell to private equity, they will pay more although that number is coming down lately, and I predict it probably will continue to do so not only in the top line number, what they’re offering in price but then after you add in all the nuances of their deal terms, the numbers get closer together.

Dr.Bethany Fishbein: Let’s talk about some of those nuances a little bit because it’s kind of a weird logic problem, right? If there are two appraisals based on the method of sale and one is significantly higher than the other, then the logical “I want to sell my practice” optometrist’s brain says, “Okay, take the higher one.”

Erik Ferjentsik: Yeah.

Dr.Bethany Fishbein: But you know and I know it’s not quite that simple. It’s not, “Somebody wants to give me this.” and “Somebody wants to give me that much less.” There are some strings attached. 

Erik Ferjentsik: Sure. 

Dr.Bethany Fishbein: So talk about the difference in selling to an optometrist versus selling to a private equity group or an institution as you said.

Erik Ferjentsik: Yeah, so the optometrist is pretty clean and simple. You transfer the business to the next generation and you get all cash at closing usually. Sometimes you’ll have to do a little bit of a Seller Note which means you forego some of the Purchase Prices in exchange for monthly payments with interest. But usually, you sell and they take over. A lot of the time, especially if you’re a single practice owner or operator, you’re retiring at closing. The banks will often not allow you to continue working unless there’s a lot of pent-up demand in terms of bookings. If you’re booked out for two months, then the bank will allow the buyer to come in and work full time. They want to work full time and then they’ll say, “Okay, you can hire the seller for a day or two.” But they’re not going to want them to pay $650 a day to keep the seller on because that’s going to reduce their chance of paying back the loan. But usually, it’s a pretty simple clean transaction. No strings attached. Now we move to private equity, where there’s so many strings. It’s like a spider web. So you start with a top-line offer. They give you this nice shiny price. But after you add everything else together, the numbers get a lot closer together. One example is Accounts Receivable. Accounts Receivable is money outstanding that’s owed to the practice that you haven’t collected yet, of which there’s a lot in this industry, right? Because of Insurance Reimbursements. So when you sell to an OD, 99% of the time, Accounts Receivable are not included. Meaning you as the seller will sell for whatever price you’re selling for and then you get to continue to collect on your receivables after the closing. So you have to factor that into whatever you’re estimating your final take-home is. I guess after you sell if you’re going to sell to an OD. If you sell to private equity, they include Accounts Receivable in. So if you have $100,000 in Accounts Receivable outstanding on average at any given time, private equity offers you $100,000 more than an optometrist. Those offers are exactly the same. Okay, and then there’s other aspects.

Dr.Bethany Fishbein: Sorry, I just want to clarify. So with the optometrist sale where you’re gonna retire at closing, if you see patients the week before you close the practice, then submit those claims to insurance, and insurance pays them two to three weeks later. That money continues to go to you, right? So you get paid for all the work that you’ve done. 

Erik Ferjentsik: Correct.

Dr.Bethany Fishbein: In most private equity sales, you see patients the week before you sell. That money comes in after the closing and that goes to them? 

Erik Ferjentsik: Yep, they keep that.

Dr.Bethany Fishbein: Interesting.

Erik Ferjentsik: So that’s in the Receivable side. Then on the Payable side – what money you owe as a business owner? In both cases, you’ll be responsible for paying off all debts. So it’s kind of interesting that you get to keep your receivables and have to pay your payables on the OD selling side. But you don’t get to keep your Receivables on the private equity selling side but then you still have to pay all your debts.

Dr.Bethany Fishbein: So the frames that you buy the week before you retire, if you sell to another OD, you have to pay for those. And if you sell to private equity, you still have to pay for those?

Erik Ferjentsik: Yeah, and they’re keeping your receivables. 

Dr.Bethany Fishbein: Gotcha.

Erik Ferjentsik: To take it a step further. What some of these groups do is they’ll put in what’s called a Net Working Capital calculation which they don’t really reveal until towards the end of a transaction. And it’s really their own personal calculation that sometimes especially if a broker is involved, I’d like to think they don’t. But they could use that as a way to take advantage of reducing the Purchase Price. But what that means is they have their own calculation of what Receivables, Payables, and cash should be based on history. And then if there’s a shortage of anything, Receivables or cash versus Payables, as we near closing, they’ll insist that you leave a certain amount of cash in the bank to make their Net Working Capital calculation work out. So when you’re closing and they say, “Oh, you know, we’ve done our calculation. And we’ve determined that you need to leave $100,000 in cash in the bank for us to make the numbers work.” Well, now your price has just gone down by $100,000. There’s other differences. So I mentioned, selling to an OD is all cash at closing. Most often and especially now, there’s going to be multiple layers of non-cash at closing. So it can be structured as what’s called the Holdback, which means. Let’s use an example. Let’s say they’re gonna give you 70% cash at closing and they have 20% of that as a Holdback. Usually, the Holdback is tied to your agreement to continue working. Historically, you can usually get a deal done for a couple of years. Now, you’re going to see a lot of three to five-year ongoing requirements because a lot of these groups are having difficulty retaining optometrists. That’s the crux of their situation. They don’t work. They’re not optometrists, so they need to figure out ways to keep and retain optometrists. Even though life might not be as appealing for optometrists after they take over. So they will tie you as a seller. Your 20% in this example of your sale proceeds to your fulfillment of your continued work employment. So let’s use two years as an easy example. Let’s use a million dollars for a price. They give you $700,000 cash at closing. The $200,000 is tied to your continued employment over two years. When you fulfill your one-year employment, after the one-year anniversary, they’ll release $100,000. When you fulfill your second year, they release the second. Some of them will say, “No, we’re not releasing it until you fulfill the entire two years.” And that means you can’t terminate your employment or be fired for cause. If they decide to terminate you for non-cause, then you would still be paid. Or if you died, they also have to pay you. That’s quite a bit different. They are going to come in and it’s very difficult for a lot of sellers to have worked for themselves for 20 or 30 years in a nice little private environment and suddenly find themselves in a corporate dollars and cents environment. A lot of groups will start picking up the pace of the rate at which you have to see patients. They may switch the EMR system over to theirs and switch to a different lab. And a lot of sellers look at that. And if you talk to some who’ve done it, some have a fine time afterward. But there’s plenty that will tell you some horror stories and there’s got to be some adjustment in the seller’s mind for that kind of qualitative post-closing aftermath. How much is that worth to you as a seller to endure that for however many years they’re asking you to endure that?

Dr.Bethany Fishbein: Yeah. And that’s a conversation that we’re having quite a bit. Because I think, as you said it right, it starts with a shiny number. And so when you hear that, you start to picture your life with that money dropped in your bank account on day one. And so then there’s other parts of your life you’ve got to picture. I don’t know. Maybe it’s a loaded comment intentional or otherwise. I think you’re painting a realistic picture. But it certainly is a picture that, to me anyway, makes a private optometrist or optometrist sale more attractive than maybe it’s getting credit for in today’s market and today’s conversations. One thing that you said kind of jumped out at me. If these sellers, these young ODs, they’ve got hundreds of thousands in student loans, and then you said, you know? The bank might not be willing to give them all the money. Then you mentioned, maybe you want to work there a day or two a week but the bank doesn’t let them do that. I have my own opinion but in your opinion, is Seller Financing the answer to eliminating the need to consider what the bank will or won’t do?

Erik Ferjentsik: Yeah. So I mean, it’s really the only way around it. But what I would suggest is avoid it if you can. So let your broker find the best buyer possible and a good broker will, hopefully, bring multiple buyers to the table and we’ll evaluate them. Sometimes I’ve recommended to my client to take a lower price offer simply because the buyer has a better financial profile. They’re more likely to get approved for financing. And for 100% financing versus having something like a Seller Note or there’s other contingencies that could enter the equation. If the bank mandates a Seller Note that’s when you have to consider it. It’s usually just a smaller percentage of the Purchase Price. And in some cases, it’s actually preferred by my clients because you can shelter money that way or you can shelter taxes, right? So if you’re receiving money later after you retired, you’ll presumably be in a lower Income Tax bracket when you receive that money and then be taxed less versus a huge windfall. Let’s say you sell at the end of the year. After you’ve made, as the owner of your practice, $300,000 to $400,000 that year and then you’re going to sell your practice for $700,000 to $800,000, or whatever it might be. You’re going to probably bump up in the tax bracket. So it’s a way to shelter some money from taxes. You also get interest and usually you’ll get quite a bit higher interest than what the bank would get for their bank loan depending on the bank. Some banks require coterminous rates which means you have to match their rate. But others will allow 1% to 2% higher than their rate. So right now, you could probably get around 6.5% interest maybe even a little higher. And some of my clients like that because they think, “Well, I don’t know what I’m going to put my money in.” But I’m not a Financial Advisor. I’m not trying to be on this call anyways. And generally speaking, if you’re 65 years old, having a portion of your retirement invested in a single private business that you’re no longer in control of is not the best way to invest your money. It should be in a diversified something, or other, or a bond. Something safer. But if the bank mandates it, you have no choice. One note on that though is what I do in all those cases is I will negotiate a Balloon Provision for my clients. So the note, the Seller Note, will be amortized over 10 years, let’s say. But we put in what’s called an unforced Balloon Provision, meaning the buyer agrees to give best efforts and apply to a lender, primarily their lender that’s financing the majority of the transaction at closing. And at the two-year point, they apply to refinance the principal balance that’s owed to the seller. And if they’ve not missed a payment which is the case. I mean, I’ve never heard of a default on a transaction that we’ve been a part of anyways. These things don’t fail. So as long as they don’t miss a payment, or they can even be late, but as long as they don’t miss a payment entirely, the bank will approve. The seller will be made whole after two years. And the bonus there is that you’re actually getting a higher effective interest rate than what’s quoted. So if you get a 6% interest rate and that’s quoted, annual interest rates for the loan amortization. The way it works is more interest is charged in the earlier years and less principal. So if you’ve paid off after two years, your effective interest rate could be 8% to 9%, depending on what you’re starting with. So that’s also a benefit.

Dr.Bethany Fishbein: Thank you. There’s a lot of psychology to that too. That goes into that. It depends, right? But some sellers retire so that they don’t have to think about the success of their business. They’ve done that work. So to have some of those things when it all works out great. But should the solo doctor who bought your practice break a leg and can’t be there for six weeks and can’t find a fill-in and all of a sudden, it’s a little bit your problem again. Which is stressful.

Erik Ferjentsik: Well, there are protections in there. So depending on the size and price of the business, the bank will require a Life Insurance policy and a Disability Insurance policy which the seller who’s issuing the note can also require. Then on top of that, it’s less common but you can have Business Overhead Insurance or require it for the buyer, which means if they do get not technically short-term disabled, but they just can’t come into work, or if they do get disabled, whichever, then the insurance company covers all overhead. So that mitigates that risk even more. What I’ll say is that if your practice is grossing between $700,000 and a million, assuming you have a pretty normal expense structure, the chances of a Seller Note requirement are low. In the buyer’s market, if you’ve got a good broker who’s recommending good lenders, then it’s a good chance that there will be plenty of buyers out there that will be able to get 100% approval. It’s once you get into these higher price ranges that the bank will not want to.  A loan, especially if the buyer doesn’t have a ton of liquidity, which they don’t. They don’t have $200,000 sitting in the bank because they’re so heavily in school loan debt. So if you’re one of those owners listening and you’re grossing a million or more, you have to prepare yourself for the chance that a portion of the Purchase Price might have to be in the form of the Seller Note.

Dr.Bethany Fishbein: You’ve mentioned it a couple of times. If you have a good broker, ask your broker. Talk a little bit about the role of a broker. If you have an associate who’s come up through the practice and who wants to buy it. I always think about a broker as being the one to kind of match sellers and buyers. But as you describe it, there’s a lot more to it than that. So talk about what a broker does.

Erik Ferjentsik: I hate using the term. It’s just a simple way to refer to it. But to me, broker kind of has a stigma of just that, that it’s connecting a buyer and a seller. And that’s probably 5% of what I do in this industry. I mean if you’re a seller, I could show you how to market your practice for sale. It’s not that difficult with the Internet. Locating buyers and finding buyers is not difficult. The crux of this situation is converting buyer interest into action, and then preserving that action, cultivating it, and getting it to the point where you can close on the transaction. And all the steps in between, the financing approval, lease assignment, getting the attorneys through drafting, and all of that. So what I tell most people is real estate is much more simplified in this industry than selling a practice. I don’t mean to belittle real estate agents but it’s so simple compared to this. There’s also public information everywhere, right? You know what the house next door sold for. You know what your home was purchased for. You can look at tax records and all this public information. You can’t look up what the practice down the road sold for. So you really need to rely on people who have access to this data internally and can use it throughout the process. So when I’m engaged in the process with my clients, I’m using data and facts rather than emotions. And that is extremely helpful to get to the finish line and successfully preserve the relationship between buyer and seller. So instead of the word broker, I like to refer to myself as a Transition Consultant. And I’m starting off appraising the practice which is a very technical job. Even though some people will call themselves appraisers or call what they perform an appraisal. And if you look at them, they’re not really appraisals. They’re more like perspectives or just an opinion. But starting from the appraisal and then going through all the phases of the purchase process, you need someone there with experience. I spend 400 plus hours on every sale that I do. And I have experience in mergers and acquisitions prior to this. And I’ve been doing this for 13 plus years in just optometry. And I still find every deal challenging. So if you would use two Real Estate agents in a Real Estate transaction, why wouldn’t you use at least one qualified Optometric Broker to sell the practice? Moreover, you’re probably running your practice as a full-time job. So if it takes me 400 hours, it’ll take you a lot longer to try to learn how to do this the first time around and you’ll make a lot of mistakes along the way. And it’s just not recommended. If you have a practice grossing $650,000 or more definitely, hire a broker. You’ll get that value in actual monetary gains. You’ll get it at an optimized Purchase Price. You’ll get it in Tax savings. The way I negotiate the Asset Allocation, for example, you’ll get it in no cost. I’ll spend thousands of dollars on marketing for you. No risk.  We’re taking on all the risk. So it’s just a no-brainer. And one last thing I’ll mention on this is that because this market is so small and fickle, there may only be eight qualified optometrists in the country that can and will buy your practice in its current condition, in its exact location, and in the way it stands. And we need access to that entire buyer’s market from the get-go. So my group anyways will not take on clients who have either attempted to sell on their own or used another unqualified broker or broker that couldn’t get the job done. Because if you as the seller, for sale by the owner, or that other broker, estranged two or three ODs or buyers along the way. That’s a huge chunk of the market. Since we are taking on all the risk and working on commission, we need access to that entire market. One more thing that I’ll mention is every single seller or client who calls me usually says, “Oh, I already have a buyer who’s going to buy my practice.” You know somebody in mind. Some have multiple in mind. And I would say well over 90% of the time, that person never ends up buying the practice. And it’s just like in real estate or if you’re selling your car, somebody shows interest, a friend or a friend of a friend, interest in your home or car. You are’nt not going to list your home for sale and bank on them over a period of six months to buy it. And find yourself in six months, they didn’t buy it. And now you’re SOL and you can’t fill your exit strategy or your retirement plan. Yes, there might be some people interested. But you need to put it out there confidentially. Or your Broker or Transition Consultant puts it out there and gets all buyers to the table in as concentrated an amount of time as possible. So that you as the seller have leverage and negotiating power. And like I mentioned before, you might want to choose from different buyers. One has a quicker path to closing. One has a better chance of getting financing. One is already licensed in the state and the other isn’t. One has to sell a home which is a major contingency and the other doesn’t. There’s so many factors other than just price that have to be considered and factored in. And a good Broker or Transition Consultant is going to have all that in mind. They’re going to make sure it’s all written up into the offer properly. And they’re going to be advising you properly about these things all the way through.

Dr.Bethany Fishbein: Eric, thank you. This is an incredible onslaught of information. This is one of those that I will absolutely go back and listen to and take some notes and dissect a little bit. But I appreciate the education. You asked beforehand, how much time to allot and I gave you a number. And I think I probably could have doubled it and kept talking because I got more questions. So there may be a part two forthcoming. But for now, if somebody is interested in this and wants to get in touch with you, how do they reach out to you? 

Erik Ferjentsik: Yeah, so they can just go to our website, www.thevisionarypracticegroup.com

or they can call our 800 number which is 877-268-8881. They can email me directly if they’d like. My direct email address is my first name. Erik with a k. E-R-I-K. F as in Frank. erikf@visionarypractice.group.com I’ll say once more, that’s E-R-I-K. F as in Frank.  erikf@visionarypractice.group.com

Dr.Bethany Fishbein: Awesome. Thank you. And for those looking to increase the value of your practice before a sale or looking to stay in your practice and reach your dreams in private practice, you can certainly learn more about what we do as well at our website www.powerpractice.com  Thank you so much for listening.