I have read articles published in many eye care publications including Review of Optometry, Eyecare Business and others discussing the value of getting a professional appraisal. I have read some “experts” opinions saying that practices should sell for 55% to 65% of the last three years’ average gross collections. Others say that practices will sell for anywhere from 16% to 82% of the last three years’ gross collections. Yet another says 40% to 60%.
A 2015 article under the umbrella of one of our major associations suggested just starting with a selling price between 55-65% of gross receipts and negotiate from there, because “appraisals can be expensive”. If we use $400,000 as an average collections number, then the range for selling price would be $220,000 to $260,000. Most appraisers in the eye care field charge less than $2,000 for an appraisal, so in this case the cost would be less than 1% of the selling price. I would certainly say that the appraisal fee is a good investment to protect both the buyer and the seller from making a several hundred thousand dollar mistake.
When my career started in the eye care industry, the typical selling price was 100% of the previous year’s gross collections. That was 1984. Since that time there have been many changes in the field that have affected profitability, most notably the growth of managed vision care (MVC). Other changes include increased competition from chains, retailers, big box stores, and internet sales.
I would advise clients to ignore gross collections when setting value. I have seen practices with gross collections of $675,000 that lose money with the owner taking no salary, and I have seen other practices that gross $300,000 that bring in over $150,000 in net profits to the owner. In this day and age, profitability is much more important than gross sales. Having said that, it is easier to be profitable if you are bringing in gross collections of $1,000,000 than if you are bringing in $200,000.
An appraisal is a cost-effective way to begin the process of selling an eye care practice. It is inexpensive insurance to assure both the buyer and the seller that the practice is a worthwhile investment. Without an appraisal, both sides are just hoping that the transaction will make sense. The appraisal should include a “sanity check” to make sure the buyer will be able to be paid a salary, pay off the indebtedness of the purchase, and have a cushion to maintain cash flow. Moving forward without an appraisal is risking the future of the practice.