How to Maximize Your Optometry Practice Value Before You Sell with Erich Mattei

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Hey everybody.
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Welcome back to the Optometry Money Podcast, where we're helping ODs all over the country make better and better decisions around their money, their careers, and their practices.
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I am your host, Evon Mendrin, Certified Financial Planner(TM) practitioner, and owner of Optometry Wealth Advisors an independent financial planning firm just for optometrists nationwide.
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And thank you so much for listening.
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Really appreciate your time and your attention today and on today's episode, we are gonna dive into how Optometry practice owners can plan five to 10 years away from a practice exit to maximize and maintain the value of the practice.
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And for that, I'm joined by Erich Mattei of Akrinos, who does a ton of work around practice transitions, as well as practice valuation work.
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And Eric's been on the podcast several times, we're gonna dive into different aspects of the business that owners should look at improving as we are preparing and leading up to the sale and exit the practice.
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And whether you're someone who's thinking about that five to 10 years away, or maybe you're a buyer thinking about that yourself, I think you're gonna get a lot outta this episode and I'll put all of Erich's contact information and all the resource we mentioned here in the episode in the show notes, including that resource Erich talks about at the end of the episode.
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Which you can find in the app you're using to listen to the podcast or at the education hub of our website, www.optometrywealth.com.
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And of course, reach out to me if you have any questions.
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podcast@optometrywealth.com.
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And if you'd like someone to help you plan around the financial aspects of exiting your practice and planning for retirement and financial independence, reach out.
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You can use the link in the show notes to schedule a no commitment introductory call.
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We can talk about all that's on your mind financially, and we can share how we help ODs all over the country, navigate those same decisions and more.
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And without further ado, here is my conversation with Erich Mattei.
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welcome back to the Optometry Money Podcast.
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I am your host, Evon Mendrin.
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I am excited to be, joined once again by friend of the podcast, friend of the show.
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Are we there yet, Erich?
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Mr.
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Erich Mattei.
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Glad to have you back on.
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I would say so.
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Evon.
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Absolutely.
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And it is a pleasure and privilege to join you here on this episode of Optometry Money Podcast.
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Perfect.
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I want to dive into a topic or set of questions that I'm finding more and more in my conversations with clients, both current clients and new clients as they're coming in to, to work with our firm, and that's planning for the eventual exits outta their practice.
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And we are, usually talking through in the context of planning for retirement preparation, we are modeling out different scenarios.
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we're talking to them about how they might want to exit their practice, who they might want to transition to modeling out different values of the business, modeling, out different structures of that.
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And inevitably, as we go through that conversation, the questions come up.
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Okay, What do we do inside of our business to.
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Either improve the value of the business as we get closer to that point, or to not lower the value of the business as we get closer to that point.
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And so all of these things, Eric, are right up your alley.
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you in your consulting work, in your valuation work, all of the work you do around practice transitions.
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I couldn't think of anyone better to have this conversation with.
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I just want to start with the first question to sort of lay the groundwork a little bit.
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And that's.
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when you think about the value of a practice or any business, what are the basic inputs of that value?
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what information needs to be used to sort of determine what a fair price of a practice should be?
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Yeah, Evon, I tell you that is.
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An excellent question, and I think a question that as an industry, we need to all be really tuned into because, why?
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private equity having come into the eyecare space about 10 years ago has definitely disrupted the transition marketplace.
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But what's interesting is that as we've seen this significant decline in the prevalence of these private equity deals since they hit their peak.
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In 2021, as we've seen this decline, we're realizing now we're having to, I don't wanna say reteach the industry on proper valuation methods, but clearly there's a big difference between valuing a business at fair market value versus valuing a business based on some multiple of an earnings basis measure that some outside investor, namely private equity, is gonna slap on a practice.
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I, again, I, all of these reasons, I think this is really important right now that we unpack this.
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So, to kick this off, this is vitally important, that everyone understand what are we looking to accomplish in deriving a fair market value?
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And fair market value, by definition would be the price.
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That in this case, a business would change hands between a willing able buyer and a willing able seller acting on their own accord and keeping the transaction at an arm's length.
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All of this technical jargon to say fair market value is the price that works based on how the business is cash flowing.
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And that is emphatically the big distinguishing feature between a private sale, which we're continuing, which we're seeing continue to accelerate as far as doctors entering private sale versus private equity sale, which we're seeing continuing to be on the decline.
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Okay?
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So it's really important that everybody out there understand first and foremost, fair market value is really how we need to be looking at these businesses.
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How are they cash flowing in such a way?
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That a willing enabled buyer can come in, secure financing, purchase from the seller, able to pay themself, the new owner, a living wage as a doctor.
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Don't worry, you're high on the hog.
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Wages will come down the line when you're further into ownership.
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But effectively, out of the gates, we're looking at this through the lens of what is the price where a buyer can borrow money, pay the seller, and based on how the business performs, that buyer can pay themself a living wage as a doctor and have sufficient funds remaining to cover the debt.
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And Evon.
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I gotta, I gotta tell you, there's a lot of things we could have hours upon hours of episodes where we're weaving in and out and talking about add backs and talking about all these little intricacies, but at the end of the day.
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This is all extremely basic math, concepts, and perhaps in the course of this episode, I'll help it help more doctors
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Right.
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A little bit more.
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But really the first key piece that I want everybody to understand and tie back to you is that it's gotta be about cash flowing.
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Yep.
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And that's what we're gonna spend this episode talking about is helping doctors better understand how to evaluate these businesses based on cash flow and specifically for our sellers out there.
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What can you do to preserve, if not increase your value as you're eyeing your exit in the next few years?
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And so theoretically the value of any business, including an Optometry practice, is the future cash flow that you're gonna Earn, adjusted by the reliability or unreliability of that future cash flow coming in.
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And it does seem to matter.
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matter who is buying that practice, right?
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If it's between two willing buyers, it does sound like it matters who those two willing buyers are.
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Obviously the selling doctor is that first willing buyer.
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It does seem to matter who's on the other side of that in terms of what that fair price might be between those two, between those two parties and when you think about a, let's start with just a single doctor practice, no associate doctors, right?
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So single owner, single doctor.
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as they are preparing, let's say 10 to five years away from planning to exit, what should they be looking at in terms of their business improvements in their business, financially, operations wise?
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What should they be looking at?
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Improving or changing that have the highest impact on that price later on.
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Yeah, that is a really great question.
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That is very much a loaded question
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Okay.
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because believe it or not, it's gonna vary by the doctor.
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Yes, you can have two doctors.
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Imagine this.
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Imagine two single owner practices in virtually identical markets grossing the same.
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But this is where we start to get into differences.
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Okay?
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Because there, there are two key pieces I would like everyone to really focus on.
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if we're putting ourselves in the shoes of one of these two sellers, what can I do?
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I'm five to 10 years out, what can I do?
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There's two things that matter.
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Profitability and capital expenditure.
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Okay.
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So when we talk profitability, is what I was referencing earlier, we were talking about fair market value and how do we construct a fair market value on a business?
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And it's based on how these things are cash flowing.
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we use a process.
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Typically we'll use a process known as capitalization of earnings, but that's one of only a few different methods that are used that need to be selected based on the merits of the project and exactly what are the objectives on the project.
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If we're looking at these two single owner practices, we're talking profitability, we're talking capital expenditure.
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So let's think of all of those things that impact profitability.
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remember, profit, we have revenue dollars coming in, we have expenses, dollars flowing out, and what's left over is profit.
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And then we take that profit and we add back whatever wages we paid ourselves as a doctor.
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Now we've got kinda this optometric net.
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We'll have to make a little adjustment for a, for an associate.
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But nonetheless, we come to understand is the true profitability of the business for a single owner operator business.
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So what are the things that are gonna impact profit revenue, right?
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If we have the same expense set up ratios, and our revenue increases, that's gonna result in increase in profit.
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Now by the same token.
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What if revenues remain stagnant?
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Can we grow profitability?
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we can, but how do you grow profitability when revenues are stagnant?
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We need to find ways to lower expenses.
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So if we're looking at what to do to drive profit, we've got revenue growth, we've got expense reduction, low hanging fruit on the expense reduction side, I would imagine our viewers out there are familiar with these concepts of benchmarks and expense benchmark.
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And as a matter of fact, Evon, I think I may have joined the show in our prior episode where we're talking about expense
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benchmarks.I believe so..
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Huge opportunity for anyone eyeing exit in next five to 10 years.
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Dare I say, y'all, if you're only a few years into ownership and you're not looking to exit for the next 30 years, roll your sleeves up and let's see what we can do to fix your benchmarks.
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So we look across your different.
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Expense categories, you're gonna have cost of goods sold.
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What is this?
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These are the costs you're paying for Any items that are selling through your practice frames, ophthalmic lenses, lab costs, contact lens.
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if you are a member of Alliance Buy group, you definitely wanna include those fees as alliance fees and COGS.
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'cause that can, that's gonna shoot paint a, a more realistic picture, exactly what's going on here with the COGS.
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But we have COGS, cost of goods sold.
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Next up is gonna be occupancy.
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So think here anything that goes into the physical space.
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Our rents, repairs and maintenance.
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Utilities.
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Then we jump into non-doctor payroll.
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Who's that gonna be?
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take a guess.
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Yes.
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on payroll who's not a doctor?
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And lastly is gonna be that general overhead.
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So for all intents and purposes, Evon, when you're looking at practices, there are different.
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Okay, that one is gonna wanna fall in based on how big the practice is.
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So without going into the granular details of the differing benchmarks, as the business grows, generically speaking, for our COGS, we're looking for 25 to 30% expense.
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For our occupancy, we're looking at six to 9% in expense.
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Our non-doctor payroll about 18 to 24% of our expense.
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And lastly, general overhead being three to 5% of operating expenses.
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So all of this to say, if you're five to 10 years out and your COGS are at 33%, there is money on the table.
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Do it.
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Get those COGS not only below 30%.
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See how close you can get them down to 25%.
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opportunity cost reductions in COGS.
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Go straight to the bottom line, straight to the profit.
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Next up is gonna be occupancy.
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Now occupancy is an interesting one because occupancy, how easy is it just to go in and renegotiate a lease midterm?
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Depends on who you ask.
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By the way, there are some commercial realtors out there that do amazing jobs of negotiating leases.
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But for all intents and purposes, and for many cases going in and adjusting occupancy expense, it's off the table.
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So when we look at adjusting the occupants, occupancy expense, it's not so much a matter of reducing that expense.
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Maybe we can, depending on where we are in the terms of the lease, and if we've got a commercial realtor in our market that really has the chops and understands how to do this.
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But for all intents and purposes, occupancy is one of those that it's not one of those levers you can easily move like COGS.
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So when we look at occupancy, how do we move that expense benchmark?
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We gotta grow the revenue.
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was just gonna say, I.
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shining a light.
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If we're seeing occupancy is 12%, would argue that means this location has the ability to generate more revenue.
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We gotta figure out how to do that.
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So I was just gonna say That makes perfect sense.
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cost of goods sold being a, typically a variable cost that's going to, change based on gross revenues based on your.
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patient activity, right.
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occupancy costs being a fixed cost unless you own your own building are willing to adjust the rents that you're paying yourself.
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Typically, there's not too much wiggle room, perhaps utilities, things like that, janitorial services.
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But for the most part, occupancy cost is gonna be a fixed cost.
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But as you mentioned, you can adjust the percentage of revenue.
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that occupancy costs are going to by increasing revenue.
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So that opportunity is really more on the improving the revenue side.
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Unfortunately, not necessarily too strongly on the improving the, expense side.
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And then you mentioned a few others, you mentioned non OD staff costs, which may be fixed may be partly variable depending on perhaps optician, pay depending on the, incentives there.
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Talk to us about non OD staff costs.
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Okay, so when we're looking at our non-doctor staffing costs, these are gonna range between 18 and 24% of expenses.
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So remarkable opportunity here to do what?
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Get us in line.
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And this is another one of these examples of where I'll say, look, if we're looking at our non-doctor payroll costs and we're up at, 28 or 29%, what does this mean?
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What can mean a number of things This, and by the way, one thing that does not mean is do not go and clean house.
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So please, if you're doing a benchmarking analysis.
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Of your practice and you're seeing your non-doctor payroll is above this range.
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we're going for, don't think that, oh, Eric was on Yvonne's show and said, I can just start firing people.
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No, that's not what we.
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wanna
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But Erich we, we magically brought non RD staff costs from 25% to zero and Doesn't that work?
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unfortunately
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Okay.
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So, um, so the, the way to look at this then, if you're five to 10 years out and you see that your non-doctor payroll is above benchmark.
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That benchmark limit being, 18 to 24%.
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If it's above, this is where I would argue that means that this team can produce more.
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Now things do get interesting, Evon, when you dig a little bit deeper into that payroll side of things.
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For example, do we have two staff members that we are paying$15 an hour for performance, where we could alternatively have one staff member that we're paying$27 an hour that's able to accomplish everything they can do and do it X percent
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Ah.
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What we have discovered in our work here at Akrinos is that many practices that are finding their non-doctor payroll is outta whack and some other HR type things.
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Many of these are ready to take the step and graduate into more professional support in their office.
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What do I mean by that?
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And by the way, if you're out there and I'm speaking to you, I'm speaking your language and you're looking around and you're like, dude, Eric, yeah, my non-doctor payroll is close to 30%.
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And dude, yeah, I have a lot of staff members in my office do a quick calculation.
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Y'all take your gross revenue, so your gross collections for the year.
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So maybe look back at 25, what were your gross collections you brought in for the year?
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Look at that non-doctor payroll.
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See what percent of total collections is non-doctor payroll.
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But then I'm gonna want you to take a step further.
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I want you to take that gross revenue collected and divide it by 200,000.
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What is this 200,000 figure I speak of?
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It's a generic, and by the way, this is very generic, so if you want to get more granular into your market specifics, I'd love to ha, I'd love to explore that with you.
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But generically speaking, a staff member is gonna generate around 200,000 of revenue for the practice.
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By the way, on the lower end, it's more like 155, 160.
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On the higher end it may be pushing upwards of 250.
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What are the differences there?
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Well, if we take our gross collected revenue divide it by our head count of full-time non-doctor employees, if that figure is coming in at around 155, 160, 165 compared to that figure coming in more in like the 235, 240, 245, effectively what you've got is here where we have a lot of staff members to achieve our revenue.
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Here.
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There's a lot of inefficiency.
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There's probably a lot of redundancy, and I'm willing to bet there's a lot of folks who are amazing people.
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We're not saying anything about people as humans, but in the context of the workplace and executing the responsibilities of the role, there's opportunity for improvement.
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Whereas you look at this practice over here that may have the same collected revenue, but is operating with less staff members.
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That means what?
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they're a more proficient, and more competent staff,
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Got it.
00:20:23.277 --> 00:20:23.636
Okay.
00:20:23.778 --> 00:20:24.738
that is huge.
00:20:24.738 --> 00:20:27.647
That is a huge exercise.
00:20:27.887 --> 00:20:28.712
What you got, Evon?
00:20:28.826 --> 00:20:34.186
So I, so what it sounds like is that, a, as you mentioned, improving the.
00:20:34.666 --> 00:20:36.886
Percentage of revenue going towards non OD staff.
00:20:36.886 --> 00:20:39.257
Cost isn't about clearing house, right?
00:20:39.257 --> 00:20:47.356
It's not necessarily just about removing that investment altogether, but it's about increasing the efficiency with the staff that you have.
00:20:47.356 --> 00:20:51.227
And maybe similar to the occupancy costs, right?
00:20:51.227 --> 00:20:57.287
it's about finding out ways to use that investment line item on your profit and loss more efficiently.
00:20:57.287 --> 00:21:01.967
And I really appreciate you providing some benchmark numbers there to think about in terms of.
00:21:02.386 --> 00:21:04.727
revenue per, full-time equivalent staff.
00:21:05.297 --> 00:21:17.146
But it does sound like some part of that, at least, is, at is looking at the team as it is and making sure that the right butts or on the right seat in the bus, so to speak.
00:21:17.146 --> 00:21:23.717
Like that you have the proper people in the proper roles, doing the right work for that person.
00:21:24.196 --> 00:21:30.192
At least a part of it is evaluating the team and just making sure you have the right people there in the right roles.
00:21:30.192 --> 00:21:30.882
Is that right?
00:21:31.140 --> 00:21:31.619
Yeah.
00:21:31.720 --> 00:21:35.559
and in so doing Evon, what that does.
00:21:36.613 --> 00:22:03.012
So look, if you're the, if you're, listening to us and you are five to 10 years from exit and you do have a little bit of a turnover issue in your office, and you don't have those rock stars that really know how to run your office, and if everything is still falling on your shoulders, these are all of the signs that we see.
00:22:04.153 --> 00:22:12.666
And I'll tell you right now, if I just identified you, I'm willing to bet that you are overstaffed and you are underpay, overstaffed and underpaying.
00:22:12.846 --> 00:22:16.291
And in, as, in as much, your benchmarks are outta whack.
00:22:16.579 --> 00:22:16.799
Ah.
00:22:16.922 --> 00:22:19.321
And it seems really counterintuitive.
00:22:19.602 --> 00:22:20.172
wait up Eric.
00:22:20.172 --> 00:22:20.622
What do you mean?
00:22:20.622 --> 00:22:23.971
I'm paying as cheap as I can pay somebody that's willing to take a job.
00:22:24.602 --> 00:22:25.981
Yeah, that's exactly my point.
00:22:26.281 --> 00:22:29.132
Because now you're needing two x the headcount to do that.
00:22:31.561 --> 00:22:34.622
And all of the things, everything cascades from that.
00:22:36.092 --> 00:22:41.612
So that's where we've realized, whoa, what if we tighten up hr?
00:22:41.612 --> 00:22:46.201
And by the way, Evon, it's not as simple as just the right butts in the right chairs.
00:22:46.382 --> 00:22:50.061
And I know, look, hey, look, the, what the Wickman book, Gino Wickman book,
00:22:50.295 --> 00:22:50.644
Right.
00:22:50.781 --> 00:22:51.832
great book, right?
00:22:51.862 --> 00:22:54.412
Entrepreneurial operating system, great concepts.
00:22:54.682 --> 00:23:02.031
I know it's something that much of Optometry has embraced, but dare I say, it's not as easy as that.
00:23:02.092 --> 00:23:08.172
As a matter of fact, we discover at times that's some of the issue is that folks think it's as easy as just that.
00:23:08.172 --> 00:23:14.922
no, it's a heck of a lot more complex than just reading a paperback and then thinking like it's gonna happen like magic.
00:23:15.491 --> 00:23:19.872
So specifically we get into job descriptions and organizational structure.
00:23:19.872 --> 00:23:23.771
Who is doing what in your office and how are they doing it and who are they reporting to?
00:23:25.152 --> 00:23:26.321
Team meetings.
00:23:27.267 --> 00:23:28.497
Training organizer.
00:23:28.707 --> 00:23:34.557
What are the level of competencies and how are we developing our people and development?
00:23:34.586 --> 00:23:39.596
How are we developing individual people to become better at what they do?
00:23:39.626 --> 00:23:48.297
Let's stop looking at our staff as$15 an hour necessity and start looking at our staff as$25 an hour investment.
00:23:49.287 --> 00:23:50.636
And that's the kind of stuff like Evon.
00:23:50.636 --> 00:23:53.277
People ask me all the time, Erich, y'all have only been at this five years.
00:23:53.426 --> 00:23:54.416
They're doing amazing things.
00:23:54.416 --> 00:23:54.807
What is it?
00:23:54.807 --> 00:23:56.186
It's things like this.
00:23:56.366 --> 00:23:58.017
It's challenging the status quo.
00:23:58.436 --> 00:24:04.467
It's helping doctors look at the business as a business, not as a practice, but as a business.
00:24:04.767 --> 00:24:07.436
So really, great stuff here.
00:24:08.457 --> 00:24:09.537
up is general overhead.
00:24:09.537 --> 00:24:11.696
So we touched on our non-doctor payroll.
00:24:12.896 --> 00:24:16.777
By the way, any listeners out there would like to unpack this one-on-one would love to.
00:24:16.777 --> 00:24:19.446
'cause this is a really fascinating arena, right?
00:24:19.446 --> 00:24:20.916
This whole world of non-doctor payroll.
00:24:21.186 --> 00:24:24.096
But last but not least, let's get to our general overhead.
00:24:24.126 --> 00:24:27.817
And that general overhead should be in the three to 5% range.
00:24:28.356 --> 00:24:45.993
So if you're running an expense analysis you're seeing that general overhead is 8%, 10, 12%, 15, 16%, I'm willing to bet that you're doing a lot of personal living through your business.
00:24:46.804 --> 00:24:59.403
while that personal living through your business may have been great for all these years, that you've been able to pay less taxes as you're looking to exit in the next five to 10 years running personal through business.
00:24:59.838 --> 00:25:01.969
Just makes your business look less profitable.
00:25:02.113 --> 00:25:02.383
Yeah.
00:25:02.479 --> 00:25:08.689
if you think back to how we started our conversation around fair market value, profitability is number one.
00:25:11.749 --> 00:25:21.769
it's very important that you are honest with yourself in evaluating what expenses are you putting on your business credit card versus your personal household credit card.
00:25:22.249 --> 00:25:25.038
And that you start to get a bit more disciplined with those.
00:25:25.788 --> 00:25:41.584
if you find yourself behaving in such a way because CPA is running your business financials the way they are, that may be a sign that you need to find another CPA to work with.
00:25:41.698 --> 00:25:42.117
Mm-hmm.
00:25:42.169 --> 00:25:43.219
So follow me on this.
00:25:43.249 --> 00:25:55.638
If we're running a lot of, we're running household expense through our business because our CPA isn't good at tax strategy for us, then I'm gonna say, we have got to get your household expenses outta your business.
00:25:55.638 --> 00:26:03.709
It's gonna destroy your fair market value, you're gonna have to argue for the add-backs and Evon.
00:26:03.709 --> 00:26:05.479
Maybe that's a separate episode altogether.
00:26:05.479 --> 00:26:07.159
What are add-backs in evaluation?
00:26:07.307 --> 00:26:07.998
I think so.
00:26:08.028 --> 00:26:08.689
don't want, as a
00:26:08.778 --> 00:26:08.837
so.
00:26:09.229 --> 00:26:11.719
you don't want to have to be justifying your add-backs.
00:26:11.719 --> 00:26:14.239
That doesn't look good to a prospective buyer.
00:26:14.358 --> 00:26:14.989
Think about it.
00:26:15.318 --> 00:26:18.878
You're having to write a story about the reason why your financials look that way.
00:26:18.878 --> 00:26:20.199
It's not a good look.
00:26:20.199 --> 00:26:23.378
Also, banks hate it.
00:26:24.009 --> 00:26:31.898
Lenders hate it when you got a seller that has more add-backs than there are days in the calendar year.
00:26:31.989 --> 00:26:33.429
That's just not a good look
00:26:33.637 --> 00:26:33.928
Yeah.
00:26:34.554 --> 00:26:40.413
So if we wanna be serious about selling our business, we gotta get serious on cleaning the business up.
00:26:41.044 --> 00:26:52.324
So get those personal expenses also known as discretionary Spend owner discretionary, get that slush fund out of the business.
00:26:52.683 --> 00:26:52.923
And
00:26:52.973 --> 00:26:53.993
I fully agree.
00:26:54.075 --> 00:27:02.505
because it means you're gonna be paying a bunch of taxes, I think you probably need to find a new CPA that is a bit more proactive in the tax strategy side of things.
00:27:03.489 --> 00:27:04.614
No, I, fully agree.
00:27:04.673 --> 00:27:12.894
I am in favor of a pretty clean separation between business activity and household spending for a number of reasons.
00:27:12.894 --> 00:27:13.374
I think.
00:27:14.199 --> 00:27:29.759
Very often we are, too keen on pushing the boundaries between what is legitimately a deductible business expense versus what's in reality, a personal expense that's not usually on the tax professional that is most often on the optometrists.
00:27:29.759 --> 00:27:34.078
So I think we need to be a little bit more honest in that and lean on the guidance of our professionals.
00:27:34.078 --> 00:27:35.409
But, that's number one.
00:27:35.409 --> 00:27:37.118
I think number two, as you mentioned.
00:27:38.078 --> 00:27:42.219
it becomes difficult to know what the practice is spending and what the household is spending.
00:27:42.219 --> 00:27:49.358
And without clarity on both, it becomes more difficult to plan financially And we don't really know what's being spent in the household.
00:27:49.358 --> 00:27:52.729
Because a lot of it's mixed in with, with what's in the practice.
00:27:52.788 --> 00:27:57.469
You don't have clarity around what your available cash flow is to do stuff with, and.
00:27:58.153 --> 00:27:59.594
for me, like I see both of it.
00:27:59.624 --> 00:28:07.963
'cause I am looking through the practice financials and the household financials, but if that is not happening, it's hard to connect those two and to pull out what's real.
00:28:07.993 --> 00:28:23.203
So if you want real clarity on what's going on financially in the practice separately and in the household separately, and make really good decisions, you gotta separate those out And, and it does impact the value, otherwise you have to start to argue for those add-backs like Erich says.
00:28:23.203 --> 00:28:25.134
So I appreciate you bringing that up.
00:28:25.134 --> 00:28:28.124
I think that's a, a huge opportunity to just clean things up.
00:28:28.153 --> 00:28:34.634
And a lot of that starts with having like clean books in the first place to know, to even be able to look at and know what's going on.
00:28:35.144 --> 00:28:42.449
Or at a minimum optometrists, like, have those come out as distributions and not as expenses.
00:28:42.449 --> 00:28:45.479
'cause usually they're not real business expenses, Glad you mentioned that.
00:28:45.528 --> 00:28:47.449
we've talked through all these different categories.
00:28:48.074 --> 00:28:54.074
it, it does sound like the two opportunities to improve the expenses themselves.
00:28:54.824 --> 00:29:00.074
are in cost of goods or in inventory costs and general administrative expenses.
00:29:00.074 --> 00:29:17.203
It sounds like when you are trying to improve the, percentage of revenue going towards occupancy costs and non OD staff, very often it's more about improving efficiency, which it sounds like it's really more about improving the revenue side, not necessarily the expense side.
00:29:17.713 --> 00:29:21.044
So let's talk a little bit about revenue.
00:29:21.203 --> 00:29:24.114
how are we thinking about improving the revenue.
00:29:24.114 --> 00:29:25.284
side of the profit and loss?
00:29:25.791 --> 00:29:26.247
Yeah.
00:29:26.307 --> 00:29:26.787
Yeah.
00:29:26.876 --> 00:29:28.436
Outstanding question there, Evon.
00:29:28.656 --> 00:29:38.491
Jumping into revenue, you're five to 10 years out, make these the best damn five to 10 years your business has ever seen.
00:29:40.366 --> 00:29:44.866
And you might be thinking to yourself, Erich, dude, I've been working my ass off for decades.
00:29:44.866 --> 00:29:46.186
I don't think I got it in me.
00:29:46.237 --> 00:29:49.086
doc, I hate to say it, but one of two things gonna happen.
00:29:49.086 --> 00:29:51.740
One, you're gonna take your foot off the gas and
00:29:51.750 --> 00:29:52.049
Yeah.
00:29:52.070 --> 00:29:56.840
decades of working your ass off is gonna go up at a fraction of what it could have been.
00:29:57.980 --> 00:30:06.381
Or two, do it and you'll see that you're gonna be able to sell this thing for a hell of a lot more than you would've had you let this thing glide.
00:30:06.500 --> 00:30:06.951
Okay?
00:30:07.161 --> 00:30:09.441
And that's really that, those are the points that I wanted to make here.
00:30:09.530 --> 00:30:17.480
Evon, it has to do with growth versus stagnation versus comparison to benchmark.
00:30:18.285 --> 00:30:18.575
Okay.
00:30:18.770 --> 00:30:22.520
yourself as a seller, IE five to 10 year exit.
00:30:22.520 --> 00:30:31.431
Put yourself in the shoes of a buyer, whether that buyer is independent or if that buyer is a consolidator, a a private equity.
00:30:31.807 --> 00:30:33.758
Think through their lens.
00:30:33.758 --> 00:30:35.708
What do they want to see?
00:30:36.157 --> 00:30:43.587
Do they want to see something that is stagnant, that is teetering on the brink, that has these things over the place, even if it's making decent money.
00:30:43.597 --> 00:30:52.688
Like even if the business has strong benchmarks, you could have the best financials in the world.
00:30:53.377 --> 00:30:57.518
if your business has been flat stagnant for the last five years, woo hoo.
00:30:58.448 --> 00:30:59.738
You may have to do some explain.
00:30:59.738 --> 00:31:13.178
And to justify if you're gonna want to be really digging your heels on negotiation, because any buyer that knows what's up, certainly expect any buyer that's working with Akrinos, we're gonna pick your practice apart.
00:31:13.417 --> 00:31:17.167
and find our buyer a hell of good price in the process.
00:31:17.268 --> 00:31:20.748
as it were, right, sure that revenue continues to grow.
00:31:20.778 --> 00:31:22.458
Does it have to grow double digit?
00:31:22.458 --> 00:31:26.748
Does it have to grow, 15 and 20% the way it did back when you were in your prime?
00:31:26.748 --> 00:31:27.798
No, it doesn't have to do that.
00:31:27.798 --> 00:31:31.157
But if you could just show some nice single digit growth.
00:31:31.607 --> 00:31:34.218
Heck, I think the industry last year grew what?
00:31:35.008 --> 00:31:36.002
low, single digits.
00:31:36.008 --> 00:31:41.938
So even if you could show like a five or 6% growth of just collected revenue, that's nice, right?
00:31:41.938 --> 00:31:45.087
So please don't think that when I'm saying, Hey, we gotta be sure revenue's growing.
00:31:45.208 --> 00:31:46.857
It doesn't have to be growing like this.
00:31:46.948 --> 00:31:50.067
Just a nice steady, do the basics.
00:31:50.188 --> 00:31:56.077
Increase your professional fees, work on the basics with handoff, with, sales in your optical.
00:31:56.258 --> 00:31:57.877
What's that AR looking like?
00:31:57.877 --> 00:31:59.557
Let's get that revenue in the door.
00:31:59.557 --> 00:32:02.107
Let's get rid of these days of having some.
00:32:02.512 --> 00:32:12.502
the biller that we know is notorious for writing things off, but we never really had the to go and tell them they need to really get their act together.
00:32:12.502 --> 00:32:15.532
this is the kind of stuff Evon five to 10 years out,
00:32:15.667 --> 00:32:15.958
Yeah.
00:32:16.042 --> 00:32:18.532
opportunity to fix that stuff,
00:32:18.643 --> 00:32:18.843
Yeah.
00:32:19.068 --> 00:32:22.368
but also something else on the revenue side that I think is really important.
00:32:22.517 --> 00:32:24.166
Oh, Bob Dylan Lyric.
00:32:24.217 --> 00:32:27.336
the Times they are a change in the times.
00:32:27.336 --> 00:32:33.247
They are a change in, as it pertains to revenue and payor mix.
00:32:34.006 --> 00:32:34.036
Okay.
00:32:34.237 --> 00:32:42.517
And this is something that, that I think is really important, that as an industry and particularly as a profession, y'all, we really need to get serious about this stuff.
00:32:43.207 --> 00:32:45.186
We can't rely on managed care anymore.
00:32:46.146 --> 00:32:46.896
We just can't.
00:32:47.826 --> 00:33:02.346
I don't know how many of you caught this headline, but last year it was in, I forget if it was Q3 or Q4 of 2025, but there was news released where CMS announced that they were not increasing.
00:33:02.376 --> 00:33:09.567
There, there was something about a change that they were making with regard to Medicare Advantage plans.
00:33:10.317 --> 00:33:13.707
And when CMS Center for Medicare and Medicaid Services.
00:33:13.707 --> 00:33:31.196
When CMS released this statement, again, it was either in Q3 or Q4 of 2025, but CMS released this statement and then United Health Stock, United Healthcare stock plummeted by 20% in a single day.
00:33:32.876 --> 00:33:38.366
I actually dropped a little video in LinkedIn on this, just one of my personal commentaries.
00:33:39.207 --> 00:33:46.797
But y'all, if you read between the lines of what this is saying, it's saying the market does not like managed care.
00:33:47.997 --> 00:33:48.686
Think about it.
00:33:49.527 --> 00:34:02.997
If CMS, the Center for Medicare and Medicaid Services makes a big announcement and it shakes stock price of one of the biggest insurers to that degree, we need to realize the free market, right?
00:34:03.076 --> 00:34:05.176
'cause stocks, United Health is traded.
00:34:05.326 --> 00:34:09.706
I forget it's on the NASDAQ or the New York Stock Exchange or what have you, or the Dow, right?
00:34:09.797 --> 00:34:13.726
But nonetheless, it's traded on this public market.
00:34:13.742 --> 00:34:17.492
It and the public market ain't liking it.
00:34:17.621 --> 00:34:17.920
Yeah.
00:34:18.722 --> 00:34:22.081
So wake up, call here, wake up call.
00:34:23.731 --> 00:34:29.822
We want as much dollars as we can to be flowing into this business directly from patients.
00:34:29.822 --> 00:34:37.501
We want to minimize the presence of insurance when managed care is involved in our practice.
00:34:37.561 --> 00:34:42.601
We want to minimize vision plans and favor medical plans.
00:34:43.231 --> 00:34:46.981
So it's really important as we're looking to increase revenue.
00:34:48.032 --> 00:34:51.931
It's not done in a way that actually shoots ourselves in the foot.
00:34:51.931 --> 00:35:10.922
Because if we're thinking we're gonna increase revenue by pulling out all the stops, get on all the vision plans and just treat any patient that comes in the door, revenue may grow, but are we really growing revenue in the way we want, or are we simply digging our whole deeper and faster than others?
00:35:11.731 --> 00:35:14.851
That's like right as we, as, that's the, by the way, that's an analogy.
00:35:15.152 --> 00:35:18.211
clients out there know that, this is an analogy I love to use.
00:35:19.411 --> 00:35:20.041
We're digging a hole.
00:35:20.041 --> 00:35:21.181
We feel like we're working hard.
00:35:21.181 --> 00:35:22.052
how deep are we going?
00:35:22.742 --> 00:35:27.152
Okay, we're working hard, but we're also digging a big old hole.
00:35:27.271 --> 00:35:30.422
So it's really important.
00:35:30.552 --> 00:35:43.882
and consider this, to, to any of our listeners out there, if you had an opportunity to buy a practice that was 100% managed care versus 100% cash pay, which would you take and why?
00:35:44.045 --> 00:35:55.193
So we need to look at that and realize that payor mix, cash, vision, plans, medical government.
00:35:56.063 --> 00:36:09.773
Depending on how that payor mix is, will have a material impact on the value of the business, and it will absolutely have an impact on your ability to maintain posture when it comes time to negotiation.
00:36:10.733 --> 00:36:21.474
And I'll tell you, if you are one of these practices and you're looking to sell and you buyer works with a group like aos, we're gonna pick this thing apart gonna get at a really good price.
00:36:21.873 --> 00:36:23.643
Really important that everyone understand.
00:36:24.663 --> 00:36:29.882
We don't just wanna start growing revenue, but we want to grow the right revenue through the right channels.
00:36:30.822 --> 00:36:31.811
So I'm curious.
00:36:31.811 --> 00:36:43.231
So when I, think about a framework that I've adopted from others of what impacts gross revenue in a practice, it's revenue per exam or revenue per patient times the amount of patients per Dr.
00:36:43.231 --> 00:36:46.615
Day times the amount of doctor days per year.
00:36:46.615 --> 00:36:52.063
And you can boil down, this very simple formula to boil down the amount of gross revenue you might Earn in a year.
00:36:52.063 --> 00:36:56.713
So you can look at each of those and say, which of these do I have the ability to improve most?
00:36:57.882 --> 00:37:19.132
One way it sounds like to improve the revenue per exam or revenue per patient is by improving the patient mix, is by improving the mix and types of patients that you are seeing, and gaining revenue from, because that's gonna have a direct impact on how much revenue you actually collect, not necessarily bill on, but actually collect.
00:37:19.132 --> 00:37:35.643
And, and when you're looking at that from your perspective, like if you're helping a buyer, are you looking at the patient mix directly and is that patient mix directly impacting the price that buyer's reasonably willing to pay?
00:37:35.972 --> 00:37:49.202
Or is it simply that it's impacting the revenue and the revenue's really what you're basing that on, like how much are you looking directly at the patient mix and thinking about what price is fair for the buyer to.
00:37:50.684 --> 00:37:52.034
yes, and yes
00:37:52.077 --> 00:37:52.327
Okay.
00:37:52.514 --> 00:37:54.704
it ties back to risk,
00:37:54.998 --> 00:37:55.327
Yep.
00:37:55.454 --> 00:37:59.492
and this is something I'm realizing, perhaps I'll have to have another conversation.
00:37:59.492 --> 00:37:59.942
Totally.
00:37:59.942 --> 00:38:01.411
Just around valuations.
00:38:01.411 --> 00:38:02.101
What are these things?
00:38:02.101 --> 00:38:02.972
How do they work?
00:38:02.972 --> 00:38:04.567
What are all these variables that are being pulled in?
00:38:05.447 --> 00:38:07.606
because it all ties back to the risk.
00:38:07.606 --> 00:38:19.014
So what happens is that consider this a practice that is 100% cash pay versus a practice that is 100% vision plan.
00:38:20.514 --> 00:38:26.364
100% vision plan is radically riskier than a hundred percent cash play.
00:38:26.454 --> 00:38:28.313
So that will play out.
00:38:28.643 --> 00:38:39.574
It can play out in the valuation when we're building up the discount rate, the equity discount rate, where that risk of the individual practice is, ramped there, right?
00:38:39.753 --> 00:38:50.626
It would also play on the other side with negotiation, and this is where things get really interesting when we look at some of the, let's let our conversation continue to unfold.
00:38:50.746 --> 00:38:53.146
I don't wanna go up on another tangent here, but it's really fascinating man.
00:38:53.146 --> 00:38:53.686
It really is.
00:38:53.775 --> 00:38:55.755
It's fascinating how all this stuff operates.
00:38:56.476 --> 00:39:11.775
And the importance though, of realizing that when we can tie it back to these business basics and look at it in that way and get diligent about doing things that need to be done from the business standpoint, this has nothing to do with patient care, with practice, with all that stuff.
00:39:11.835 --> 00:39:15.195
I'm talking just pure the business side of these things.
00:39:15.411 --> 00:39:41.416
it can be huge, but please do understand that payor mix and patient mix, We have a patient mix of commercial vision plans, Medicaid, Medicare, maybe a little bit of major medical, and then a little bit of cash pay, and we have a, fairly diverse pool of patients regarding what they're coming into for primary care versus medical.
00:39:41.626 --> 00:39:46.277
Then over here we have a practice that may be generating the same exact gross revenue.
00:39:47.371 --> 00:39:54.648
But over here you have one commercial vision plan that so happens to be the best one for that market.
00:39:55.907 --> 00:39:57.737
And by the way, that is gonna vary by market.
00:39:58.068 --> 00:40:04.367
I know in past episodes we haven't even talked geospatial market analysis in this conversation, but that plays a huge role in all this
00:40:04.626 --> 00:40:04.956
Yeah.
00:40:05.148 --> 00:40:05.688
in your market?
00:40:05.688 --> 00:40:06.318
What are they doing?
00:40:06.318 --> 00:40:07.188
How are we showing up to them?
00:40:07.518 --> 00:40:23.967
But when we tie it over here, we're looking at that patient mix of, if we had this insurance practice over here, maybe we have one vision plan that we've aligned with strategically because of things that we know they're doing in the market.
00:40:24.597 --> 00:40:35.878
And then maybe one or two major medical plans that we've aligned with strategically because maybe we know there's a couple of big employers in town that have them and Oh yeah, we do have some cool equipment.
00:40:35.878 --> 00:40:36.628
OCTs, right?
00:40:36.628 --> 00:40:38.907
The cameras to be able to do a lot of major medical.
00:40:39.268 --> 00:40:39.748
Care.
00:40:39.827 --> 00:40:46.307
And then, I don't know, maybe they've a lot of fun doing, specialty contact lenses.
00:40:47.418 --> 00:40:52.967
So in this practice over here, you got a lot of insurances with 15% cash pay.
00:40:53.027 --> 00:40:59.027
Over here you've got just a few insurances, but they are strategic insurances.
00:40:59.807 --> 00:41:09.827
IE better reimbursements, But then you got 45% of the revenue coming in as cash.
00:41:10.608 --> 00:41:13.608
These two businesses looking identical.
00:41:14.478 --> 00:41:20.777
They may even have the same exact identical expenses and maybe they're out of benchmark on expenses too.
00:41:20.777 --> 00:41:23.297
Maybe they do have their colleagues or off the rails and all these other things.
00:41:23.777 --> 00:41:32.958
But you have these two practices with everything identical, but one of them simply has three x the cash pay receivables that is gonna get a better price.
00:41:33.347 --> 00:41:36.557
Then that practice that, that does not have as much cash receivables.
00:41:36.827 --> 00:41:43.547
So it's important as we look at this, and we're not just growing revenue, but we're growing it in the right way.
00:41:43.666 --> 00:41:48.579
in a way that's more sustainable, it, it improves the reliability of that revenue continuing.
00:41:48.666 --> 00:41:49.295
Exactly.
00:41:49.655 --> 00:42:04.956
And by the way, this wouldn't be the case if we saw historically, if we saw historically that healthcare, health insurance and vision plan reimbursements were going up, then perhaps we'd be talking about something totally different.
00:42:04.956 --> 00:42:06.485
But the fact is, they're not.
00:42:06.726 --> 00:42:13.815
They are not, they're not the brightest minds in the world of medical billing and coding.
00:42:14.025 --> 00:42:19.425
They're having to update their stuff multiple times a year to keep up with the changes.
00:42:19.516 --> 00:42:20.775
So think about that.
00:42:21.521 --> 00:42:26.891
how many resources are we expending trying to figure out what kind of modifier do we need to put on it this year?
00:42:28.099 --> 00:42:28.400
Yeah.
00:42:29.045 --> 00:42:29.525
For what?
00:42:29.525 --> 00:42:33.626
$2.50 cents like y'all.
00:42:33.626 --> 00:42:37.775
We can grow these businesses by a hell of a lot more than$2.50 at a time.
00:42:38.010 --> 00:42:38.340
okay.
00:42:38.340 --> 00:42:40.139
So I really like how you've broken this down.
00:42:40.139 --> 00:42:42.420
Ultimately, this all comes down to improving cashflow.
00:42:43.875 --> 00:42:45.614
And how do we do that?
00:42:45.614 --> 00:42:47.235
we can look at improving revenue.
00:42:47.264 --> 00:42:49.664
So that's cash dollars coming into the business.
00:42:49.664 --> 00:42:52.304
We can look at it in terms of improving expenses.
00:42:52.304 --> 00:42:57.655
We have these different expense categories we can impact in a, in a variety of levels.
00:42:57.704 --> 00:43:01.690
which ultimately impacts earnings, which ultimately leads to cash flow.
00:43:02.355 --> 00:43:04.445
And a few just follow up questions here.
00:43:04.445 --> 00:43:16.454
So, you know, number one, for this single doctor, single owner practice, how much does hiring associate doctors impact the potential outcomes here when they're thinking about that?
00:43:16.858 --> 00:43:24.215
Yeah, that's a really great question and this is all gonna really based on the need in the practice.
00:43:24.527 --> 00:43:32.628
There are a lot of practices out there right now that we've got sellers who are really ready to get out.
00:43:32.628 --> 00:43:38.327
So they are the single owner operator, but they are no longer working five days a week.
00:43:38.327 --> 00:43:41.447
Maybe they're only in their office seeing patients two days a week.
00:43:41.447 --> 00:43:45.858
Then they have fill-ins or associates seeing patients the other two or three days a week.
00:43:47.057 --> 00:43:55.518
So it's really important though, that we look at this through a full-time equivalent lens, right?
00:43:55.577 --> 00:44:02.938
And realizing that, you got a$1.3 million practice with an owner operator and then two associates.
00:44:03.597 --> 00:44:05.427
That's a single doctor practice.
00:44:06.148 --> 00:44:07.858
I will tell you right now, it's a single doctor practice.
00:44:07.858 --> 00:44:10.047
If it's not a single doctor practice, something's wrong.
00:44:10.108 --> 00:44:24.478
And by the way, the only way it would be a non single doctor practice 1.3 rev if rev per patient were so low that we really needed that, all of that coverage just to get the patient throughput.
00:44:24.507 --> 00:44:30.987
And if that's the, if that's what's going on, there are other things that can be done to improve that business.
00:44:31.378 --> 00:44:33.177
Actually, pretty simply, believe it or not.
00:44:33.478 --> 00:44:45.407
But, but getting back to the whole thing regarding hiring associates, for these purposes, it's six, one way half dozen the other because really what we're looking at, we wanna look at it through the lens of full-time equivalent.
00:44:45.827 --> 00:44:48.047
You wanna pull in all of those wages.
00:44:48.047 --> 00:44:56.507
So any doctor wages, whether it's going to owner, operator, or those associates, we wanna lump all of the doctor wages together.
00:44:57.257 --> 00:44:57.708
Okay?
00:44:58.608 --> 00:45:02.708
In evaluating the true cash flow of that, but I cannot stress it enough.
00:45:02.708 --> 00:45:03.547
It's really important.
00:45:03.547 --> 00:45:10.628
We look at this through the lens of is the actual required doctor coverage of this.
00:45:10.847 --> 00:45:10.967
it.
00:45:10.967 --> 00:45:28.697
So some examples that come to mind hearing you talk about that are that if a, if an owner is wanting to maybe bring down their time in the practice, but want to maintain a full-time equivalent amount of doctor hours in the practice to at least maintain or grow that gross revenue and earnings at the same rate.
00:45:29.172 --> 00:45:35.112
then that associate doctor might just fill in for the time the owner doctor wants to bring down for themselves.
00:45:35.501 --> 00:45:39.282
So that's, but that's keeping it within one full-time equivalent OD.
00:45:40.092 --> 00:45:55.061
And on another example is that if they want to move beyond one full-time equivalent OD because there's patient demand for it, then that additional associate is adding to the gross revenue and likely adding to the earnings and cashflow, the practice.
00:45:55.061 --> 00:46:01.541
So two, as I mentioned, two very different needs of the business and that associate doctors impacting it in two different ways.
00:46:01.634 --> 00:46:02.264
Yes.
00:46:02.293 --> 00:46:08.936
Now it is vital that appropriate doctor wages are being factored into these equations
00:46:08.987 --> 00:46:09.436
Got gotcha.
00:46:09.496 --> 00:46:09.827
Okay?
00:46:10.262 --> 00:46:28.213
and I know we didn't do a deep dive on exactly all the steps of how we construct a fair market valuation, but the importance of realizing that, hey, doctor owner many years, you're presumably in a position of paying yourself a good bit more than benchmark.
00:46:28.213 --> 00:46:37.753
As a matter of fact, according to the American Optometric Association, doctors in ownership earned upwards of 50% more than those that, that, that are not.
00:46:38.032 --> 00:46:43.402
so there's a lot of upside there, but it's really important that we look at this based on equivalence.
00:46:44.208 --> 00:46:51.137
and how those things factor into the valuation because they will have a significant material impact.
00:46:51.228 --> 00:46:56.387
It's also vital that we're honest with ourselves about this stuff.
00:46:56.807 --> 00:47:05.838
So to think that we have$2 million practice with a single FTE Uhuh, that ain't gonna cut it, right?
00:47:05.838 --> 00:47:11.708
To think, oh, we have a$2 million practice with a single full-time doctor that we're paying$140,000 a year.
00:47:11.858 --> 00:47:14.617
No, I'm gonna call shenanigans on that one.
00:47:15.018 --> 00:47:18.887
and presumably many people, the banks will call shenanigans on that one as well.
00:47:18.887 --> 00:47:23.943
so it's really important we look at this, the right way to be sure we're pulling in the right, the right add-backs into the equation.
00:47:23.972 --> 00:47:34.503
and I'm realizing that is a topic that we had not touched on prior, but that is definitely something Evon I would love to spend a little bit of time touching on add-backs, also talking about capital expenditure.
00:47:34.532 --> 00:47:37.652
'cause these are things that will have a material impact on that.
00:47:38.057 --> 00:47:39.047
Valuation of that.
00:47:39.047 --> 00:47:39.677
practice?
00:47:39.847 --> 00:47:40.927
let's dive into add-backs then.
00:47:40.927 --> 00:47:45.217
Let's, talk about how add-backs impact all this.
00:47:45.306 --> 00:47:46.746
What are add-backs?
00:47:46.746 --> 00:47:47.686
just run through what those are.
00:47:48.838 --> 00:47:49.228
Yeah.
00:47:49.588 --> 00:47:57.327
So add backs are gonna be adjustments made to the financials that reflect more of the true performance of the practice.
00:47:58.557 --> 00:48:08.938
common add-backs would be, doctor salary, your single doctor owner, your tax team, your CPA and your financial Planner.
00:48:08.938 --> 00:48:23.608
Have you set up as drawing a salary out of your And let's say your salary that you're drawing, let's say you're a single doctor, single location, grossing a million dollars, you're paying yourself a$300,000 a year salary.
00:48:24.688 --> 00:48:26.728
That's an expense to the business.
00:48:27.628 --> 00:48:31.318
But we're gonna add that back, why you're the owner operator.
00:48:32.068 --> 00:48:34.168
So we're gonna add back that 300 k.
00:48:35.742 --> 00:48:42.583
Now in so doing, we're also gonna then pull out of the business though what we gotta pay a doctor to be in there.
00:48:43.242 --> 00:48:51.463
But this is a really good example where if you are an owner and you're paying yourself a$300,000 a year salary, first and foremost, congratulations.
00:48:52.213 --> 00:48:58.483
built, you've got your business to a point where you can, your financial Planner or CPA are advising you to, to pay yourself that.
00:48:58.483 --> 00:49:01.032
That's freaking amazing, okay?
00:49:01.483 --> 00:49:12.043
And that's where then you realize you worked your tail off to get your business where you could pay yourself a$300,000 a year salary, but in your market, we can hire in a full-time doctor for 150,000.
00:49:12.793 --> 00:49:21.583
we'd add back that 300 k salary of the owner, then we'd subtract out that 150 k full-time equivalent.
00:49:22.483 --> 00:49:26.012
And that's gonna show what, that's gonna blow up the value of the business.
00:49:26.072 --> 00:49:26.583
Why?
00:49:26.672 --> 00:49:38.532
Yeah, because now we got that 150 delta, that$150,000 overage that the owner was paying themself above what they would've paid a full-time fill in that now is going straight into profit.
00:49:39.702 --> 00:49:40.722
And that's a beautiful thing.
00:49:41.652 --> 00:49:57.932
So a few other things on add-backs, other add-backs I had mentioned earlier, we were talking about the general business overhead that we want that to be in three to 5%, but it's not uncommon that this is 8, 10, 12, hell, 18%.
00:49:58.293 --> 00:49:59.612
When do these occur?
00:50:00.873 --> 00:50:02.583
When you're living a good life through your
00:50:02.876 --> 00:50:03.166
Yeah.
00:50:05.253 --> 00:50:09.213
you're going on trips on your business, you're buying cars on your business.
00:50:09.273 --> 00:50:11.432
You got teenage kids that are learning how to drive.
00:50:11.432 --> 00:50:12.123
You gotta buy a car.
00:50:12.123 --> 00:50:14.103
Hey, look now the practice has another vehicle.
00:50:14.152 --> 00:50:14.483
okay.
00:50:14.572 --> 00:50:19.163
So all that stuff, it feels good when you're there because it doesn't hit personal finance.
00:50:19.943 --> 00:50:21.802
You are not gonna see any of those expense flow.
00:50:21.802 --> 00:50:23.992
Personal finance, it feels good.
00:50:23.992 --> 00:50:29.753
We've reduced some taxes for the tax year, but lo and behold, we realize that these are things that we're gonna have to do.
00:50:29.753 --> 00:50:30.742
Add backs.
00:50:31.672 --> 00:50:35.123
We wanna try to minimize add backs of seller discretionary spend.
00:50:35.333 --> 00:50:37.702
Why questions.
00:50:37.822 --> 00:50:38.422
Think about it.
00:50:38.483 --> 00:50:47.632
If you were gonna go buy something and then you start getting all these additional details, only after you submitted a letter of intent or something like that, you'd be like, what the hell's going on?
00:50:47.632 --> 00:50:48.682
Gimme all the facts on the
00:50:48.831 --> 00:50:49.181
right.
00:50:49.913 --> 00:50:57.023
So in the world of add-backs, it's also imperative that doctors follow, understand the following.
00:50:57.833 --> 00:51:01.853
If your COGS are outta control, that's on you.
00:51:02.063 --> 00:51:08.873
There's no adjustment we can make to valuation to justify the fact that you are overspending on COGS for all those years.
00:51:10.253 --> 00:51:15.773
If you pay below market rent, we have got to add back.
00:51:16.568 --> 00:51:24.367
Or should I say adjust that rent to a market rent, for example, I own my building.
00:51:25.597 --> 00:51:28.297
I pay myself very little rents.
00:51:29.137 --> 00:51:30.757
just the way I've been doing things.
00:51:31.628 --> 00:51:35.918
You're paying yourself$1,500 a month rent, that's fine and good.
00:51:36.188 --> 00:51:37.807
You wanna sell your practice.
00:51:37.838 --> 00:51:44.807
But market rent is, let's say market rent for a space, your size would be 4,500 a month.
00:51:45.648 --> 00:51:51.918
we are gonna have$36,000 of expense added into your financials to do what?
00:51:51.918 --> 00:51:52.847
Account for that.
00:51:54.077 --> 00:52:00.347
you, as the owner of the real estate, were gonna lease it to the new owner at a way below market rent, which I know you're
00:52:00.496 --> 00:52:00.717
Yep.
00:52:00.978 --> 00:52:02.507
So we need to be sure that's factored in.
00:52:02.777 --> 00:52:07.217
So it's really important that everyone understand that some of these expenses.
00:52:08.878 --> 00:52:10.978
we do add-backs to, to hit profitability.
00:52:10.978 --> 00:52:15.447
Some of these expenses we can get into doing adjustments, but other expenses we can't.
00:52:16.978 --> 00:52:17.458
Right?
00:52:17.637 --> 00:52:29.998
So rent is one another also that we really gotta look at is that non-doctor payroll, example, you are an established practice.
00:52:30.478 --> 00:52:43.498
It's you, a few staff members, maybe one of those staff members is your spouse or a child, and you're paying them something other than what would be the right wage to pay.
00:52:43.827 --> 00:52:46.077
Maybe it's your spouse and they're not on payroll.
00:52:47.097 --> 00:52:53.847
So when we look at your benchmarks, your expenses, your non-doctor expense benchmark may be around 14%.
00:52:55.708 --> 00:52:58.588
The range is 18 to 24.
00:52:59.577 --> 00:53:04.648
We have got to move those expenses up into the range of what it should be.
00:53:05.818 --> 00:53:06.538
Why?
00:53:06.657 --> 00:53:06.688
Okay.
00:53:07.918 --> 00:53:12.958
We can't assume that the buyer is gonna have a spouse that's gonna work in the practice with no wage.
00:53:13.237 --> 00:53:15.097
You're gonna, you're gonna have to replace that spouse
00:53:15.657 --> 00:53:15.958
yeah.
00:53:15.987 --> 00:53:30.748
So we really have to be sure that the right adjustments are being made so that we can start negotiating around an actual fair market value.
00:53:31.137 --> 00:53:35.427
That, by the way, is gonna be the range that banks are looking
00:53:35.797 --> 00:53:36.036
Yeah.
00:53:37.257 --> 00:53:50.802
and that is how and why Evon Akrinos gets quite a bit of buyers contacting us after they signed a letter of intent, but then they engage with Akrinos, and they get us all the financials, and we run the valuation.
00:53:50.802 --> 00:53:52.061
We start doing the stuff.
00:53:53.871 --> 00:53:58.882
we are finding deals that are going to sale, going to active sale.
00:53:59.706 --> 00:54:04.777
For$150 and$200,000 below what that original asking price was.
00:54:04.777 --> 00:54:06.847
And there's a number of reasons for that.
00:54:07.567 --> 00:54:11.797
So it's really important that everybody get, get real about this stuff.
00:54:11.827 --> 00:54:25.146
It does no one any good when everybody's been working their tail off for the last six months, buyer and seller negotiating for the last six months, only to get to the bank saying, oh, we can't write that.
00:54:25.146 --> 00:54:26.617
It's not cash flow insufficiently
00:54:26.686 --> 00:54:26.925
Yeah.
00:54:27.907 --> 00:54:30.516
that does no one any good, one any good.
00:54:30.516 --> 00:54:35.887
So it's really important also that our listeners out there that are prospective sellers eyeing the five to 10 year exit.
00:54:36.427 --> 00:54:39.336
Really, now is your time to start making these changes.
00:54:39.606 --> 00:54:41.817
Because when it comes to be go time.
00:54:41.827 --> 00:54:48.583
There are a lot of things at play that you're not gonna have control over, but right now, when you're five to 10 years out, you have the opportunity to do what?
00:54:48.583 --> 00:54:50.923
Get those expense benchmarks under control.
00:54:51.103 --> 00:54:52.213
You have an opportunity to do what?
00:54:52.213 --> 00:54:59.324
Grow revenue, but grow it around a service mix and a payor mix that's gonna be, that's gonna drive value.
00:55:00.043 --> 00:55:04.543
Something else we didn't touch on at all, Evon Capital expenditure.
00:55:06.313 --> 00:55:06.733
Sure.
00:55:06.733 --> 00:55:17.503
It's been a great practice for all these years, but oh my gosh, that exam lane looks like it was out of, barely a, it's barely functioning that OCT.
00:55:17.503 --> 00:55:19.153
You gotta hit it on the side.
00:55:19.153 --> 00:55:20.833
Do all these things just to get it to operate right.
00:55:20.983 --> 00:55:28.304
If you follow'em going here, CapEx, we can't be selling something that needs new equipment, needs new furniture.
00:55:28.423 --> 00:55:32.023
All that inventory in the optical is old crap that nobody wants.
00:55:32.353 --> 00:55:37.304
We gotta be sure that this thing is, it has merits.
00:55:38.003 --> 00:55:38.063
Yeah.
00:55:38.574 --> 00:55:39.764
Equipment and diagnostics.
00:55:41.204 --> 00:55:44.293
Non-medical technology, right?
00:55:44.594 --> 00:55:47.923
Leaseholder improvements, furniture and fixtures.
00:55:49.213 --> 00:55:57.110
Know as a seller, five to 10 years out, Know As a seller, you're not gonna get away with it.
00:55:57.469 --> 00:56:02.780
You're not gonna get away with selling something to the next generation that can barely function.
00:56:02.900 --> 00:56:03.920
It ain't gonna happen.
00:56:04.579 --> 00:56:13.340
And by the way, it's not that it's not gonna happen because if a buyer works with a credo and we're gonna pick the practice apart, it's not gonna, banks are gonna laugh you out of the office.
00:56:14.719 --> 00:56:17.460
again, Evon a lot, it's an amazing time we're living in right now.
00:56:17.460 --> 00:56:21.960
But I also feel like now more than ever, doctors really need to understand the facts.
00:56:21.989 --> 00:56:23.699
And the facts is not fluff.
00:56:24.269 --> 00:56:26.429
The facts is not coming from an online community.
00:56:26.579 --> 00:56:31.800
The facts are not coming from whatever ChatGPT or Claude, or Open ai, or whatever the hell we're calling these days.
00:56:31.889 --> 00:56:37.079
What it's telling you, the facts are, this is how the system works.
00:56:37.228 --> 00:56:49.599
So it's really important to understand where you can have an impact on things so that your practice is set up so that when it goes through the system, it's gonna be favorable for all parties.
00:56:49.771 --> 00:56:59.887
One, of the questions that I did have written down, is can you be too profitable if it's, if it shows that you're not investing in the practice and you just touched on that, right?
00:57:00.396 --> 00:57:11.286
You may have a very profitable practice above and beyond benchmarks, but if the buyer is looking around and everything in the practice is outdated, you haven't invested in the practice for, the last 10 years.
00:57:12.032 --> 00:57:14.161
that's gonna impact the value, right?
00:57:14.672 --> 00:57:16.052
So that, it's an interesting question.
00:57:16.101 --> 00:57:25.106
I dunno how you feel about that, Erich, but, maybe you just told us how you feel about that, it, it does seem like there's a point where you may be too profitable if it means you're not reinvesting back into the business.
00:57:25.556 --> 00:57:31.166
The way I once owners to think about this is that you have to market your practice for sale.
00:57:31.677 --> 00:57:42.626
You have to market it, and you have to present it and prepare it in a way to where a buyer is going to be as comfortable as possible, as ready as possible to step in and go to work.
00:57:42.626 --> 00:57:50.846
And if, if the future cash flows and the uncertainty or certainty of those future cash flows are what's going to determine some fair price?
00:57:51.275 --> 00:58:03.786
if you have all of these things in the business that make it very uncertain or if the buyer is going to perceive that there's a lot of risk in this business for the same amount of revenues coming in or the same amount of profits coming in.
00:58:04.221 --> 00:58:06.891
That's gonna impact that buyer's willingness to buy your business.
00:58:07.130 --> 00:58:15.851
And whether it's not having clean and accurate financial statements and, and record keeping, whether it's having out of date technology or equipments.
00:58:16.510 --> 00:58:25.300
if there's too many add-backs and too many questions start coming in, that buyer's going to start to feel like things are not going, are not very likely to continue on as they are.
00:58:25.300 --> 00:58:29.385
And so we gotta prepare and we can't sell the buyer on potential.
00:58:29.436 --> 00:58:33.976
if the, if there's potential opportunity in the business, why aren't you taking advantage of that potential?
00:58:34.735 --> 00:58:35.606
why aren't you doing it?
00:58:36.775 --> 00:58:42.235
So we have to think about it as something we need to market and sell just like we prepare our houses, right?
00:58:42.445 --> 00:58:44.456
We're preparing our houses for market and for sale.
00:58:45.206 --> 00:58:50.606
Let's look at this really important asset that you've built, you've built up over years and decades.
00:58:50.882 --> 00:58:55.621
and let's get it ready so that the next buyer can step in and feel really confident.
00:58:56.686 --> 00:59:04.597
About the revenues that you've built up and the earnings you've built up, and, just outta respect to time, Erich, I think this is a pretty good place to stop.
00:59:04.597 --> 00:59:11.166
I've got a couple questions, but We'll, I think we'll tackle that in a future episode, specifically diving into to valuations.
00:59:11.166 --> 00:59:14.806
But, I know you have a resource for listeners of the show.
00:59:14.806 --> 00:59:15.436
Tell us about that.
00:59:16.672 --> 00:59:17.123
Yeah.
00:59:17.123 --> 00:59:17.362
Yeah.
00:59:17.362 --> 00:59:19.282
Evon, we've got, we got a ton of resources, right?
00:59:19.282 --> 00:59:22.373
But we did put together something for listeners of your show.
00:59:22.472 --> 00:59:25.467
little 360 due diligence asset, y'all.
00:59:25.563 --> 00:59:27.992
And basically what this is, it just kind of sets things up.
00:59:28.083 --> 00:59:36.893
If you are one of these listeners five years out, just some nice bullets looking at, five to three years out, then, two years out, then one year out, then six months out.
00:59:37.177 --> 00:59:38.527
Kind of just some nice little things.
00:59:38.527 --> 00:59:44.847
You can have a little, guess we'll say it a little desktop reference for you as your, approach to those next few years.
00:59:44.847 --> 00:59:50.768
hey, look, Evon, if anybody would like to claim it, y'all can just reach out to Evon and he'll send you on over.
00:59:50.768 --> 00:59:52.938
Or you can shoot us an email contact@akrinos.com.
00:59:54.217 --> 01:00:00.637
Let us know that you tuned into this episode of Optometry Money Podcast and we'll see about getting those assets on over to you.
01:00:00.697 --> 01:00:01.507
appreciate it, Eric.
01:00:01.586 --> 01:00:09.657
as always, it was a pleasure and I'll put all of your information and resources in the show notes and, for everyone, really appreciate your time.
01:00:09.686 --> 01:00:17.237
the earliest, the earlier you can start planning here, both in the business and financially outside of the business, getting you ready for that point.
01:00:17.606 --> 01:00:20.067
the much more freedom and flexibility you're gonna have as you get there.
01:00:20.067 --> 01:00:22.347
for everyone, really appreciate your time in listening today.
01:00:22.347 --> 01:00:24.476
We will catch you on the next episode.
01:00:24.686 --> 01:00:25.847
In the meantime, take care.