As the current economic climate prompts optometrists to reconsider practice valuations, exit plans and buyer interest, RHIANNON BOWMAN reflects on where opportunities lie for the next generation of independent practice owners.
Buying an existing business generally carries less risk than starting a new one – and this holds true in optometry where the unique combination of clinical expertise and retail services provide the foundations for a resilient sector.
Purchasing an established independent practice has several advantages, including immediate cash flow and a proven financial history, which serve as a predictor of future success while providing a smooth pathway to securing financial assistance.
There’s also the acquisition of existing patients, goodwill, contacts, suppliers, equipment, stock and employees and managers.
These practical considerations aside, key industry figures agree the health component of optometry in an aging population ensures longevity, making independent practice ownership a sound investment.
They also agree that regional independent practices may provide the greenest pastures for prospective buyers due to lower overheads and less competition, while bucking the current economic downturn.
For those looking to buy into the independent optometry dream, there’s plenty to consider, particularly in a market where COVID-19 has prompted some owners to accelerate their exit strategies.
For optometrists considering purchasing an independent practice, it’s important to first understand the market forces brought about by COVID-19 and how this is influencing the psychology of buyers and sellers.
In his role as national business development manager at independent optometry network Eyecare Plus, Mr Philip Rose works closely with practice owners to grow their businesses.
He says many owners are re-evaluating their personal priorities as a result of COVID-19.
“In some cases, it is accelerating their retirement and succession plans. At the same time, it is evident that these times are not exactly conducive for a buyer to make an investment decision,” Rose says.
He estimates most serious buyer inquiries are coming from the 30-40 age bracket.
“These potential buyers have gathered sufficient industry experience to know what they want to see in a practice. The younger the buyers, the more daunting self-employment seems. But that is also because they are underestimating the opportunities of an independent lifestyle,” he says.
As the CEO of Optometry NSW/ACT, Mr Andrew McKinnon has seen few active buyers in recent months. With many optometrists stood down or still working reduced hours, the market is still stabilising.
He says locums have also been affected, with job prospects evaporating, leaving them with 25-33% less income. “They’ve been hammered,” McKinnon says.
“No one is actively looking to buy. There is very little activity, largely due to uncertainty. When the market recovers, there will be opportunities because the profession is resilient, and optometry practice ownership is a sound investment.”
With a career in optometry spanning 40 years, Mr Phillip Fent, CEO of Optometrist Business Brokers, agrees with McKinnon’s sentiment.
A former optometrist who bought and sold 11 of his own practices before establishing an optometry locum and recruitment service, Fent has recently pivoted his business into a brokering service.
Having informally provided business advice to colleagues for many years, he has retrained, gaining real estate licenses in Victoria and NSW and is a member of Australian Institute of Business Brokers.
He says state governments’ restrictions to minimise the spread of COVID-19 has meant many full-time employed optometrists are working reduced, part-time hours and several locums have been unable to secure work since March.
Some final-year optometry students completing clinical placements have also been dismissed in the downturn, resulting in delayed graduation.
“Essentially, those who want to buy themselves a job have two options: open a greenfield practice or buy an existing practice,” Fent says.
If they opt for the latter, buying into a practice with the support of an optometry group can make the first foray into business ownership easier. Those groups can help avoid the heavy lifting associated with areas such as marketing, suppliers and business platforms.
One such organisation is George and Matilda Eyecare. CEO Mr Chris Beer says inquiries to join its independent community have increased in recent months.
“It is perhaps no surprise that in such uncertain times, people are looking for more support and more security. What we are focused on, is ensuring we find the right partners, who are willing to work with us to ensure that their practices are taking the right steps to navigate these turbulent times,” Beer says.
“If people have been considering their exit strategy or plans to realise the value of their practice, the pandemic has clearly been a catalyst to accelerate these conversations.”
Among those interested in joining the nearly 100-practice network, Beer says there is a common factor.
“The profile of these practices is certainly diverse, but we are seeing people start these discussions with us much earlier now than previously. We put this down to a recognition that it is getting increasingly tough to weather these storms without the kind of investment in your business’s marketing, platforms and people that we’ve made a cornerstone of its response to COVID-19.”
Push and pull
In 2017, ProVision surveyed 59 optometrists who had graduated within the past five years to gauge their interest in independent practice ownership, including factors ‘pulling’ them toward this goal or ‘pushing’ them away.
Building long-term relationships with patients, and using the full scope of optometric skills, ranked as the top responses to the main benefits of independent practice ownership. Professional and financial autonomy, and the ability to focus on a specific area of optometry, also ranked highly.
The survey respondents also said help in identifying practice purchase opportunities and locations, and financial advice and support, would encourage them into independent practice ownership.
They nominated a lack of business experience and the cost of purchase as the main barriers to independent practice ownership. Competition, the administrative load associated with business ownership, and access to finance were also considered prohibitive.
ProVision business services manager Mr Mark Corduff says those factors are still relevant today.
“ProVision is pro-active in educating prospective buyers on what a good practice looks like. We’ve created a new Pro-Launch platform to help any optometrist understand the intricacies of practice ownership and how ProVision can help them with the skills that they didn’t learn at university. Optometry students and employed optometrists don’t always get exposed to fundamental business concepts, so our job is to take the fear away from making critical business decisions,” Corduff says.
Through its extensive network of 460 practices and state-based business coaches, Corduff says ProVision introduces potential buyers to members who are looking to sell.
“While new buyers went quiet for a month or two, the entry of a significant number of new graduates into the profession will mean that more optometrists are considering practice ownership as their best option for a strong financial future. We have noticed an uplift in employed optometrists enquiring about either acquiring an existing practice or starting a greenfield practice from scratch,” Corduff says. “This is a healthy sign for practitioners who are at the other end of their journey and looking to sell. There will always be buyers for well run, profitable optometry practices.”
The ‘push’ and ‘pull’ of practice ownership – and the value of reliable business advice – is also familiar to Mr Sean Roffey.
Roffey, who offers an optometry brokering service through his company, Health Business Sales, has more than 20 years’ experience selling retail pharmacy businesses in NSW.
He has known McKinnon, the Optometry NSW/ACT CEO, in a business capacity for 10 years, in which time he has helped many young optometrists succeed in business ownership.
He says the market has been slow, possibly as a result of COVID-19, but overall, the pandemic is a blip on the radar.
“It is generally a slow-moving market – practice turnover is not high. But new owners can succeed if the practice is run correctly with the right input,” he explains.
Drawing parallels with the pharmacy profession, Roffey says some optometrists aren’t typically business-minded, and tend to gravitate towards buying groups for support. But he notes others have a strong business acumen and are willing to take risks.
“There are young buyers interested. Pre-COVID, I sold a Sydney practice located in a smaller shopping centre to a young optometrist – they wanted to run a business. Young buyers come with a different mindset; more modern thinking, and depending on location, a different spin on retail.”
Roffey says it’s important young optometrists get the right advice.
“Advice and knowledge will see them succeed. Each business represents a different opportunity,” he says.
Roffey’s advice to buyers is not to be scared of goodwill; the established reputation of a business regarded as a quantifiable asset and calculated as part of its value when it is sold.
“Goodwill is security. Goodwill counts for a lot. And seek advice – have the right team, have an accountant that understands the industry,” Roffey says.
“My advice is don’t open a greenfield practice. Buy a known business, with a known income source, with patients already walking through the door.”
Regional practices have, on balance, withstood the market downturn associated with COVID, and in some cases are exceeding profit expectations, but each owner must have one eye on the future.
McKinnon, from Optometry NSW/ACT, says when the pandemic started to bite, a handful of practice owners – all male and aged in their 60s – called him to discuss their business options.
“They were starting to think about retiring and had their own health concerns to consider alongside the government’s restrictions on allied health services. This pandemic was the nudge they needed to bring their retirement plans forward, and to start to ‘think aloud’ in speaking with me. But since then, there has been no further contact or progress on selling their practices, as far as I’m aware,” McKinnon says.
In his experience, Fent estimates there are more than 2,000 independent optometry practices in Australia, and owners are predominantly aged over 55.
The disruption and uncertainty associated with COVID-19 has meant his clients in this cohort, who are potentially in the early stages of succession planning or preparing to sell, are delaying their plans in response to a “wait and see” attitude among buyers.
Fent has seen first-hand that regional practices have not been as adversely affected by COVID-19 as some city practices, who have operated under tighter lockdown restrictions and a significant drop in foot traffic.
“Some regional practices are flat out; three graduates started in one central NSW practice last month,” Fent says, highlighting the opportunities that lay beyond city limits.
He says regional practice has extra potential now that momentum is swinging in that direction.
“Graduates, early career optometrists and employees need to be more flexible in their thinking. I was speaking to university students after giving a presentation in August last year, and the students were not interested in moving to the country for work. Now, that’s not the case.”
Rose, from Eyecare Plus, agrees with Fent’s assessment. “When seen through the lens of a practice owner, regional practices are performing consistently better than their metro counterparts – the same was true prior to COVID-19,” Rose says.
“The lower COVID-case count in addition to the lower levels of competition has led to a less significant drop in turnover, making the recovery and profit level maintenance much easier. In fact, many regional practices have grown their turnover relative to 2019.”
Rose says, generally speaking, regional practices present a better business opportunity.
“I always say, go regional where you can purchase a quality practice in a great location. In the city, you’re competing on price, and that’s not a viable long-term solution. Regional practices have a lower cost base and longer leases. Regional practices’ rental cost can be between 5-8% of turnover. In a busy metro shopping centre, it’s often 12-20% of turnover,” he says. “Overheads are higher in city practices so require a lot more turnover to make ends meet.”
Despite the clear financial benefit regional practices present, Rose says it has proven difficult to find buyers.
In his experience, a cultural disconnect between an older generation of optometrists in regional locations nearing retirement and looking to sell, and a younger generation of graduates and early career optometrists with strong ties to extended family and community in city centres, means buyers and sellers are not connecting on a personal or business level.
“I know of a practice owner who wants to sell their well-established, successful practice in a regional town within four hours’ drive of Sydney and two hours to the beach – and he can’t find a buyer,” Rose says in disbelief.
He says the problem is compounded by misinformed or risk-adverse financial and legal advisers who don’t understand the profession.
“For example, they don’t understand that most sellers are willing to continue working in the practice, phasing out over time, allowing for mentorship of the new owner/entrepreneur and passing on patient goodwill,” Rose says.
“I deal a lot with accountants of buyers and sellers – it’s an opportunity to inform them of how things work in the industry. When graduates aren’t taught business skills, nervous banks and accountants advise them it’s too high-risk to buy.”
As more optometry graduates enter the workforce, Rose believes there will be fewer city practices to employ them, and wages will go down.
“We’re not seeing growth in new practices opening. In fact, we’re seeing practices consolidating.”
According to Roffey, a broker, the pool of buyers in rural and regional locations is small.
“Without buyers, the only options for those practice owners are closure, consolidation or succession-planning. Despite rural and regional practices boasting lower rents, lower overheads, and more profit in owner’s pockets, the majority of optometry graduates with Asian heritage are culturally predisposed to live and work together in city-based communities. But with more graduates coming through, there will be a lack of job opportunity in city areas,” Roffey says.
McKinnon believes optometrists need to go beyond the city limits to see that opportunities are abound. At a UNSW careers event in September, he repeatedly urged graduates to look beyond cities for employment.
“I’ve spoken with 12 or so rural optometrists over the previous month and they’re absolutely smashing it. There is large pent-up demand for their services. One practice near the Blue Mountains I spoke to has doubled turnover year-on-year, up 100%. It is one of many getting into double-digit growth. Conversely, a number of practices – quality high-end clinical practices – around Sydney have continued trading through COVID and have done sensationally well. It goes to show that you can still do well if you do it right, regardless of economic downturn,” McKinnon says.
Although buyers are thin on the ground at the moment, Fent says there are opportunists in the market who own small practices and are looking to acquire another.
“They’re looking for a bargain, but vendors are not keen to sell to this type of buyer. If it’s a business they’ve had for some years, they may not be desperate to sell. They may be managing to stay in business with government assistance such as reduced rent and JobKeeper, but when bank delays with repayment and JobKeeper finish, it will be a different situation, and that will put extra pressure on sales,” he says.
Based on his experience accumulated over four decades in the profession, Fent says there are three common reasons why businesses fail.“The first is monetary. Since the banking royal commission, the ‘big four’ only lend for the term of the lease, guaranteed by bricks and mortar. They’re no longer lending on ‘goodwill’.
“The second is an inadequate lease. Buyers need to make certain they secure a long lease with options. For example, a five-year lease plus an option for another five-years, and an option for another five-years on top of that, or three, plus three, plus three. The lease also needs to be transferrable to a new owner. The third is inadequate legal and accounting advice. I dealt with one practice in NSW that even before the signature stage, the buyer had spent more than $50,000 in legal fees. Buyers need an adviser or representative with really good commercially savvy legal experience.”
Rose sums up the situation in the current market: “On one hand, we have the business owner wanting to achieve the best price for the practice, which they have built up over many years. On the other hand, we have the banks and accountants advising their customers to be careful, without really understanding how resilient our industry is. Optometry remains a very attractive investment, due to the ‘health’ component of our turnover and has never been forced to close during these difficult times.”