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Managing risk—practice ownership buy in or start up?

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Jason Chen (L) and Jenkin Yau at their practice in Point Cook VIC
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Mark Overton
Ideology Consulting

Business entails risk and a large part of being a practice owner and manager is how you manage that risk.

The difference between starting a practice from scratch and buying into an existing practice is the level and quality of information at your disposal.

When starting a new practice you have no idea how many patients will visit your practice and how much they will spend. Winning market share takes time. Almost everyone with a vision problem is seeing an optometrist already, so why would they take a risk and come to you instead?

When buying into an existing practice you can more accurately predict how many patients will visit and how much they will spend. There is a high level of knowledge available to reduce your risk.

Money

With all investments, increased risk equals increased return. When buying into a practice, you can predict with some certainty the benefit you will get from the practice and what you should pay to get it. When setting up a new practice, you know what it will cost to set up but not the benefit you will get. If it goes brilliantly, you will have paid much less for a proportionally greater benefit. On the other hand, you could lose the lot.

Buying into an existing practice reduces your financial risk substantially. You can assess the business and its performance with some certainty but it’s going to cost you more money. While over the years the cost of setting up or buying into a practice has remained fairly constant, the industry risk has increased. Competition is more prevalent, more effective and more aggressive than ever before. Buying into an existing practice with a proven record and experienced people on the team looks more attractive.

Are you ready to go solo?

You may be familiar with the basic management principles of planning, organising, leading and controlling, but carrying this out is another matter entirely. Each practice is different and has its own particular nuances that can bring an unfamiliar or inexperienced manager some significant challenges. Therefore, there are significant advantages in buying into an existing practice with the support from others with experience.

Opportunity

Buying into a practice takes time and opportunities don’t come around too often. Plan well ahead and start to build relationships and contacts. When buying into a partnership the current owners will want to know that you are a decent and trustworthy person, and that you can contribute to the professional skills and knowledge of the practice. The current owners’ future earnings will be tied up with you, and vice versa.

Method

There are two basic ways to buy into a practice.

  • Fixed percentage. You buy 50 per cent or some other amount of the practice for the value of that part of the practice on current valuation. A value is agreed on and you pay the current owner for their share or the agreed percentage. You then become a partner or director with the same rights as the others.
  • Progressive buy-in. Over time you will buy some or all of the practice starting with, for example, 10 per cent. Every year you may buy another five to 10 per cent until your target is reached. This will cost you more as each year the practice is revalued and the price usually increases.

The method you choose depends mainly on what you can afford and what the current owner is prepared to consider.

Finance

You have a pulse and an optometry degree so money is not too hard to get, but the deal still needs to make financial sense. Basically, you are buying a flow of profits—this is profit after you have been paid a salary. The ratio of profits to capital (the amount you invested to get the profit) can vary but this ratio needs to represent a good return after you have paid for the capital, accounted for risk and covered other costs. To reduce their lending risk, most lenders like to see that you have assets. Always plan ahead and seek advice.

Optometry Australia can recommend experienced advisers who can answer your queries. In addition, find a good personal accountant and talk to at least two financiers such as a bank, private lender or broker.



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