Our goal with this article is to outline the most necessary considerations buyers should keep in mind while conducting the due diligence to purchase a practice.

Financial due diligence

One of your primary goals must be to evaluate the financial health of the Optometry practice you wish to purchase. This serves to ensure the practice provides enough revenue to cover expenses, debt service terms (your bank/owner-financed loan), and provide desired income. Your potential acquisition may be struggling to meet expectations at this stage, and the only way to know the scope and scale of the opportunity is to dig into the numbers.

This comprehensive review of the financial stability of the practice includes but is not limited to:

Review financial documents.

Prior to purchasing the practice, the buyer should review the practice valuation and supporting financial statements, comparing these collections & reporting for consistency. Financial statements to be reviewed include:

• federal & state tax returns
• state & local sales tax returns
• financial and bank statements
• accountant-prepared profit and loss statement
• collections reported in the general ledger accounting software
• collections shown in the seller’s Optometry practice EHR/PM software.

Assess financial viability.

Conduct a financial forecast and feasibility analysis based on historical revenues & expenses of the practice. It is imperative that Buyers include all ongoing expenses of the Optometry practice, including:

• general overhead
• occupancy
• payroll & benefits
• lab costs
• equipment leases & contracts
• any other expenses that will be assumed upon purchase.

Develop a 3 year forecast.

Understanding projected practice economics after acquisition that reflects the buyer’s vision for the future will give you a preview of what your post purchase practice can provide. This will include:

• expanding scope of care
• modernizing the “fixer-upper” practice
• relocation provisions and/or potential real estate investment

Akrinos ProTip: forecast debt service terms to determine financial viability of the venture!

EBITDA.

Earnings Before Interest Taxes Depreciation & Amortization provides visibility of the true net profit of the seller’s Optometry practice. This calculation starts with the net income reported on the seller’s financial documents, then adds back those expenses that will not be assumed by you such as retirement plan contributions for the seller, depreciation and amortization, owners salary (if the practice is incorporated), as well as expenses personal to the seller that will not be incurred by the buyer.

Assets and liabilities.

It is imperative you as the buyer understand all major assets you are purchasing and liabilities you are assuming responsibility for. Assets will include equipment, inventory, accounts receivable, and real estate, among other items. Liabilities include debts, employee compensation earned not yet paid, and services paid for but not yet delivered. It is also advised to obtain a list of all employees and their current salaries, employee benefits enrollment, and backlog of employee review documentation.

Revenue channels.

When purchasing an Optometry practice, it's important for Buyers to understand revenue sources, segmented by payor, CPT code, service area or department, and patient-type, especially when the practice for sale receives managed care reimbursements. Conduct a payor audit by requesting appropriate payor reports out of the EHR with reporting as net collections and broken-out by service or product area.

If you intend to be credentialed with the medical insurance and vision care plans currently accepted in the practice, conduct a local managed care audit to ensure those carriers are still continuing to be utilized (and perhaps uncover other plans that would be appropriate to add to the practice upon transfer of ownership.

Legal due diligence

The goal here is simple but absolutely vital to your success: to ensure that the Optometry practice to be purchased is in a good legal standing with all federal and state codes. For best results, work with an experienced attorney and advisory team, they’ll advise you that your legal due diligence should include at least the following:

Bill of sale.

Acquire a list of all assets and liabilities to be included in the sale such that the buyer knows exactly what they are purchasing (do not assume that every asset on the balance sheet will be included in the sale!).

Assets include:

• equipment
• inventories
• property
• trademarks
• real estate

Liabilities include:

• employee benefits and bonuses
• licensing fees
• bank loans
• lawsuits

Akrinos ProTip: Buyer may assume responsibility for other liabilities upon purchase. Although most sales will not include these liabilities it is important to be fully informed of all facets of the practice.

Review legal documents.

It is imperative that the Buyer’s counsel evaluate all legal documents relevant to the practice including articles of incorporation and operating agreements. Additionally, obtain documentation of any ongoing contracts the buyer will assume after the purchase such as marketing service and vendor agreements. Also, if there are associates employed in the practice, the Buyer should understand their employment contracts and be prepared to re-negotiate. Although most (if not all) of these contracts will be replaced with new agreements for the new business entity, full review of legal documents is highly recommended to ensure due diligence.

Real estate agreements.

Understanding the current and future real estate situation of the practice is vital prior to purchasing the practice. The Buyer’s legal due diligence of real estate documents will include review of any commercial lease agreements, purchase agreements, and, if there will be a real estate purchase involved, title & insurance. There are a variety of key components to assess in the lease agreement including general lease terms, options for renewal, renewal rates, and demolition & relocation clauses (which allow the landlord to break or alter your lease!), among others.

Intellectual property.

If the business name will be transferred to the buyer upon the sale of the practice obtaining intellectual property agreements is vital. Buyers will want to ensure that the business name is registered properly with both federal and state agencies. Also, legal documents for any other trademarks associated with the practice that intend to be transferred upon the sale should be obtained and reviewed as part of legal due diligence prior to the purchase.

Practice management due diligence

The purpose of this effort is to address the day-to-day operations of the practice to ensure they meet the expectations of the buyer. Identifying operational issues early will empower the Buyer to make the right decision and identify what needs to be done when they assume ownership. This is also a chance to pinpoint some low hanging fruit in the operation that will allow a new owner to realize growth early in the transition period. Practice management due diligence includes:

Get personal.

Prior to purchasing an Optometry practice, it’s important for every stakeholder to engage in transparent and candid communication throughout the inspection of the office. It’s impossible to overstate the value of this opportunity to investigate a variety of items including:

• the reasons the seller is selling the practice
• the expectations of the seller after the sale
• Does the seller plan to retire or continue patient care?
• At this practice post-acquisition or elsewhere?
• Will this acquisition require a non-compete clause?

This personal visit to the office also provides the Buyer with the opportunity to get a firsthand view of operations, engage with staff, assess the overall physical condition of the office, and inspect all equipment & inventories that will be included in the bill of sale.

Analyze the business.

A key element of the Buyer’s practice management due diligence is analysis of the business to understand the KPIs that deliver the financial performance of the practice. Thanks to modern practice management and EHR systems, this due diligence can uncover powerful insights of the practice that identify key drivers, constraints, and opportunities across the practice. Buyers will want to request the reports from the seller segmenting patients in various ways, including: new versus returning patients, patient type, goods and services provided, demographic reporting, equipment utilization, and more.

The Buyer should be aware that the reports generated by any EHR are predicated on the quality of data that’s been entered over the years. Put more simply: garbage in, garbage out. If some of the reports you’re evaluating through this process don’t pass the smell test, the reason could be that the EHR data isn’t trustworthy and the financial diligence may carry more weight.

Assess operations.

The existing practice’s bandwidth for change will be a key determinant of the rate at which the buyer can implement sustainable change in the practice following the purchase. Obtain the practice procedures manual and interview both the seller and their administrators, or managers, to gain a clear understanding of day-to-day operations. Buyers will want to be sure to evaluate operations inclusive of patient flow, equipment utilization, and personnel requirements.

Inspect equipment and inventory.

Another important piece of practice management due diligence prior to purchasing an Optometry practice is a thorough inspection of equipment and inventory to determine usability and sellability of each. Tour the office one room at a time, accompanied by the itemized list of assets and inventory provided by the seller, assessing each item to ensure it is in good working condition, and inventories or in suitable sellable condition. This is also a great opportunity to understand other arrangements the practice has in place with equipment suppliers and the in-office processes for maintaining equipment and ordering supplies and inventory.

Wrapping Up

Purchasing a practice is one path to practice ownership for modern ODs. Conducting financial, legal, and practice management due diligence will empower the Buyer throughout the purchase process, inform strategy moving forward, and position them for success upon taking over the practice. And then the real fun begins!