Practice Transitions Series

In this series, Review of Optometry takes a close look at the dilemmas, decisions and life changes at each stage of an optometrists careerfrom optometry school to active practice to retirement. In each installment, we talk with optometrists in that career stage, as well as consultants who have
relevant expertise and insight.

Peter G. Shaw-McMinn, O.D., bought an underperforming optometry practice near Riverside, Calif., right out of school, anticipating that it would be a short-term investment. Twenty-eight years later, hes still thereand Sun City Vision Centers is booming.

I love what I do. Ill probably still be trying to see patients when Im on a gurney with an I.V. hooked up, Dr. Shaw-McMinn jokes. Now in his 50s, he can point to optometrists who practiced until they were 75 or even 90 years old, so he figures his own retirement could still be decades away.

Part of why Dr. Shaw-McMinn isnt burned out is that he has always limited his on-the-job hours to 20 or fewer. The remainder of his time he devotes to family, teaching at Southern California School of Optometry, lecturing and writing on practice management, travel and other pursuits.

How did he build two healthy practices with that kind of schedule? With a lot of energy and a little help, obviously. Four other O.D.s work in Dr. Shaw-McMinns practice, sharing overhead expenses but otherwise functioning as independent practitioners. Its a model, he said, that combines the best of group and solo practice, while limiting the disadvantages of each. He usually consults with his independent associates on major equipment purchases, for example, but the final decision is his. 

When hes ready to retire, Dr. Shaw-McMinn hopes hell be able to work out a nice transition for everyone. His daughter, now in her second year of optometry school, will likely succeed him at one of the practices offices; perhaps one or more of his associates will buy him out at the other. And he has an emergency plan, just in case a sudden illness or accident cuts his career short.

Size Offers Flexibility

Another California optometrist, Fred H. Dubick, O.D., MBA, owns three private practices in the Los Angeles area with his wife, Ellen Shuham, O.D. The couple hopes to transition out of practice in the next three to five years.

In California, only an optometrist can own the practice and the owner has to provide patient care at least 50% of the time care is available. That makes it virtually impossible for us to sell our three practices to a single buyer, Dr. Dubick says. Even if a new graduate could afford it, how could they operate within the law? The reality is that well probably have to sell to different buyers. This means the new owners will lose some of the economies of scale Dr. Dubick and Dr. Shuham have enjoyed with a single payroll system, joint purchasing, and a shared optical lab. 

Of course, the nice part about the multi-office practice is that he and his wife can transition out as slowly or as quickly as they like, selling off one or all threeor even taking on a partner, depending on buyers interest and their own needs. Were lucky to have that flexibility. A solo practitioner in a small town isnt going to have as many choices, Dr. Dubick says. He hopes that by the time hes ready to retire, one of his associates will be ready to buy at least part of the practice. But if that doesnt work out, hes prepared to list the practices for sale.

I would imagine that when Im ready to sell, Ill be looking for a clean break. Otherwise, why sell? I enjoy managing the business, says Dr. Dubick, who recently completed his MBA. 

After 27 years in practice, hes still excited, still energized and still investing in the practice with new equipment and cosmetic upgrades. One of the offices was completely renovated just three years ago. With 9% growth last year in revenues, these efforts continue to pay off, and Dr. Dubick envisions that nothing will change as he nears retirement. I think the best time to sell is when the business is growing, so I dont plan to cut back and let the revenues plateau, he says.

And, while hes expecting a nice chunk of change from the sale of three big-city practices, That revenue is just one component in our retirement plan, Dr. Dubick says. It certainly isnt everything. Over the years, weve made other investments and tried to manage them well so that we can retire the way we want.

Dream Bigand Early

For lots of O.D.s, just figuring out what kind of lifestyle they want in retirement is the first challenge.

In my experience, busy professionals can get depressed if they sell their practice and suddenly have nothing to do, says Benjamin A. Tobias, CFP, CPA, of Tobias Financial Advisers, a financial planning firm in Plantation, Fla. Thats one of the reasons he recommends that doctors work a couple days a week for a few years after retirement. He also advises workaholic clients to take an unusual vacation, and spend it doing some soul-searching.

You really need to consider what your expenses and income needs in retirement are going to be, he says. Are you going to travel? Spend every day on the golf course? I have clients with seven-figure portfolios who live frugally and barely draw any money out. On the other hand, I have clients with eight-figure portfolios who have trouble making ends meet because they live such a luxury lifestyle. 

Part of the planning is also figuring out how you want to work during the last years of practice. If youre burned out, make a change, says Dr. Shaw-McMinn. You dont necessarily have to retire immediately. If you really want to cut back to part-time or take a few months off to sail around the world, then youve got to look at ways of restructuring your practice. Bring in a partner or associates or find a way to share the expenseswhatever it takes.

Get Ready Financially

Clearly, when it comes to retirement planning, an early start is ideal. But its not that unusual for busy practitioners to be so focused on paying off loans and growing the business that they neglect to put aside sufficient money for retirement along the way. 

After determining what your spending in retirement is likely to be, the next step is to take a hard look at whether your assets can support that desired lifestyle, says Mr. Tobias. The hardest part of my job is telling someone who wants to retire in five years that he isnt in a financial position to take that step yet, he says.

As retirement nears, O.D.s might want to change or add to their current retirement plans. The good thing is that professionals in their 50s or older can put away significant amounts of money per year into retirement plans, and there are several options for doing this in a way that doesnt commit you to the same level of saving for your employees, Mr. Tobias says.

For most small employers, he recommends SIMPLE plans because they are easy to set up and administer. Practice owners who want to save larger amounts of money might consider profit sharing or defined benefit plans, although these can be more complex to set up and administer. The Self-Employed 401(k) is a good option for an independent doctor with no employees. (See below for a comparison of retirement plan options.)

Retirement Plan Options for Small Business Owners

Max. Ann. Contribution
(Age 50+)
Pros / Cons
SIMPLE $10,000
-Easy to set up and administer
-Small employee match (2% to 3%)
401(k) $15,000
-Designed for larger companies
-Few advantages over SIMPLE plans for small employers
($20,000) / 25% of compensation up to $44,000 ($49,000)
-Combines profit sharing and 401(k) features
-Relatively easy setup
-Allows large contributions
-Not available for businesses with employees
SEP IRA 25% of employee compensation or 20% of self-employed compensation up to $44,000 -Tobias Financial Advisers doesnt  recommend this type of plan
Profit-Sharing Plan $44,000 -More complex
-Set contribution divided among employees (including owner) according to a formula based on percentage of salary
Defined Benefit Plan (Pension) $175,000 -More complex
-May be able to roll practice sale value into pension
-Can put in substantial amounts of income in last few earning years to fund pension and reduce tax liability

Source: Benjamin A. Tobias, Tobias Financial Advisers

Health insurance can be a major issue for anyone who wants to retire before age 65. Younger, healthy retirees may be able to purchase insurance policies for themselves, but anyone with pre-existing conditions may need to be covered as an employee, so that should be considered prior to the sale of a practice. Interestingly, I find that health care professionals often give little thought to their health insurance needs in retirement, Mr. Tobias says. 

Once retirement income is in order, practice owners should also do some advance tax planning with their accountant or other financial professional to discuss the income and estate tax implications of selling the practice. 

Talking to a CPA a few years out from retirement is a must, says Marilee Blackwell, president of Blackwell Consulting in St. Augustine, Fla. In some cases, the seller might want to change the form of business based on the tax ramifications, so you want to allow time for that to happen.

Mr. Tobias agrees. For the seller, the ideal situation is to sell the stock or assets of the corporation so the proceeds of the sale are taxed at the capital gains tax rate of 15% rather than the ordinary federal income tax rate, which can be as high as 35%, plus additional state inclime taxes, he says. However, this isnt necessarily good for the buyer, so how the sale will be structured is an important point for negotiation. 

Time for a Practice Checkup

Once your retirement goals and the means to achieve them are in place, its time to make sure the practice is well-positioned to sell for its full value.

Ms. Blackwell says practice owners should try to get an early appraisal or at least a rough idea of the value of their practice a few years before retiring, in case changes need to be made. Doctors are often surprised to find the true market value is lower than they thought. 

Years ago, doctors were taught to expect their practice to be worth close to 100% of the average gross annual revenues, but very few practices will sell for that much today, she says. A more reliable rule of thumb is 40% to 70% of gross. Since the value is closely tied to the income the buyer can expect to generate from the practice, lower-volume, less profitable practices will command the low end of the range, while busy, high-net practices will tend to be at the upper end. 

Someone who is planning to retire in the near future isnt going to turn a small practice into a large one overnight. Nor can they change external factors that affect the price, such as the demographic trends in the local community. 

However, there are plenty of things sellers can do during their last five years in practice to boost their practices value and attractiveness to buyers. 

First of all, says Ms. Blackwell, Look at practice statistics, like your inventory turnover, staff productivity, revenues per patient, and concentration of managed care risk, to see how they compare to the typical optometric practice, and make improvements where you can. You want to keep your net as high as possible without letting your practice deteriorate. That means that you should continue to make reasonable investments in equipment, staff training and the appearance of the practice during the last few years.

If you want to make improvements to increase the value of the practice, its important to do so several years before you want to sell because potential buyers will want to look back at three to five years of practice records, Ms. Blackwell says. Sudden material changes in revenue and expenses raise a red flag to potential buyers and their creditors, she says. For example, if your cost of goods normally runs about 33% and it drops to 25% during the year of appraisal, buyers and lenders are going to be skeptical about whether its a sustainable reduction.

In the last five years before a sale, doctors should also start preparing regular profit/loss and balance sheets, if they havent already been doing so. Be sure you are reporting all the revenue during that time, says Ms. Blackwell.

Additionally, its time to scale back on creative accounting and limit any personal expenses that have been run through the business. Discretionary spending on owner perks such as an expensive car, home office, travel expenses, and other items that artificially inflate the practices expenses should be eliminated or at least itemized so that potential buyers can evaluate the true cost of doing business.

When and How to Sell

So if youre not quite ready to retire, but definitely getting to that point, when should you actually put the plans in motion?

First of all, its important to do what you can to reduce the risk of the unexpected, such as giving your associates a right of first refusal, Ms. Blackwell says. As you near retirement, dont leave things up in the air, or you risk resorting to a fire sale in the event of unexpected death or disability.

Beyond that, however, she says the length of time it takes to sell the practice depends on local market conditions. In desirable areas, an optometrist might be able to get the practice appraised, find a buyer, negotiate the contract, and close the sale in less than six months. In areas that are less desirable to live in, it can take much longer to find a suitable buyer.

An optometrist who is thinking about retirement really has three options to consider, Ms. Blackwell says. You can sell the practice outright; bring on a partner as a transition to full retirement; or just work until the day you lock the doors and fold the practice. Although the latter option is one that most people would prefer to avoid, Letting the practice value decline over time is acceptable if its a conscious decision and you understand that the practice may be difficult or impossible to sell, she says.

Bringing on an associate a few years before retirement makes the transition easier and more seamless to the patients, Ms. Blackwell says. This strategy allows the younger doctor to learn the ropes so he or she is prepared to eventually run the practice; and it reduces the risk of patient attrition due to the change in ownership. 

The senior doctor also has the option to sell part of the practice to the junior associate, with the remainder to be sold at retirement. However, Ms. Blackwell warns that  it may be more difficult for the buyer to get financing for the first half of the practice. Therefore, the senior doctor may have to agree to seller financing or work out an earn-in arrangement.

Regardless of how you structure the transition, advance planning always makes it go more smoothly and usually guarantees a higher sale value for the practice.

From what Ive seen, the people who are happiest in retirement are those who controlled the timing of it, Dr. Dubick observes. My goal all along has been to plan ahead so that I can retire when Im ready and do it right.

Next in the series: In December, well wrap up the series with a look at how three optometrists sold their practices and what retirement looks like from their point of view.

Vol. No: 143:11Issue: 11/15/2006