In 2017, I was taken by surprise when I received unsolicited interest from a large retailer to buy my 5-location practice. That was a wakeup call for me since I knew nothing about private equity purchases at the time. With my interest piqued, I took the initiative to learn more about private equity (PE) transactions and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) valuation of practices. Through a series of changes that increased revenue and kept expenses in check, I was able to more than double the EBITDA value of the practice in only two years. Taking the EBITDA multiplier into account, we were able to generate a huge increase in sale price – about 4x the original offer – when I became the first optometrist in Texas to sell my practice, Hill Country Vision Center, to a private equity firm in 2019.
Creating the Plan
I began my quest to increase the value of my practice by looking at top line revenue versus our bottom line and realized that I could make the practice more attractive to PE firms while also increasing the payout I would receive if I sold. Like most ECPs, I was exposed to minimal business education in optometry school. However, I had started paying attention to business metrics and entering data into self-made spreadsheets around 2010. It was clear to me that the path to increased revenue was to improve our KPIs (key performance indicators). With that in mind, I purchased EDGEPro, knowing that this analytics software would improve my ability to look for growth opportunities and effortlessly follow our progress toward KPI improvement in real time.
I also knew that I would need to possess a complete understanding of the P&L (profit and loss statement) of the practice and be able to justify all expenses to potential buyers. I decided to scrutinize each of our expenses and ask myself “Would someone who is buying my practice want to pay for this?” For those expenses that seemed to be unjustifiable, I came up with strategies to reduce or eliminate them.
Working the Process
I knew the changes necessary to bolster the value of my practice required buy-in from my staff, so I implemented an enhanced profit-sharing plan for everyone on the team and opportunities for individuals to earn performance bonuses. I also made sure that each staff member understood how their performance affected the profitability of the practice and, therefore, the profit share everyone received.
I got in the habit of reviewing our business metrics on a daily basis. Our analytics software allowed me to see how our performance compared to other practices and also to our own performance for the same period in the prior year. Based on this, I determined which of our KPIs were ripe for improvement. Each month we would work toward improving a specific KPI of my choosing. We adopted the philosophy of incremental improvements, repeatedly making small changes to achieve interim goals in the drive towards larger achievements. Over time, these added up to big, sustainable gains in productivity. We tracked our progress toward these goals in the EDGEPro software, and used it to make sure we were maintaining that improved performance.
The managers at each location led office meetings every two to three weeks, during which performance on business metrics was shared with staff and discussions around process improvement for the target KPI were held. We created competitions based on KPIs at each location as well, with the winner at each location and the winner company-wide receiving individual bonuses. On a quarterly basis, the entire staff split a profit share equal to 10% of the increase in profit compared to the previous year. My staff began to actively work with me to improve these benchmarks, and pretty soon we had one of the most unified, successful teams in the area, because we were all working together.
Over the 2-year period leading up to the sale of the practice, we worked to improve many different KPIs. Among our biggest wins was increasing our revenue per patient by ($15), largely by decreasing zero dollar frame sales (34% to 27%) and increasing AR percentage (26% to 63%) Continuous tracking of our progress turned out to be a major key to success. In the beginning, I often noticed that the KPI we had just improved a month earlier showed a decline later on when we targeted a new KPI. Just by targeting the same KPI a few times, we were able to sustain process changes that drove improvement in each KPI. Eventually, they became part of our culture and we ultimately performed at a consistently high level on each KPI we had targeted.
Critically, our analytics software also allowed us to see how individuals were performing. This made it easy for us to identify those team members who were underperforming and in need of encouragement. To help build my team members, we’d schedule a meeting with myself or the location manager. Sometimes additional training was needed, and individual goals were set for improvement. This approach almost always resulted in successful remediation. As an example, I remember being surprised at the low percentage of AR sales by one of my best opticians. When I met with her, she said selling AR made her feel like a used car salesman. I asked if she had AR coating on her glasses. Naturally, she did. I asked her if she had ordered it for her family members’ eyewear. Of course, she had. She began to realize that she truly saw value in AR. Simply calling this to her attention caused her to think more about the benefits of AR and present it as a bundled part of her recommended lens for every patient. Her AR percentage skyrocketed.
In addition to improving our revenue per patient, I was also determined to increase our number of examinations. I accomplished this primarily by targeted marketing and building our brand recognition. We used direct advertising, geo-fencing, and social media (Facebook Marketing and Instagram) to attract new patients. Over 2 years, this helped us increase our number of exams by 12.6%.
On the expense side, EDGEPro enabled us to reduce our cost-of-goods-sold percentage by keeping only the best-performing products on our frame boards. The software allowed us to easily determine how much board space was dedicated to each frame line and the turnover for those products. We could then find out which product lines were earning their keep and, more importantly, which specific frames were selling the best. We used that information to negotiate better pricing for a few select frames rather than a discount on an entire product line, which radically changed our profitability in this key area. We were also able to see the effect of changing frame price points in real time, allowing us to confidently make pricing adjustments that gave us the best return on our frame investment.
Staff cost typically runs neck-and-neck with cost of goods sold for the highest expense in nearly all practices. It’s easy for staff expenses to get out of control since the default reaction to problems in many practices is to hire more staff. An interesting dynamic developed in response to the profit-sharing program I had devised: The staff realized that these expenses had a significant effect on profitability and, therefore, on their bonuses. The result was that staff members were motivated to become more efficient, rather than hire additional employees. Because of this, staff cost decreased and accountability became part of staff culture.
Even if You’re Not Trying to Sell Your Business, Run it Like You Are
After 15-20 years in practice, it’s easy to become complacent and develop a “good enough” mentality. However, there are many reasons not to let that happen. First, no matter what stage of practice you’re in or what your exit strategy is, increasing the value of your practice eventually leads to a better future. Also, life can be unpredictable and you never know when you may want or be forced to sell your practice, so it pays to be prepared. What’s more, the changes we made at Hill Country Vision Center improved not only the value of the practice, but also the culture of the practice, and even patient outcomes. Working together toward a common goal improved the camaraderie and motivation among staff members, who became more efficient and hard-working. Even between meetings, they would often call me and ask about performance metrics.
My experience over the past few years has only strengthened my interest in business. In fact, I have enrolled in an MBA program with a concentration in finance. One of the things I’ve come to realize is that optometrists often treat their practice as a form of employment and do not look at it as a business that will generate income and wealth, whether or not they actively participate in the exam room. In companies all over the world, it is the exact opposite. Successful companies search for means to run their business more efficiently and create a better product to generate wealth for investors (i.e. the owner). ECPs who adopt this philosophy will enjoy more freedom, improved financial independence and a better life.
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