The last eight months have brought with them unexpected challenges that have caused practice owners and employees alike to pause for thought about their future.
Some practice owners who have navigated their businesses through unchartered waters, seen revenue decline and been forced to cut back on staff, are now considering shutting up shop.
Employees and locums who had their pay cut, work hours reduced or their jobs terminated altogether, are seeking greater control over their careers.
But does that mean it’s a good time to execute your business succession plan… or indeed, to buy into an established business? And if the answer is yes, what do you need to know?
Whether you’re just starting out in your business or you’re nearing retirement, a business succession plan is something you should commit to paper. That’s because, although ideally you’ll only need to execute it as you head towards retirement, unplanned exits do happen. You may fall ill, hit a financial hurdle, or simply have a change of heart in response to external pressures – like the recent drought, devastating bushfires, the COVID-19 pandemic and declines in superannuation fund valuations.
Rather like an estate plan, your business succession plan should include logistical and financial decisions about who will take over your business in the event of your retirement, death, or disability. By clearly setting all of this out, you’ll minimise the risk of disruption to any business partners, your employees and patients. You’ll also maximise the opportunity to achieve a smooth transition from your business at an optimum price.
your ability to execute any of these choices could be limited by the structure that you employ to set up the business in the first place
According to Mark Corduff, Business Services Manager at ProVision, there are generally four options for practice owners considering their succession:
- Partnership – i.e. bring in a junior or equal partner depending upon your time frame,
- Practice sale – sell the business to another optometrist,
- Retain ownership and employ an optometrist, or
- Close down – the least preferred option for obvious reasons but it could involve merging with another like-minded practitioner.
Importantly, Mr Corduff says this is something to think about before you even take on a practice because “your ability to execute any of these choices could be limited by the structure that you employ to set up the business in the first place, e.g. whether you’re a sole trader, partnership, private company, family trust etc.
“It therefore pays dividends to seek independent financial and legal advice to set up the right structure from day one to avoid costly restructures at day 9,125,” he said.
Chris Beer, CEO at George & Matilda, agrees that long-term planning is essential to achieve the best outcome. His company has acquired over 90 successful optometry practices across Australia in the past 3.5 years with principal optometrists contracted to remain on for around five years.
“Having worked with many independent optometrists to help them build their plans for the future, we understand what an important process succession planning can be,” Mr Beer told mivision. “The one thing we hear most often from people is that they wish they had started the process of succession planning sooner. It is tempting to believe that it’s better to wait for the right time to sell, but the people who begin exploring their options early end up much happier with the final outcome.”
In a time of so much uncertainty, Mr Beer encourages people to start conversations early. “We have learnt that failing to plan is planning to fail. Our whole purpose is to support all independent optometrists and we are happy to assist many independents think through their options whether they come onboard with us or not, just as we did through the COVID-19 situation.”
Like George & Matilda, The Optical Company has worked with and acquired many individual practices and groups, where vendors have owned/operated their business for many years and in some cases enter the transition period in their personal succession plan. “It’s important to recognise the legacy established by the vendor across their customer base and brand” said Aaron Kangisser, Head of Retail, The Optical Company. “When helping a practice owner to plan their succession, we aim to maintain open dialogue between all parties, factor in the requirements of all and remain conscious of the practical and emotional considerations,” he added.
There are probably a lot of young optometrists who are working as employees who’ve just been through COVID-19 and … they’re now thinking that they’d rather be in control of their destiny
NAVIGATING THE TIDE
A confluence of events may well be set to trigger practice sales. Many independent optometrists in Australia are currently approaching retirement age, and having been hit by the pressures of drought, bushfires, a roller coaster stockmarket and COVID-19, they may decide to jump early.
Lily Wegrzynowski, Chief Business Development Officer, says despite uncertainty surrounding how long it will take for business to return to normal, there should be buyers on the market over coming months.
“There are probably a lot of young optometrists who are working as employees who’ve just been through COVID-19 and they’ve had their hours reduced or cut altogether and perhaps they’re now thinking that they’d rather be in control of their destiny.
“Similarly over the last five years we have seen an increasing number of optometrists enjoying the flexibility and variety that comes with locum-work, and until COVID-19, they had plenty of engagements. Having seen the other side – having lost their work and had no control over their situation – they too may be looking at the option of owning their own practice. And although it might be tough financially to consider buying or opening a practice, at least they will be in control of their own situation.
“This presents an opportunity for people transitioning to retirement.”
Interestingly, Ms Wegrzynowski believes independent practice owners in the suburbs will be better placed than ever to sell.
“Post-COVID we can expect a more community oriented, ‘buy local’ spirit. We also anticipate more people will spend at least part of their week working from home, which will change the dynamic of communities and encourage even more local sourcing of products and services. This is good news for independents who are typically located in communities rather than in CBDs,” she said.
Philip Rose, National Business Development Manager at Eyecare Plus believes practice owners in regional areas are well placed to sell into the current market.
“Regional practices are once again leading the way back to financial recovery and normality, showing a strong upswing in turnover. Some are even exceeding their planned budgets, which makes them an attractive proposition,” he said.
Buying Quality of Life
A number of Eyecare Plus Members are currently looking closely at their succession plans. In particular their exit strategy options.
Some, like Giorgio Campanella in Victoria, are employing graduate optometrists. For Mr Campanella, this is enabling him to not only improve his work-life balance but also to commence his succession plan, which involves entering into partnership with a young optometrist in the future.
“I have been able to handover patients immediately after initial consultation for optical coherence tomography, visual field testing and dry eye assessments instead of re-booking them for a later date. My graduate optometrist, Kimberly Chee, has more time to give thorough explanations and we have revamped our patient information handouts and dry eye reports. We are also planning to do short informative videos, featuring Kim, to post on Facebook, which will ensure she becomes known by our existing patient base,” said Mr Campanella.
A year on year comparison has shown a strong increase in new patient numbers as well as good growth in turnover. A great result. Of course, there are costs to consider like refurnishing a second consulting room and the graduate salary, however, Mr Campanella looks at the situation as buying quality of life.
PREPARING FOR SALE
We may be tired of hearing about it, but COVID-19 is a factor for consideration when you’re preparing your practice for sale.
As Craig Spiegel, co-founder of Credabl says, first up, you’ll need to stress test your succession plan to ensure recent events relating to COVID-19 don’t impact the assumptions you made when you first put your plan together.
“Consider whether you are able to assure prospective buyers, with confidence, that patients haven’t been lost for good and that any revenue decrease is temporary,” he said adding that it’s more important than ever to ensure your books are normalised.
“Executing your succession plan in response to COVID-19 may not mean you’ve had the time to prepare the books accordingly and this will be detrimental to the sales process. For example, it is common for small businesses to put certain expenses through the business that would probably not be expensed in more corporate settings. Maybe your spouse works in the practice part time and has motor vehicle and phone expenses on the books. These types of expenses can impact the net profit of the business and should be cleaned up,” he said.
“You also need to ensure all financials are up to date – which they should be if you applied for JobKeeper. This will be important to demonstrate to a prospective purchaser what the practice can bill in a 12 month cycle. Being able to identify turnover, expenses and profitability pre and post COVID-19, along with any JobKeeper payments or deferred rent will be important. A prospective buyer will want to know what things look like excluding anomalies – they need a normalised view of the business.”
Ms Wegrzynowski agreed. “It sounds so obvious to say ‘make sure your books are in order’, but it’s amazing to see how many practices, even those that go through a broker, put their businesses on the market without having their last three years of financials ready.
“Your books should be clean, normalised and transparent, right down to how you operated during COVID-19. Sales may have been down, your staff may have been paid by JobKeeper and that’s fine. It is what it is. Setting it all out with transparency will ease the way for discussions and negotiations with potential buyers.”
Preparing the practice premises itself is also key to optimising the sale.
“You should be working harder to build up your practice in your last years than ever before because you want to maximise the opportunity before you sell. And get it looking good – it’s a smart idea to get fresh eyes to come into the practice to advise on how to make it look better for little or no cost. Some practices just look tired – removing faded posters and a good clean may be all that’s required,” Ms Wegrzynowski said.
If you’re leasing your practice premises, you’ll also need to have a good understanding of your contractual obligations before you put your practice on the market.
Steve Nicoll, Director of Retail Leasing Services in Melbourne, advises practice owners to remind themselves of the length of their lease and the options available for re-assigning and renewing it.
“You need to make sure you are aware of the relevant conditions of the Retail Leases Act which states the rights of the purchaser of any business and those of the landlord with regard to approving the reassignment of a lease when a business is sold,” Mr Nicoll explained.
“Previously the assignor (i.e. seller) was responsible until the lease (they had assigned (sold)) expired and if the new operator of the business failed, they had to re-open it, or payout the balance of the lease. The good news is that the Retail Leases Act changed a few years ago and under clause 62 the requirement is that an assignor is no longer liable for any future obligations of the assignee (the buyer) if they have met the criteria in the various sub-clauses of that clause. Seek legal advice to ensure you do exactly what the Act requires in that regard so that you qualify for that clause, and also ensure your purchaser seeks legal advice on the terms of any assignment of lease.”
A Smooth Transition After Over 40 Years
“I had thought about succession planning when we first opened Optical Warehouse, but things changed fairly often and it was only ever in the back of my mind. It was not formalised and with little detail,” Mr Wheeler told mivision. “No external advice was sought as I am independent almost to a fault.”
Preparing his practices for sale involved making them as presentable as possible and ensuring paperwork was clear and easy to follow.
When it came to preparing himself for retirement, Mr Wheeler negotiated part time work for two to three years to ease the way. Having been ‘in charge’ of the business since he was 29, Mr Wheeler quickly felt a sense of relief once the succession plan had been agreed and was underway. “I was very content to pass the business on and to not have to continually come up with good business ideas – it was incredibly relieving mentally.”
Looking back on the experience he says there are some things he would have changed. “Yes, I would have liked to have eliminated all the dumb things I have done… but all in all, my timing was right and transitioning into retirement with The Optical Company went very smoothly.”
THE FLIP-SIDE: BUYING INTO A SUCCESSION PLAN
Every seller needs a buyer and with an older generation of optometrists likely to commence executing their exit plans in the coming months, there will be some exciting opportunities for younger optometrists to secure their future.
According to the experts, regional areas and suburbs are the areas with the greatest potential for growth, however as Ms Wegrzynowski says, that doesn’t mean you should jump in without research.
Post-COVID we can expect a more community oriented, ‘buy local’ spirit… This is good news for independents who are typically located in communities rather than in CBDs
“Evaluate the areas you’re interested in. Walk the streets during the day to see who is about, think about the community’s likely future, do research – don’t just rely on hearsay.
“Once you’ve identified a potential location and practice, look at the businesses/ traders/ professionals in the area. Is it a commuter suburb that is empty of people during the day – and if so what will that mean for business – will you need to (do you want to) work around this by being open outside normal business hours? Other suburbs will be more vibrant day and night, right through the working week.
“Think also about how you can immerse yourself in the community – it’s all well and good to expect people to support you but how do you support the people and businesses around you – even if you don’t live there, there are plenty of ways to get involved through associations, events, supporting community groups, other businesses, schools etc. Communities want to support and engage with authentic local businesses.”
Once you’ve decided on the location and practice you’re looking to buy, Philip Rose says one of the challenges could be arranging finance.
“In uncertain times, the banks are cautious, and now this is even more the case as it has become very difficult to predict the future.
“We are currently helping a couple of our members pass their practices on to new owners. The two options being used are vendor financing and the traditional financing model.
When it comes to negotiating the purchase price of a practice, Mr Rose said this should be based on pre-COVID-19 valuations
“Vendor financing is ideal for younger optometrists as it bypasses the common bank hurdles of sufficient equity and so on. An important aspect of such a model is that there are clear start and end dates set for the ‘buy-in’ to commence and be finalised by.
“The traditional funding model – using a bank – is easiest if the buyer has built up sufficient equity and assets to provide the security the banks will ask for.”
When it comes to negotiating the purchase price of a practice, Mr Rose said this should be based on pre-COVID-19 valuations.
“This assumes that the practice will grow back to its former turnover and profit levels as things move back to a more normal rhythm. To protect both the buyer and the vendor, staggered payment plans or certain hurdle clauses may currently have to be included in any sale contract. Your accountant can guide you through these important steps, as can your association or buying group.”
As well as arranging finance for the purchase, Mr Spiegel at Credabl reminds prospective buyers to ensure they have financial support or finance facilities to support the purchase in the event that practice turnover takes longer to build to pre COVID-19 levels.
“Ensure the books being presented are accurate and correct and check for potential future financial obligations, such as staff entitlements, and lease or loan obligations.
Additionally he said, “To protect your business, ensure a restraint clause is written into the sale contract to prevent the existing owner from setting up in business within five to 10km of the practice for a period of two to five years as this would allow them time to acquire patients.”
TAKING ON A LEASE
If the practice you’re buying is operating out of leased premises, Mr Nicoll at Retail Leasing Services says there are some additional important steps to consider.
“Any new owner should make sure they have a solid lease available with a long lease term, if not, there should be as many options to renew as possible,” he said.
“Make sure the lease occupancy costs (total rent, outgoings, promotions fund and rates) are sustainable for the business and at the same time, research to see what the market rent is for other premises in the same location. This can only be done by ringing around other tenants in the area and seeing what their lease terms are. For example, it would help to know the area of their premises, the length of lease, when their lease commenced, together with the annual rental reviews. It’s also important to understand the timing for any market review and when you’ll need to exercise an option over your lease.
“There are many clauses in a lease that may be in the landlord’s favour and not a lot can be done about that if you are assigning the lease, but it is always good to look at what guarantees are required and also the security deposit and/or bond applicable. Where there are personal guarantees as part of any assignment, try and have them removed by offering a higher bank guarantee or security deposit/bond. This will ensure your personal assets are not on the line should any default occur down the track. If you can’t do this, look at what can be done to protect your personal assets under the lease obligation as the new owner/guarantor of the assigned or renewed lease.”
Where there are personal guarantees as part of any assignment, try and have them removed… This will ensure your personal assets are not on the line
THERE’S NO TIME LIKE NOW
Whether you’re about to sell your practice or about to buy, a business succession plan is a must have. But if you haven’t already got one in place, don’t worry – you’re not alone.
As Mr Corduff says, “Succession planning is rarely considered during the planning stages of starting or entering into a new business, but as with all planning, it should be undertaken right from the outset with the preferred end in mind.
“In our experience, having a well-thought out succession plan, ideally 10 –15 years in advance of your desired exit date, will give you the best chance to maximise the value of your business; achieve a work life balance before you exit; and ensure your business remains independent and thrives beyond your ownership. It will also give you peace of mind that your staff will be well looked after and your patients will be in good clinical hands into the future. Above all it will allow you to transition gracefully into retirement or onto your next adventure.
“The current situation we see ourselves in is a great opportunity to assess where you’re at in your business and what your future goals are with succession planning front of mind. The sooner you plan, the more options you will have available to you.”