Deep Dive Into Financial Due Diligence When Buying an Optometry Practice with Jackson Pace and Kevin Dang, CPAs

Evon is joined by Jackson Pace, CPA and Kevin Dang, CPA of Refractional CFO to take a deep dive into financial due diligence when buying a practice. 

They talk about:

• The goal of financial due diligence and the list of what to review
• The documentation and information needed and the process of how to review them
• What factors they've seen that indicate the health of a practice
• What sellers should focus on to improve and preserve the value of their practice
• And more! 

Have questions on anything discussed or want to have topics or questions featured on the show? Send Evon an email at podcast@optometrywealth.com.

Check out www.optometrywealth.com to get to know more about Evon, his financial planning firm Optometry Wealth Advisors, and how he helps optometrists nationwide. From there, you can schedule a short Intro call to share what's on your mind and learn how Evon helps ODs master their cash flow and debt, build their net worth, and plan purposefully around their money and their practices. 

Resources mentioned on this episode:

• Refractional CFO
• The Optometry Money Podcast Ep 71: Viewing the Health of Your Practice Through the Eyes of a CFO with Jackson Pace, CPA

The Optometry Money Podcast is dedicated to helping optometrists make better decisions around their money, careers, and practices. The show is hosted by Evon Mendrin, CFP®, CSLP®, owner of Optometry Wealth Advisors, a financial planning firm just for optometrists nationwide.

Transcript

Evon: 0:04

Hey, everybody. Welcome back to The Optometry Money Podcast, where I help an OD's all over the country make better and better decisions around their money, their careers, and their practices. I am your host, Evon Mendrin, Certified Financial Planner(TM) practitioner. And owner of Optometry Wealth Advisors, an independent financial planning firm, just for optometrists nationwide. And thank you so much for listening. On today's episode, I am joined by Jackson Pace and Kevin Dang CPAs at Refractional CFO. And we take a deep dive into what financial due diligence looks like when buying an optometry practice. Uh, buying or selling a practice is one of the biggest transactions you might go through in your lifetime. And we talk about the goals of financial due diligence, what you're looking for, and the list of different things you want to review and check the health of in the practice. We talk about the different documentation and information together, what the process looks like to go through it all. We talk about some of the biggest factors they've seen that shows the health of a practice and some of the things sellers should work on way before deciding to sell to both grow and preserve the value of the practice and make it sale ready. If you have any questions, reach out to me at podcast@OptometryWealth.Com or to Jackson and Kevin over at Refraction CFO. You can check out any of the links and resources mentioned in the episode in the show notes, which you can find at the education hub on my website. Www.OptometryWealth.Com. And while you're there, you can check out all the other resources and episodes we've put together And if you're interested in learning more about working together with Optometry Wealth Advisors, you can schedule a no commitment introductory call. We can talk about what's on your mind financially and how I help OD's all over the country navigate those same financial decisions. And without further ado here is my conversation with Jackson Pace and Kevin Dang. And welcome back to The Optometry Money Podcast. I am your host, Evon Mendrin, and I am excited to, welcome back to the podcast, Jackson Pace, and welcome for the first time to the, podcast, Kevin Dang, both CPAs of Refraction CFO. Jackson, Kevin, thank you so much for coming on.

Kevin: 2:22

Thank you for having.

Jackson: 2:23

Thanks, Evon.

Evon: 2:24

Yeah, and I, I'm excited to dive into financial due diligence for practice purchases and, I personally have seen just a continuing steady stream of practices available for sale. in my conversations with associate doctors, not all, but, many want to desire to get into practice ownership in some way, shape or form. And so there's, there's definitely seems to be more and more continued opportunities to purchase into practices if that's a direction an optometrist wants to take their career. And, I continue to see questions about what to make of practice, financials, how to really look at a business and know that it's worth buying or at least worth buying at the valuation. So continue to see questions around that. And before we hit record, the three of us were talking about you two seeing the same thing, continued opportunities to, to buy with more practices for sale, continued opportunities to purchase for those that want to. So I have heard the practice due diligence described in sort of three layers. There's the financial due diligence, the legal due diligence, and then the practice management or operational due diligence. And today I really wanna focus in on that, on the anatomy of financial due diligence. Knowing the work that both of you do and the expertise you have, not only in just financial management in, in tax planning for Optometry practices. But now in doing this work, with optometrists and taking them through that financial due diligence. So, I'm excited to dive in. And the first question is, is really more of a general one, and that's when going through financial due diligence, like what is that, generally speaking, what are you looking for when going through financial due diligence? What are you trying to accomplish? What's the general goal?

Kevin: 4:09

Yeah, sure. So financial due diligence is, a comprehensive examination and analysis all the aspect of the business, right? And look at the financials so that we can get a clue about the overall health, risk, and potential opportunity that business can provide. So. There are a few area that is really important when we look at, a business and going through the financial due diligence. The first area is, you know, the revenue analysis. We need to look in depth to the historical revenue and, try to distinguish the revenue stream such as eye exam, optical sale, additional services if there is, and we figure out the revenue trend and seasonality pattern. And then the next area that we focus on is the cost structure. Every single business have different cost structure, and so we want to see, the operating expense, stock cost, cost of goods sold. we want to analyze the cost management strategy and pot potential area for improvement. We want to look at areas such as inventory management, if the business have inventory, and how fast, how good the inventory being sold. we want to look at the capital expenditure, right? We want to look at the areas such as, equipment, technology, any capital expenditure that there is, and then. One area that is particularly important is the cash flow and working capital, right? we want to see consistencies of cash flow, liquidity. The, the business can turn out the, the nice, steady cash flow for its owners or can support the operation and future, growth. And we also look at, debt liability. we, from the financial, we want to, you know, assess the outstanding, outstanding debts and liability and any loans or line of credit. we want to take a look at the interest rate, if it's reasonable. Is there a need for refinancing? Any potential refinancing opportunity. And then we look at the profitability metrics, right? Such as gross margin, operating margin or net profit. We also compare this metric against the industry to see if this business is performing well, against its peers in the industry, right? with, with the same size and, same location or, same type of services that the, the business is providing. and then we want to answer, take a look at, you know, the what, what, financial reporting system and internal control that a business have, to safeguard the asset and, to create the, the, the safety in, in the operation of the business. And finally we want to take a look at the financial projection. We want to reveal the practice, financial pro projection and, and see the future growth, in, in that business. So those are the area that we are looking for when we do the financial due diligence. Okay.

Jackson: 7:26

If I can add, so, one of my favorite author authors, Dr. Steven Covey, so he wrote the book, seven Habits of Highly Effective People. One of his most salient quotes is,"begin with the end in mind". And, and I love that quote because really as a, as applying it to financial due diligence. You know, Kevin had a, had a awesome list. I mean, really walk through in depth, you know, everything that we have to get to at some point in the practice. For the listeners, you know, whether you are an associate working at a practice, maybe you are an established practice owner, you know, at, at any spectrum in, in, in, you know, in the realm of practice ownership. hopefully you, you kind of look at this as a mindset because I, I guarantee at some point or another, you, you, you're probably gonna be approached with somebody either wanting to purchase your practice or maybe you as an associate wanting to purchase somebody else's practice. And so, you know, these, these are important things to start thinking about, for the practice owners. and kind of going back to that mind, shift of, financial due diligence. Everything that Kevin just listed, these are the things that you need to be working on in your practice now. So for example, you know, one of them was inventory management. You know, hopefully you have an inventory management system and you have an idea of, of the inventory that's, that's in your practice and you are effectively managing it. you know, some of the other ones, you know, profitability metrics, even the revenue analysis, you know, this is kind of a common one that I, I see on, on the backend as we. You'll look at different financials from different practices is we have a practice in, obviously, you know, there's not a lot of different revenue line items in a practice. but for the most part, we have clinic revenue. We have, if we have an optical, we have revenue from selling glasses, from selling contact lenses, maybe different accessories, you know, the more detailed we can start to get in tracking all these different things in the practice. Then we, we actually get to the point of needing to do the financial due diligence. A lot of that work's already done, for us. And so, you know, in that regard, when Kevin and I jump into these types of things, it, it, it just, for you guys, it makes it a lot more affordable for you to hire us and, and, and help you with this because you, you've already been doing the work, you know, versus us having to come in there and really creating everything so that we can get to the point where we can actually do the financial due diligence, in a practice.

Evon: 9:51

Interesting. The, the things that are beneficial for a buyer to look for or that are beneficial down the road for a seller to work on when ready to sell are also beneficial today in your business if you're working on these things all along the way. It's, it's much more beneficial for your business to have worked on all of these things and been organized about it as you're going along, rather than this big concentrated effort to improve the business. Like right as you wanna sell it. Yeah.

Kevin: 10:18

that's

Jackson: 10:18

And I'll even add one more thing. A lot of times we, we hear the grumblings of, you know, for example, we have an accounting system, you know, QuickBooks Online is a popular one, and, and sometimes there's this pain of, oh, we gotta pay like a monthly fee for this accounting software. And, and you know, we, we just need to get numbers in it. think of it as an investment. I mean, this, this is the financial history, the financial records of your practice. So the more you can invest in that, just like any asset, it, it's going to grow in value. And so, you know, maybe you are a practice owner in thinking about maybe selling. I mean, the, the better you can keep your records on a day-to-day basis, whether that's for a year, two years, 10 years. Again, that's going to become an asset of the practice so that when somebody wants to hop in and really analyze and see what your practice can do, and maybe the potential that's there, the more information they have. I mean, it just, the more valuable your practice will be, at, at that point.

Evon: 11:13

Yeah. And in terms of going back to your, starting with the end in mind, sort of the, the high level goals that eventually you want to end up at once you've gone through this process, to me it seems like it, it comes down to, do your, do the financials support that this is a business you want to buy and own. Do the financials support, the valuation or the price that is potentially that you're gonna pay. And, and does the practice provide enough revenue and cashflow to cover expenses, and debt service and support your lifestyle? Does that seem like a good way to sort of summarize like the end goal of, of what, what trying to solve for? we're trying to solve for?

Kevin: 11:54

Really good. Yeah. Even, even for the buyer too, I may add, you know, some, some people buy into a business and basically they have to put in sweat equity. So it's like they're buy into a job. Some people don't like that. They want to buy into something that is more turnkey, right? And they willing to pay a little bit premium for that. And so, you know, the question is, okay, if I, I can make two,$300,000. Let's say we make$300,000 in a practice, how much time for, for me as a business owner to go in, right? if it's a$300,000 and I, I, I'm spending 60, 70 hours a, a week working in the practice and cover all areas, then the, perhaps the business may not be as attractive as a practice that I come in, I make the same money, but work way less if there is a formal system. And infrastructure in place to support that, right, to support that level of revenue. Well, the end cash flow may be the same, right? The business owner might bring in the same amount of money, but obviously the quality of life and time and effort putting into the business is really different. So yeah.

Evon: 13:07

On that note, and another question that comes to mind in hearing you say that is, do you. You know, there may be theoretically, an opportunity for higher return on your time and investment to purchase a fixer-upper practice. I guess we can say at a lower price or valuation, than buying into something that's much more established at a much higher price. but you also mentioned, well, okay, there's a lot more sweat equity that can go into it, and perhaps you may be earning the same amount anyways with, with more work and effort. Like, do you see often that that relationship can hold true? Does it just depend on each opportunity? What are, what are your thoughts on that?

Kevin: 13:46

Yeah, I, I see in both way. you know, for, for sweat equity, I. For, for a business is that I can feel like I can go in and I can turn it around or grow it way fast and I can get it cheap because the process is not as good. And yes, I, I may coming in, you know, but, if there is limited amount of opportunity for growth or I may have to really work myself and it's that, that's a risk, right. No, you know, no business owner want to come in and walk in business for 60, 70 hours forever. That would be really hard, especially most of the doctors may have family and children to take care of. and so, yeah, I can see it, but way I, I can see, doctors coming in and buy a business that maybe not so well established and get is a really good deal. And going in and put more time. you can see that a lot of re almost approaching retirement age. doctor, they don't want to work so much in the business. And so for someone who is younger to coming in and build up the practice, there's a lot of opportunity for growth right there.

Jackson: 14:58

Yeah. If I can add one thing, Evon, you know, one, one thing that Kevin said there is risk. You know, we're, whether you're selling a practice, buying a practice. Probably more so on, on the buying the practice. There's risk that's involved. And so therein, that's why we're doing financial and, and you kind of layered it in the, you know, the three components of due diligence, but especially in the financial component of the due diligence, really what we're trying to accomplish is how can we mitigate that risk. So, you know, if somebody just throws out this, this insane practice valuation. Who knows, maybe it's worth that, maybe it's not. On the financial side, what we're going to come in and do is really look at it from a financial standpoint and say, can this practice support this valuation? And if anything, kind of dissect how, how we arrived at that valuation. And, you know, at the end of the day, just like any investment, you, you gotta do your homework. And so, you know, this is, this is just part of doing that homework. Getting to understand, the practice was kind of like going on a date. You know, you, you're gonna, you're gonna get to know the practice, you know, before you actually buy it. And, which should hopefully provide some comfort and assurance that once you actually do sign on that dotted line and, and you become, you know, the owner of, of this new practice, that there are some assurities in, in, things that will this hopefully make it turn out to be the, the scenario and the situation you want it to be.

Evon: 16:28

And, and so then what is the, what information needs to be gathered for you to do this appropriately? What are some of the things and, and information and documents that you need to gather to make sure that you can do an appropriate amount of financial due diligence here?

Kevin: 16:46

Yeah, so at the, at the very least you need, you know, financial, state due religion, you need financial statement, right? Is is in the word, but for, for the at least you want three years of the financial statement. So that mean income statement, balance sheet, And then cash flow statement if available. So when I say three years that the previous three years and answer, you want the year to date financial statement of the current year also and then, all the document that you need to gather the, the tax returns. So, you want to gather the business tax return, for the past three years. So. for on the business level that would have, the income tax return at the federal and the state, and then payroll tax, property tax, sale tax, et cetera, if available. And then, because most of the, practice that are for sale, most of them are, are structured as passed through entity like S corporation or partnership. then we want, the individual return for the, for the owners for the past three years.

Evon: 17:59

Mm.

Kevin: 18:00

And then, we take a look at, the detail aging report for account receivable. and then we go through any overdue invoices, the account payable records, so that we can detect any expenses and the trend in the expenses. we also take a look at. You know, contract and agreement. Do they agree to the revenue stream? we want to take a, a look at, you know, patient and revenue data and try to, to map out the patient demographic and analysis of the patient base, the breakdown of revenue source. And then, we answer, you know, from the financial, we take a look at, the asset listing, to see. The equipment and the technology that are being invested. we also take a look at the inventory and so take a look at the inventory listing and see how, how good or how fast the inventory being managed. So those are the information that we gathering for financial due diligence. So, lots of, lots of information, is, is in the word due diligence, right? So, so the more that you do your homework. The better the result would be you're trying to put together the, the puzzle right? To form a big picture, to see the risk of the deal of the business that you're trying to walk into.

Evon: 19:24

Hmm.

Jackson: 19:25

Yeah. Yeah, so, and if you are counting, so I mean that, that's almost 15 different documents that that span multiple years. So, so you can see there, there's a lot of, and again, the more information we can get, the more information, that can be, you know, input to the analysis, as part of the financial due diligence, the better. And you know, typically when we present this initial list of all these, you know, kind of the documents request list, here's the laundry list of everything that we need. from the, the current practice owner to be able to perform this due diligence. A lot of times they'll get back to us and they'll say, they're just some of these reports we don't have, you know? And so, I guarantee you, you, you know, we're probably gonna run into some degree of, you know, hey, there's this information we want to get, we can't get it. And, you know, just know that that's it. It's not a deal breaker. Again, these, sometimes we have a really good practice, you know, really good doctor. Really good, you know, patient base and, you know, phenomenal staff. And it could be just the most amazing practice in the world. But on the record keeping side, maybe there, it was either just really lax or non-existent or maybe there just wasn't the need, for that practice owner to maintain all these different documents as part of running their practice. And so, you know, it doesn't mean that it's a bad practice, it just means that for a potential buyer. It's going to be a little bit harder to, to complete that due diligence in, in the analysis. And so kind of going back to, you know, the practice owners and, and looking at this, record keeping is really building an asset in your practice. You know, it just, again, when, when you get to the point where potentially you wanna sell, if you can just have this list of documents that you're maintaining on an annual basis to where at any given point you can hand those over to, you know, any, any professional for them to do their, financial due diligence. It just makes the process that much, seamless and, and, and, and, and smoother. So.

Evon: 21:22

Yeah, it, it's, it's interesting to think about, as a seller, you are marketing your business for sale, right? So the easier you can make that process for a potential buyer, the, the better the buyer's going to feel, the more confident the buyer's gonna feel about going into that transaction with you. So the more you can keep this clean record keeping, not only is it beneficial for your business in the meantime and making it a smoother, running more pro, potentially more profitable business, better cash flowing business while you own it. But it may make it easier and just a smoother process to, to sell it, to get into a transaction with someone. I. Knowing you've got all these things sort of organized. And, and Jackson, as you mentioned, like for the seller's perspective, it does say, I feel like it does say something about the business where, where there's, if there's too many of these records that are not there, or not up to date or just, you know, sort of a mess, it does certainly say something about the business, but it definitely increases your uncertainty about what to pay for the business or whether it's something you'd want to own. You know, it it, but it may not be a deal breaker. As you said. It may be a perfectly fine business, but it seems to increase the uncertainty when going through that.

Kevin: 22:30

Yeah. So, you know, a, a deal is a, is about the, the coming and a two party, right? And so it's about a compromise. And these financial due diligence is like the bridge to connect to side of the party. And so, you know, the more record that you have. the easier that two party can come together and agree on a, a target price, right?

Evon: 22:56

Hey everybody. One thing Kevin mentioned after recording was to take a look at whether the practice you're thinking of buying received the employee retention credit, especially if you're doing a stock purchase. Uh, with so many of the businesses that took the ERC, not actually meeting full eligibility, you'll want to request any clear documentation you'd need to show that it's legitimate and to avoid any lingering liability from that. And to make sure that any PPP loans were officially forgiven. So some additional COVID related things to keep in mind as you're doing your due diligence and with that back to the episode. And in terms of the process you go through when looking at all these different things, like what, is there a certain flow or a certain way you look at this big detailed list of information? Not that you know, I don't know that listeners themselves would go through it on their own, but at least so they have a feel for when they're hiring someone like you. Like how are you going through that? bit by bit. What does that look like?

Kevin: 23:57

Yeah. So, you know, when, when we take a look at the, financial record, we trying to put the big picture together. And so just like the area that we try to focus on, like revenue, cost structure, cash flow, all those things, we trying to connect them together, right? Just like we take a look at the financial and we compare it to the tax return. if there is a mismatch, then we'll ask the question. So our job right there is to paint a big picture for, either the buyer or the seller. And then we, our job right there is to ask the question. So we either represent, most of the time we represent the buyer. and then for example, like let's say we represent the buyer, and the buyer hire us to do the due diligence. Then we take a look. We know our job is to gather all the document, we create a list of document. We send it to the other party and asking the seller, accountant or lawyer to provide all this document. Then we come back and we take a look at all of them trying to paint the picture, and then we come back to the. Buy and, and say, Hey, this is what we find out. This is the big picture, this is the perceived risk. And then our job is there to raise the question to the other party, right? If I take a look at the tax return and I see the financial just not matching to the tax return, I would ask the question. So, for every single business owner out there, Every single year, their biggest motivation is how do we reduce the tax? And the best way to do that is to reduce the profit. But when, at the time that they want to sell the business, then the question is how we increase the profit, right? and the cash flow as high as possible. So that is a conflict right there that we are trying to detect. you know, at the time of filing tax, then the, they want the profit to be as low as possible, but when selling, we want to make it attractive so we may inflate the profit. So our, our job is, you know, file any discrepancy and communicate with the buyer about the risk.

Evon: 26:02

Mm-Hmm.

Jackson: 26:02

Yeah. You know, and another, another thing that we're trying to do is, you know, we've all, we've all heard the term EBITDA and, and, and I know a lot of times we look at practice valuations as multiples of EBITDA and, Really what we're doing is more real world. so when we look at financial statements, we're trying to adjust them as close to what actual is possible. And, and, and the reason I say that is, you know, take for example, we have a, a, a practice doing very well, you know, single owner, you know, maybe that that owner is also the only, doctor, you know, at the practice or, you know, maybe they have an associate working with them as well. You know, a lot of times in that scenario. There's a lot of expenses that run through the practice that are maybe in excess of, of what, you know, maybe the person that's going to purchase the practice will run through there and, and, and nothing, you know, typically fraudulent. It's, you know, for example. Doctors are required to complete, continuing education every year. And so we all know there's, there's really fun destinations to go to, to have, you know, to take that CE and, and maybe there's, you know, kind of the DIY you can just sit at your office and, and, and complete the CE and so. You know, maybe the, the owner is, they have a, a, just a, a larger CE budget. and so all those numbers are going to, you'll start to flow through, through the practice financials. And so when we come in, we really have to really dissect and start to understand, you know, what are some of those expenses that might be in excess of, you know, maybe the, the. New doctor coming in that's gonna take over things. And so as we go through, we can really start to adjust and, and that's where we really get to understand exactly what the practice can do from a cashflow standpoint.

Evon: 27:46

Yeah, you're, so you're trying to get down to the core, like what is the true operating net income? What are, what is the, the true revenue minus true operating expenses that the new buyer's going to experience or, I've heard it said like discretionary net income of the practice. And you see enough profit and loss or income statements of a practice and you start to see personal expenses creep in there too, right? Like Costco expenses or meals between husband and wife that both work in the practice. You start to see these personal expenses creep in or, you know, owners distributions that are distributed a lot through the practice that are really personal expenses. So how do you, how do you see the, the owner's compensation and personal expenses? Through a business, you know, do you reconcile by pulling those out, are those adjustments to, to the work that you're doing, is that simply a part of boiling it down to the true operating net income of the practice? Like how do you view the owner's income and the owner's, you know, personal expenses that might be coming through the practice?

Jackson: 28:49

Yeah, no, a lot of it's just conversations. I mean, like Kevin said, when we see the financials and we start going through these, you know, we, we have, you know, kind of the checklist and the system that we use to go through those. At some point we have to, you know, just have conversations around the different line items on the profit and loss statement. And so, you know, if there's a line item for meals, a line item for travel, you know, they're gonna stand out. I mean, we've seen enough financials to know, you know, what number looks a little too high and, and if that number looks a little too high, then we're gonna have a conversation around that. And, and typically in those conversations, again, as, as long as we have some good record keeping and we can drill down into that. We can start to identify things that, that maybe are a little more in excess of what you know, it, it potentially could be if somebody else was to come in there and, and purchase the practice. So.

Kevin: 29:41

Yeah. Yeah. And, to sum up, it's just like I said, our job is to ask question. And, for any buyer out there, you, you're not going through, you know, CPA, for advising, then you need to ask a lot of question. due religion is all about gathering data. makes sense out of the data, painting the big picture, and if you see any discrepancy is you have to ask question. That's, you know, the more question, the more information that you have, the better decision that you can make. you know, the, the party that have more information will be better off in the negotiation process, right? So as a seller, they would have. Obviously the seller would have the most information at their disposal, and then the buyer will not. So that's why the buyer have to do extra staff to verify the information and to ask the question.

Evon: 30:36

That's such a good point. And, you know, these numbers, these financial, this financial information tells the story of the business. But it tells the story of, it's the results of what's happening in the business. And you should be asking good questions. Kevin, like you said, you should be asking why things are the way that they are. Why is revenue trending a certain direction? Why is certain parts of revenue coming from optical versus, patient fees versus something else? Why is, why are certain expenses going a certain direction? there you should be asking a lot of good questions and this blends together with the others. Layers of due diligence. It blends together with, you are looking at the operations and practice management of the practice.'cause then you can actually see why the financials are ending up the way they are. By talking with staff and looking at the processes and procedures and all those different kinds of things. It, it all starts with looking through this and asking the right questions and asking enough of them. And

Kevin: 31:32

Right.

Evon: 31:33

in going through that, how much. How important is the projection of future potential and something we talked about a little bit earlier with, with like, fixer upper practices, like how much do you weigh the potential for changes that a buyer would want to make in the practice versus what the practice has already done when going through this?

Kevin: 32:02

Yeah. So, you know, the, the, the future, projection is important that when we take a look at those detail, we need to be reasonable, right? is the assumption being made in the projection reasonable, and then. With the, with the fixer upper, practice, like you said, there are risk and do we perceive all the risk associated with that? Right. We may be blindsided, or maybe having, overly, you know, overly confident in ourself that we can turn things around. So we have to be really cautious about, buying those practice. Right. And then. we, of course we, every single business out there, we want growth, right? We want, to buy a business and make it bigger and be more profitable. And so always that's area that can be improved. And through the financial due diligence, we will be able to, you know, take a look and see, okay, why are these lie items so high? Is there anything that I can do about it? You know, do. We have the, resources to go in and, and making changes. we can, you know, in, in a lot of practices, the, some of the doctor going in and they say, okay, they're not working at the full capacity. we can hire one or two more doctor coming in. Certainly we will improve the revenue significantly. And so, you know, with, with Ansel, take a look at what, what would be the cost of, hiring additional help. So buying a practice that you put the money in, you buy the practice, but you also have to, project the operating, the, the operating cost, right? A lot of PR practice owner that they're going in and they buy a practice and they, now, let's say we have to buy this practice for like a million dollar, then at least you have to purchase yourself a boat at 1 million to keep the business going for a few months so that the cash flow can come in and cover all the expenses and. You know, so you don't just look at the buying price, you also look at the cash that you need to inject to the business to, make that growth happen, right? So.

Jackson: 34:23

Yeah. And, and one thing I'll add, you know, when you go in and you're looking at a practice and, and potentially purchasing a practice and, you know, maybe there's somebody listening to the podcast right now that's actually maybe going through the financial due diligence themself. You know, my, my biggest piece of advice would be. Purchase the practice based off of what it's doing as of today. You know, as of now, you know, when we look at things we're, we're gonna go back three years, we're gonna see how it was operating in the past. a lot of times with talking with the practice owner, you know, they're gonna say, Hey, if you brought in another associate, you could do, you know, maybe double or triple or, you know, here's all these potential scenarios that could, you know, happen in the future based off of maybe some adjustments that they. Wanted to make, but just never did. but as far as purchasing the practice, you really gotta look and see, you know, how are they operating, you know, at least within the last 12 months, you know, if not last, you know, few months to really get a, a good, solid understanding of where things are now. And, you know, for the most part, I mean, banks, private equity, you know, when they look at a practice, they, they never land or they never purchase based off of what it can potentially do. It, it's always based off of what it's doing now, because that's, for the most part, that's, that's somewhat guaranteed. I mean, it's, it's real, it's happening in, in the moment, so,

Evon: 35:43

Yeah. If a, if a seller's going to sell you potential, then why aren't the sellers implementing the things that could potentially happen? Right.

Jackson: 35:51

exactly.

Kevin: 35:52

right.

Evon: 35:52

Yeah, so from a, from the standpoint of the price and valuation and your expectations, look at that valuation and price through what it's doing now, but for your own business planning purposes and just wondering if it's a business you'd wanna buy. That's really where the projections are, are important of taking a look to see what changes you can make. and what risks might come up, as Kevin said, what risks might come up, how much uncertainty is there around it, and trying to put reasonable projections, you know, not, not too, not too rosy In the projections. And as you go through this, what are some of the biggest factors that you would say that tell you whether a practice is financially healthy or unhealthy in a, in a, in a purchase or sale?

Jackson: 36:40

you know, there's, we talked a lot about the financial metrics. You know, a lot of times we have to look at the non-financial metrics as well, and so when we look at a practice, the numbers are important, but also what's important is everything else that you're buying along with the practice. So, I. But we wanna look at the equipment. Is it in good operating condition? We, we want to, if, if possible, some way to, to ask the staff, is this a good, you know, is this a good place to work there? You know, do you have good processes? are you treated fairly? I mean, the, a lot of times the receptionist sitting at the front desk, they're gonna tell you way more about the practice and than you can ever find elsewhere, just because they hear the conversations, they know what's going on. And, and they're gonna give you a really good understanding of, of kind of the, the non-financial health of the practice. the other thing is the patient base. I mean, who is this practice serving? You know, what are the, what are the demographics of the patients? Is it, you know, are they, is it kind of spread out? Is it, you know, are they, are they all older patients? Are they all younger patients? Is it, you know, is it a patient base you even wanna serve? You know, maybe somebody. Doesn't have a lot of experience in medical and, and if they're looking at a practice that's, you know, all with a patient base of, of a, of an older patient base, then, you know, maybe it is just not a good fit. so, so you're looking at some of those, types of things as well. kind of going back to the staffing, you know, what is the staff used to as far as benefits? you know, what motivates them, what demotivates them, understanding, that side of it. And also just the reputation in the community. You know, there's, is the, you know, has this practice been around for a while? You know, is it, is it a very well known name? Is it, or maybe it's a brand new practice that, you know, nobody quite knows about it yet, but they, they do have patients and so you, you definitely wanna look and see, You know, what the, kind of the reputation and branding of the practice is. And then, you know, part of it, and I guess this falls under the umbrella of the, the financial due diligence is, you know, what's the competition? Are they. They may be looking at selling the practice because there's been three or four other practices that have opened up in the area and now their margins just aren't quite where they, were. Or, or maybe is it the opposite? I mean, maybe our, our practices around the area, you know, closing down. And so now all the patients are coming to kind of the last practice standing and, and maybe that's why they're wanting to sell is because all of a sudden their numbers have gone, you know, sky high because they've got this huge influx. Of different patients. So, and maybe the last one I'll kind of throw in there and then, you know, Kevin, if, if you've got something you wanna add as well is where is the office or the, the actual practice located, the, the real estate, you know, is, are, are you potentially buying the real estate along with the practice? Is it potentially two separate transactions? Is, does the, does the the current doctor like, own the building or. you know, and if so, what does the lease look like in this, in the current building? And if it's a long-term lease, hopefully it's a space that, that you want to be in long term. If it, and if it's a, you know, short-term lease, just know that you're gonna potentially run into, on the lease side, you know, maybe you're paying four or 5,000 bucks a month in rent and the lease is due, in a year and in what's fair market space for that, or fair market value for that space. Now, could your lease. Your rent expense possibly double within the matter of of a couple months, so.

Evon: 40:09

Cool. And Kevin, what, what are your thoughts?

Kevin: 40:11

you know, on the financial side, I think, all the area, the financial side important, but, the most important for me is cash flow. I want to see a really consistent, track of cash flow and, you know, it can support you as the buyer that going in and buy practice. And also remember that most of the buyer, finance the, the, the purchase. And so, the sale may have a certain amount of a level of cash flow, but you also have to have the factor in that you come in to buy a practice and you're gonna have to take out a loan so you have an, you know, extra expense on the loan, payment and interest. And then, so you may not be familiar with the practice. And so, you know, some, some area of revenue can, may be lost if, some client, you know, are really loyal and they come to the practice be because of the previous owner, the ability to retain the staff, right. I. perhaps take a look and see, okay, are the staff happy getting paid? with the, the previous level, most of the time when the buyer coming in and buyer the practice to retain the staff, they have to raise the salary. you know, the the biggest struggle, in the industry right now in the healthcare industry is retaining the staff. Right? Where are they getting paid? Good? Do they have. adequate benefit, retirement plan. And if the previous owner doesn't have that and you want to implement those, area to make the staff happy to retain them, then you know, those would be extra cost. That is, you know, the, the, the old financials never factor those thing in, but you have to factor those in so that would, affect the cash flow in the future for you.

Evon: 42:08

Yeah. It's, it's not just revenue. It's not just profit, it's, it's cash flow. What, what is the flow of cash into the practice and, and out of it. And, you both gave perfect, a perfect blend of financial and non-financial things to, to think about and, and the, the cost of people in, in a practice is substantial. I mean, it's. in, in any practice, it, it takes a substantial investment in people relative to the other expenses to drive every dollar of revenue. And I've heard it described that in a transition, in a practice transition, either a sale or a purchase, the cost of, of, of the team, of the staff is especially tricky and especially important because, what you just mentioned, Kevin, is that, you need to make sure you can keep the team there. And in order to do that, you do need to make sure they're adequately compensated for the work and there's appropriate benefits and things like that. So you may need to look at whether they are appropriately. compensated. And on the other hand, if, if compensation's too high or if there's too many long-term staff members that are, you know, you know, have been there for a while, or if benefits are too rich, they're more difficult to bring back relative to stuff like cost of goods sold and inventory. so the, the cost of the team is a, seems like a really important. a really important part of the business and the happiness of the team and the, the way that the team works together in a practice seems like such an important part of what makes a business successful. and something to keep an eye on when you're, when you're, looking to purchase one. From a, a seller's perspective. One last question for you from a seller's perspective, is there anything you as a seller should be looking at improving? As you are preparing for, for selling your practice, we've talked a lot from the seller's perspective, from the, I'm sorry, from the buyer's perspective, but from the seller's perspective. Are there any really important key parts that you wanna make sure you're looking at in order to, to sell your practice?

Jackson: 44:06

Yeah, I can, I can maybe take one. And then Kevin. so if I had to pick just one, it, it'd really be, you know, as, as we've looked at a lot of different practices, the ones that I, that I see having the most success, I. Are the ones that are most efficient and, and they're really the most efficient with their staff, which means they're doing an insane amount of volume and work, but with a very small staff. And sometimes I just have to scratch my head'cause it's, you know, sometimes I'll look at a practice. And what they're doing with their staff compared to a practice, you know, that maybe has a, a, a staff size, you know, almost double what theirs is. It's, it's almost on the, on the net income side. But, you know, it's pretty com, you know, comfortable if not even better. And so I, I think from the seller's perspective, you really have to take a hard look at your operations and your flow. Really understanding, you know, what just makes things happen and happen quickly and happen efficiently, right? From, you know, you know, the patient walking in, in the door, checking in, you know, going back, having their exam, you know, doing all the testing and you know, leaving the office, you know, going to the checkout desk, maybe going through the optical, whatever processes you can do, and fine tune to just make that as streamlined as efficient as possible. Then really what it translates it to is, is you can have staff and maybe pay them a little bit more to keep them happy and motivated and and excited to come to work every day and, and happy staff, and they're gonna be efficient staff and they're, and they're gonna do, you know, a great job for you. Versus if you have a staff that's maybe too large, you know, then it's, it's hard to maybe pay them all a fair wage. And so you're just gonna have a lot of, you know, maybe some of'em are just gonna be good because that's their nature and, and they wanna come to work and work hard. But, you know, sometimes what you end up with is, you know, a lot of staff that's just inefficient and they're just showing up, clocking in, you know, doing the, the job at hand, but really maybe not figuring out ways to improve and, and make the practice better. So that'd probably be my, my number one thing.

Kevin: 46:15

and, and from me, just one word that I think every single seller need to pay attention to is planning. Succession planning, right, time is on your side. As a seller, you have all the time on the earth to make the practice so valuable and attractive to the buyer. And so when people come to us and say that. They want to sell the business. We, we always hope that they have a strong team in place, that they plan ahead. You know, if you want to sell you, you should think ahead two, three years. make everything really good and attractive financially. you know, the, the system is there, like Jackson say. And so it's all about planning. You know, time is on the side of the seller way more than the buyer.

Evon: 47:03

Got it. Yeah. And, and making these improvements while you're not planning to sell, while you own the practice and are enjoying the benefits of owning it because the, the more you can improve the business now, make sure there's accurate bookkeeping and accounting and, and financial records and all these different things that we talked about, the more valuable your business will be if something came up unexpectedly and you need to sell. But the less stress and work you have to do on the tail end as you plan to exit and, knowing you, you've done the best you can along the way to preserve the value of your business. And. this has been fantastic. I, I appreciate both of your time and this is a, a huge transaction. I mean, this is a, a, a huge transaction that optometrists are, are going through, whether it's their first practice that they're purchasing or selling, or I've got clients that are looking to buy second locations and, and buy other practices from doctors. So wherever you stand, I mean, this is an important transaction. Fortunately, you don't have to go through it yourselves. Listeners. You have great professionals like Jackson and Kevin here to, to help walk you through it. And where can people find and follow and learn more about what both of you're doing?

Jackson: 48:13

Yeah, so probably the easiest way is our website, fractionalcfo.com. we've made it super easy. If you go on there, there's a big button, if, if you want to book a call, we call it a discovery call, but really it's a just a quick, easy way for you to go there. Click on it, it takes you right to our calendar. You can schedule 15 minutes and, and speak with myself, or Kevin and. We're CPAs, we're not salespeople. We're, we're bad at the sales part. but we, we love talking to doctors and, you know, if, if there's a, an issue in your practice or a problem that we can help you solve, I mean, that's why we're in business is we provide services to hopefully make your life a little bit easier. and, you know, especially in the, in the realm of the financial due diligence, you know, we can, we can definitely help you out there. So, again, super simple. You click on it, you schedule a time, and then all of a sudden you, you get a phone call from us. So, that, that's probably the, the easiest place to find us. And, and another thing we'll do Evon is, is, you know, we've put together, a pretty good comprehensive guide. You know, Kevin's put a lot of work into it as well, so. as we get that finalized and and finished, we can get you a copy, that you can include for, the listeners to go and access as well.

Evon: 49:23

Awesome. That would be great. And yeah, we'll put all of your contact information again in the show notes and whenever you have that guide available, I'll add that to the show notes as well. So listeners, you can find that. in, in the show notes. And again, appreciate both of your time. This was a, a lot of fun to talk through and for the listener, appreciate your time and attention listening today will catch you on the next episode. In the meantime, take care.