Intro to Optometry Practice Valuations with Erich Mattei

On today's episode. I have a very fun conversation with Erich Mattei of Akrinos about practice valuations. And we provide sort of an introduction to, uh, optometry practice valuations. Erich talks to us about his experience and what goes into a practice valuation, he talks about three general approaches to practicing businesses and where Optometry fits into that. And Erich talks about some of the room for improvement in practice valuations and how they, they can be done better.

And some of the things he's seen around valuations that act as roadblocks of the successful transition of independent optometry practices from current owner to the next generation of owners. So this was a fun topic. I really enjoyed it. Hopefully we'll have Erich on again for sort of a part two of this conversation.

If you have any questions, of course, reach out to me at E V O N at Optometry Wealth dot com and of course, if you have any questions or suggestions about future episode topics, feel free to reach out. I will throw all of the links and resources and Erich's contact information in the show notes, which you can find that the education hub at my website, www dot Optometry Wealth dot com. Forward slash education.

And while they're there, of course, feel free to schedule a no commitment introductory call. We can talk about whatever's on your mind financially, and all about how we serve optometrist practice owners and non-practice owners alike, nationwide. Without further ado. Here is my fun conversation with Erich Mattei Welcome back to the Optometry Money podcast. And on today's episode, I am excited to welcome back, uh, Mr. Erich Mattei of Akrinos. Erich, thank you so much for coming back on.

How are you doing?

Your team at Akrinos does a lot of work with practice transitions, buying, selling practices, cold starting practices, and valuations tend to be a part of that. So just talk to us a little bit about your. Your background and your work on the valuation side for, for an optometry practice,

And when you drill down and you look at how many of those own practices. We've come to realize, oh wow, we're still in the midst of seeing a whole lot of practice transition, uh, and at the same time that we're seeing all this interest in doctors wanting to get out, we are seeing this renewed interest in doctors wanting to get into ownership, um, and Evon, that's actually, as a matter of fact, how we came to getting into working with valuations and transitions, right?

So, um, as many folks have come to know us and Acrinos, and a lot of my, uh, my talks and my articles, a lot of it centers around, uh, Cold Start, right? We have the Cold Start Corner, we have amazing programs like the Practice Launchpad, our business foundations, our You know, I mean, everyone loves the business foundations, the performance we do and business plans and geospatial analyses.

So how we came in to get into the valuation work is that, look, the way we look at getting into practice ownership is from a standpoint of, okay, you're a doctor who's going to be going to a bank and borrowing a lot of money, more than you've ever borrowed in your life, to start a business. So that's how we came into getting involved in transition work is because a lot of these doctors who are looking to cold starting, it's like, Hey, should I, the first question is, Karina, should I cold start?

Or should I go and make an offer on that fixer upper on the other side of town? So it was through that that we came to very organically, um, connecting with more and more doctors. who were presented with opportunities to purchase a practice. So, as it were, and as you know, Evon, you know, I do come from a, well, a finance background and, uh, in the MBA work. And as you know, um, continue to do more and more on the valuation front.

Uh, recently made some big investments in Acrinos, in the market leading software and, and the data sets, which, uh, really empowers us, positions us to. presents some amazing value to our clients with the work we can do.

But what it all really ties back to, again, to answer your question of how we got into this, it all started with working with emerging practice owners who are ready to get into ownership and realizing that if we really are going to take an objective approach to that phase of their career, we must be positioned to understand and navigate valuations and transitions just as proficiently as we can with a cold start journey.

So, uh, in so doing, it's amazing because we're also coming to, um, be able to assess financials, um, oftentimes valuations, valuations that are performed by CPAs and advisors all across the country. And it's really interesting from our viewpoint.

In working with the emerging practice owner to kind of start to see some of the, well, quite frankly, some of the systematic things that are occurring, Evon, that I think we're going to jump into in our conversation here that I, that I think in my professional opinion is perhaps holding the industry back in seeing this mass transition of independents to independents.

And then Erich, you're seeing on your side, this growing interest in practice ownership from that next generation of buyers and owners. And the price that's paid to transition the business is an important part of that, obviously, and an important part of the decision of what you have either purchasing a practice or simply cold starting one of your own. So the, the valuation, that price, the fair market value, is an important part of that.

Separate from the transition, just a step back from a transition standpoint, just sort of in general, when should a practice owner see their business as something that has a value to be looked at and thought about? Like at what point of practice ownership should that be on their minds?

You can totally do it. Anybody, anybody that wants to do it, Evon, I'm going to go on the record here. Anyone who wants to get into practice ownership can. It doesn't mean that everyone's, everyone's experience getting there is going to be the exact same. But if you really want to do it, There's a lot of, there's a lot of, uh, there are a lot of advocates, uh, and resources available to you bring that dream to reality.

But, uh, but getting back to it, to answer your question, um, I'll answer your question with the question, Evon, before I answer, when do you think at what stage should someone come to understanding the value of that business? Because if the business is an asset in one's overall portfolio. Right there, elbow to elbow with retirement assets, non qualified accounts, perhaps a real estate portfolio.

If that practice is an asset, at what stage of the game should you understand and know the value of that asset?

It's going to give you cash flow through the earnings of the business, and it's also going to be an asset that appreciates. Hopefully, if going as expected, it's going to appreciate in value. The sooner you do that, I think the sooner you have a more... I think it's a more beneficial, healthy mindset around what it is you own. Like you mentioned, Erich, you, you don't have a job. You didn't purchase your way into a more stressful job. You bought an asset.

And although you work in that asset as an employee separately, you, you can take that hat off, put on the shareholder or LLC member hat, the owner's hat and look at it from that perspective. Now, the interesting thing though, Erich, is that when does the value start to become more of a reality because, for example, like if you're cold starting a practice, there's not much earnings that, you know, it's a, it's a really drive a value off.

You're really looking at the stuff, the assets of the practice, maybe the equity that's there in the practice. So at what point do you start to say, okay, this is sort of a reliable valuation that you can really see and make some assumptions off of?

Most practices, I mean, you're really humming, humming along, a lot, a lot of practices that are making it by that 10 year mark, you're kind of, you're kind of cruising along here, um, so with that big debt removed, now is when you've got this, you know, got, got this thing really, really kind of, uh, put in a position that you can Really better zero in on what that goodwill is, right?

Really, truly understand those excess earnings, um, because prior to that, when you have, when you still carry that significant debt, again, it's, it's gonna, it's gonna mess with things with your numbers. Um, but by the same token, you could also look at other, other benchmark thresholds, uh, and a novel benchmark threshold would just be that million dollar gross. So there are practices that are hitting a million dollar gross. You know, by year three, by year five, right?

Um, sometimes even sooner than that. Um, that's very rare though, by the way, everyone, please. That is, that is the exception, not the rule. But, um, I would say those are kind of the two, the two points, Evon, right? So one, when you hit that million dollar of gross revenue, right? And then number two, definitely when you've paid off that loan. Whether you cold started or whether it was a practice you had purchased when you've paid off that loan.

Hey, get plugged into understanding the value of that asset. Evon, so how often, right, so in the work that you do, um, you know, Optometry Wealth Advisors, you guys work with, with clients across the spectrum of their careers. Um, but if there's one thing they all have in common, they all probably have diversified portfolios, certainly some more diversified than others.

So I mean, how often are folks checking, you know, if they have real estate, how often are they looking at values of the property? If they have brokerage account, qualified retirement funds, how often are you, you checking the value of your assets?

Others are very excited about the daily ups and downs of their accounts and have to sort of bring them backwards. So,

And by the way, Evon, now, now is where it will kind of come to, come to valuation from a different angle and that is just the established practice, you know, um, had the pleasure of, of, of having lunch with a good friend of mine during academy recently. And he's a, he's a doctor, you know, uh, 10, 12 years in, he's A really exciting time for him, looking to build a building, right, these huge milestones in his practice and, uh, and we're having this exact conversation, right?

And it was in the context of the conversation, the aha, and just as I think before we went live and I shared it with you, Evon, like it's something, it's, it's never been a part of the decision making of the practice and yet. The business. Any business, right? You could be in the screen printing business, doing hats with logos and commercial merchandising, right? Or an optometry practice. You grow the value of the business. How do you grow the value of the business?

You maximize the the profitability, right? So we must have that valuation. I would argue that. And particularly, if we want independent healthcare to remain independent, we need to better understand the values of these practices at real time, because that's also, that's when you know, I love, one of the favorite calls that we love, can I say we get a favorite call? We love hearing from everybody, no matter what these cool business needs are, right?

Because it's, again, the work that we do, it's, it's all this business stuff that's typically, it's, It's the core fundamentals and structure of the business that unfortunately is sometimes an afterthought, right? You know, um, but as it were, one of our favorite things to, to, to have conversations with folks about is, hey, I've got this associate in my practice. When is the right time for me to talk about partnership? It starts with understanding the value of the practice. It, it really does.

And if, if we think, and I'll invite those, those listeners, those listeners out there that are in private practice, maybe you own a practice and you've got the associate or maybe you're the associate and you're ready to get into ownership and broach that conversation. Y'all, this is how, this is how we, we have these private practices grow and thrive. And have forces like private equity and health care not be able to, not be able to compete.

Because it's a matter of that, starting that path to ownership, to legacy ownership earlier in the practice life cycle. When you look at the numbers of this stuff over time, everyone wins and everyone wins big. It's really, it's really far out, far out thinking. But as it were, we can even think of... Well, look, Evon, even decisions like, I'm sure you guys probably have, you know, clients with well diversified portfolios buying the property to build the building to put their office on.

And then to figure out, what do I want on that property? Do I want standalone optometry? Do I want to make a strip where it's me and a couple of tenants? You know, all of this stuff plays into big financial decisions. The value of that practice. How are we going to know how much to invest in the practice if we don't know what kind of ROI that practice is generating? Like we don't understand that value and the growth appreciation of the value over time.

And that mindset shift, when you think about, okay, I own an asset and my actions within that asset impact its valuation. And when you, you and I were talking about before, before recording is when you're making decisions in the business, like purchasing equipment, like expanding, like doing other things, then you can think about it. Not only in terms of how does it impact the cash flow and profit, but in reality. How does that impact the evaluation?

Um, and you mentioned thinking about this in sort of in real time as you're owning it. The, you know, a big difference between a public market, like a publicly traded stock market, is that there's thousands of market participants buying and selling these, uh, these shares of businesses throughout the day. And you can, you can see how that can lead to a fair market value as the, as the day goes on. With a private practice, you don't have that.

It's, it's mostly based on what one willing buyer and one willing seller is going to come to agreement to. So when you think about a valuation, like what What goes into a valuation? What are the factors in an optometry practice that go into what the valuation ultimately comes out to?

And as it were, there's a few different ways you can go about it. We're going to keep this kind of high level here, okay? So at a high level, you can kind of think... Everything falls into like three general approaches. There's going to be the, the asset based approach, which tends to look more at the, the assets of the business. So think where that would impact, say, capital intensive businesses.

Take like, um, You know, take one of those big commercial contractors that gets government contracts to do the streets, right? It's a very capital intensive business. So think of how, like, asset valuation models would impact those compared to other, say, more service oriented businesses, okay? So you've got asset based approaches, favor more assets, and then obviously, uh, a value around goodwill. Then you've got income based approaches.

And the income based approach is to look at the profitability of the business. So this is where, and this really plays into a lot of this dialogue that we've been having here today regarding, at least a portion of our dialogue here today, regarding when the business, um, when the business is an asset, how profitable is it? So your income based approaches are looking purely at that, right?

Um, and, and determining, weighing that profitability versus where that investment dollar could go elsewhere and perhaps have a more profitable outcome, right? Then the third area is the market based approach. And that's predominantly around comps and And kind of these other economic trends.

So this is where, you know, say what's going on, uh, in your given market, uh, competitive market as far as sales or other optometry practices in that, in that area, but also other things just regarding like overall trends in that market. Is this a, you know, a booming kind of growth economy or is it kind of, you know, perhaps in a market or in a community that Maybe it's not in, uh, in thriving economic times, if you will.

So once again, at a high level, you have the asset based approach, which looks at the, at the assets, the physical assets of the business, plus goodwill, then you've got the income based approach. And that's really all about like, Hey, how profitable is this? In other words. How good is this optometry practice at being a profitable optometry practice, right? And then the third is the market based approach.

And that's more based, again, on the comps, as well as some of that, some of that local, local market data.

Ultimately, the, the sales price is going to be whatever that buyer and seller agree on in their negotiations, so how closely does a, a typical practice sale price, follow with that valuation, and secondly, how do banks look at that valuation when deciding whether and how much to lend for, for that, uh, purchase?

Now that Evon, if we think back to you, some of what we've discussed prior to going live regarding, you know, some of these systemic things that I, that I think. It's high time we really strive for change here, um, in the industry. I think some of that needs to come to the forefront. And by the way, what, what is that for viewers out there that might be wondering like, uh, Erich, what are you talking about here?

It, it really kind of ties back to the fact that we've got all these practices for sale. And we got a lot of people that want to get into ownership and we've got folks that are going at times to try to purchase a practice and the financials of the practice don't even back up the numbers of what a valuation is trying to illustrate.

So where I'm going with this is that I think we're in a phase now where we, and when I say we, I mean we as professionals that provide these valuations, I think these valuations are coming to be overvalued.

We're still seeing the bubble from a lot of that big private equity surge a few years back, and I think that bubble has led to the comps are still higher, but also, Evon, I think the bubble has impacted a mindset shift, a mindset shift amongst those that are looking to sell, hey, maybe I'll, maybe I'll get the sale like my optometry school buddy got. Realizing that it's only, it's the diamond in the rough. That's one in a hundred, right? And that ship has kind of sailed.

Who knows what the next ship is going to be to come along. But right now, I think the comps are still propped up. And it's also kind of pervaded the narrative. And it's the narrative around what doctors would, would want and wish for. Right.

But number two, I think it also, from the standpoint of, of the brokerage model, which is the conventional model of practice transitions, you know, there, there are white papers in the business journals that make some arguments that the brokerage model has very much, um, has very much, um, held back a lot of business transition because of just the way that system works.

So, um, So, you know, like I said, this all ties back to what really prompted all this was, again, Akrinos working with emerging practice owners, looking to cold start. And then we found ourselves also seeing these valuations, seeing these financials, connecting with more and more bankers as well. And that leads to the second piece of your question. And that is the role of the banks.

That's also prompted a lot of this kind of, kind of this thinking that we're becoming proponents of and we're encouraging others to do, right? We need to help these practices transition. And we need to be bold about the steps we're going to take to do that. Um, because the fact is, as far as getting financing through banks, they do have their own lending requirements. And, um, I mean, getting into preparing financials, and this is totally on the seller. This is totally on the seller.

So, to, to, to audience out there who perhaps you do own a practice, and you're looking to sell in the next few years, be sure you're getting the financials of your practice good and clean, so that banks are going to be willing to underwrite your buyer. And if you're an associate in a practice looking to get into ownership and starting to have those conversations with the seller, We want to be sure that the seller's financials are good and clean so that banks can approve them.

Because yes, again, banks do have their lending requirements. Um, and they're kind of all over the map. It's really exciting to see and refreshing to see the degree to which a lot of banks want to get involved in this. Because private practice optometry is where it's at.

It really, you know, folks thought that private equity coming on the scene a few years ago was like, The death knell and the, you know, people think that managed care, vision plans and the supply chain is the death knell for private practice. Um, the future is incredibly bright for private practice. And from a transition standpoint, I think it's an exciting time to dial in on more realistic value of the modern practices to see more of these transitions occur.

And the valuations themselves are using higher multiples based on comps and the, the higher sales prices from private equities. So, and. It sounds like the practice financials may not be supporting such high valuations, or at least on the lender side, it sounds like the lenders are not willing or hesitant to lend based on such high valuations. Is that what you're seeing?

Perhaps part of this message also goes to other parties out there that are in this world of doing valuations. Perhaps it's time for all of us to step up. Um, but also getting back to like the brokerage model. In the brokerage model alone, 10 percent of a commission to a broker. What if we lived in a world where that wasn't the case? Well, now we see, wow, you get it back to something else that you mentioned, like the valuation kind of sets, like, like it's an estimate, but there's still a range.

I mean, there is swing where we could perhaps go live in a separate conversation and I could give with you the list of Five key things that a seller could demand a premium for, but then also five key things that a buyer could demand a discount for. You know, that, that's where, that's where you start to get into some of the negotiation stuff. But I do believe a lot of this is going to start with, um, we need to rethink valuation.

Um, I love getting the opportunity to connect and meet with folks like you, Evon, and, and many professionals across the industry that are bringing this to the forefront of the conversation, right? Because it's truly, it's an amazing time for private practice optometry with the growing public health need for vision medical eye care, the expansion of scope of care, of optometry. I mean, again, an incredible time to get into practice ownership.

And, um, I'm excited for the work that we get to do at Akrinos and to be a part of other, um, programs such as this, uh, such as this to help get the, get the word out.

I will throw all of the links and resources we talk about in this episode, in the show notes, and we will catch you on the next episode, in the meantime. Everybody take care.