The Optometry Money Podcast Ep. 160: How to Maximize Your Optometry Practice Value Before You Sell with Erich Mattei

Evon: [00:00:00] Hey everybody. Welcome back to the Optometry Money Podcast, where we’re helping ODs 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™ practitioner, and owner of Optometry Wealth Advisors, an independent financial planning firm just for optometrists nationwide.

And thank you so much for listening. Really appreciate your time and your attention today. On today’s episode, we are gonna dive into how optometry practice owners can plan five to 10 years away from a practice exit to maximize and maintain the value of the practice. And for that, I’m joined by Erich Mattei of Akrinos, who does a ton of work around practice transitions, as well as practice valuation work.

Erich’s been on the podcast several times. We’re gonna dive into different aspects of the business that owners should look at improving as we are preparing and leading up to the sale and exit of the practice.

Whether you’re someone [00:01:00] who’s thinking about that five to 10 years away, or maybe you’re a buyer thinking about that yourself, I think you’re gonna get a lot out of this episode. I’ll put all of Erich’s contact information and all the resources we mentioned here in the episode in the show notes, including that resource Erich talks about at the end of the episode, which you can find in the app you’re using to listen to the podcast or at the education hub of our website, www.optometrywealth.com.

And of course, reach out to me if you have any questions — podcast@optometrywealth.com. And if you’d like someone to help you plan around the financial aspects of exiting your practice and planning for retirement and financial independence, reach out. You can use the link in the show notes to schedule a no-commitment introductory call. We can talk about all that’s on your mind financially, and we can share how we help ODs all over the country navigate those same decisions and more. And without further ado, here is my conversation with Erich Mattei.

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Start of the Interview with Erich Mattei of Akrinos

Evon: [00:02:00] Welcome back to the Optometry Money Podcast. I am your host, Evon Mendrin. I am excited to be joined once again by friend of the podcast, friend of the show — are we there yet, Erich? Mr. Erich Mattei. Glad to have you back on.

Erich: I would say so, Evon. Absolutely. And it is a pleasure and privilege to join you here on this episode of the Optometry Money Podcast.

Evon: Perfect. I want to dive into a topic — or set of questions — that I’m finding more and more in my conversations with clients, both current clients and new clients as they’re coming in to work with our firm, and that’s planning for the eventual exit out of their practice. We are usually talking through this in the context of planning for retirement preparation — we are modeling out different scenarios, [00:03:00] we’re talking to them about how they might want to exit their practice, who they might want to transition to, modeling out different values of the business, modeling out different structures of that. And inevitably, as we go through that conversation, the questions come up: what do we do inside of our business to either improve the value of the business as we get closer to that point, or to not lower the value of the business as we get closer to that point?

And so all of these things, Erich, are right up your alley — in your consulting work, in your valuation work, all of the work you do around practice transitions. I couldn’t think of anyone better to have this conversation with.

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What Basic Factors Go Into the Valuation for an Optometry Practice?

Evon: I just want to start with the first question to sort of lay the groundwork a little bit. When you think about the value of a practice or any business, what are the basic inputs of that value? What information needs to be used to determine what a fair price of a practice should be?

Erich: Yeah, Evon, that is an excellent question, and I think a question that as an industry we need to all be really tuned into. [00:04:00] Private equity having come into the eyecare space about 10 years ago has definitely disrupted the transition marketplace. But what’s interesting is that as we’ve seen this significant decline in the prevalence of these private equity deals since they hit their peak in 2021, we’re realizing now we’re having to — I don’t wanna say reteach the industry on proper valuation methods — but clearly there’s a big difference between valuing a business at fair market value versus valuing a business based on some multiple of an earnings basis measure that some outside investor, namely private equity, is gonna slap on a practice.

Again, for all of these reasons, I think this is really important right now that we unpack this. So to kick this off, it’s vitally important that everyone understand what are we looking to accomplish in deriving a fair market value? Fair market value, by definition, would be the price that [00:05:00] — in this case a business — would change hands between a willing, able buyer and a willing, able seller acting on their own accord and keeping the transaction at arm’s length. All of this technical jargon to say: fair market value is the price that works based on how the business is cash flowing. And that is emphatically the big distinguishing feature between a private sale — which we’re continuing to see accelerate as far as doctors entering private sale — versus a private equity sale, which we’re seeing continuing to be on the decline.

So it’s really important that everybody out there understand: first and foremost, fair market value is really how we need to be looking at these businesses. How are they cash flowing in such a way [00:06:00] that a willing, able buyer can come in, secure financing, purchase from the seller, and — based on how the business performs — that buyer can pay themselves a living wage as a doctor and have sufficient funds remaining to cover the debt?

And Evon, I gotta tell you, there are a lot of things we could have hours upon hours of episodes weaving in and out and talking about — add-backs, all these little intricacies — but at the end of the day, [00:07:00] this is all extremely basic math concepts. And perhaps in the course of this episode I’ll help more doctors understand that a little bit more. But really the first key piece I want everybody to understand and tie back to is that it’s gotta be about cash flowing.

Evon: Yep.

Erich: And that’s what we’re gonna spend this episode talking about — helping doctors better understand how to evaluate these businesses based on cash flow, and specifically for our sellers out there, what can you do to preserve, if not increase, your value as you’re eyeing your exit in the next few years?

Evon: And so theoretically, the value of any business — including an optometry practice — is the future cash flow that you’re gonna earn, adjusted by the reliability or unreliability of that future cash flow coming in. And it does seem to matter who is buying that practice, right? If it’s between two willing buyers, [00:08:00] it does sound like it matters who those two willing buyers are. Obviously the selling doctor is one party — it does seem to matter who’s on the other side of that in terms of what that fair price might be between those two parties.

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How Can Optometry Practice Owners Plan to Improve the Value of Their Practice Before Exiting?

Evon: Let’s start with just a single doctor practice — no associate doctors, right? So single owner, single doctor. As they are preparing — let’s say 10 to five years away from planning to exit — what should they be looking at in terms of business improvements, financially and operations-wise? What should they be looking at improving or changing that will have the highest impact on that price later on?

Erich: Yeah, that is a really great question, and it’s very much a loaded question, [00:09:00] because believe it or not, it’s gonna vary by the doctor. Imagine this: imagine two single owner practices in virtually identical markets grossing the same. But this is where we start to get into differences. There are two key pieces I would like everyone to really focus on. If we’re putting ourselves in the shoes of one of these two sellers — what can I do? I’m five to 10 years out, what can I do? There are two things that matter: profitability and capital expenditure.

Evon: Okay.

Erich: So when we talk profitability, this is what I was referencing earlier when we were talking about fair market value and how we construct a fair market value on a business — it’s based on how these things are cash flowing. We use a process typically known as capitalization of earnings, but that’s one of only a few different methods that are used, and the right one needs to be selected based on the merits of the project and the objectives.

If we’re looking at these two single owner practices, we’re talking profitability and capital expenditure. So let’s think of all of those things that impact profitability. [00:10:00] Remember: profit — we have revenue dollars coming in, we have expense dollars flowing out, and what’s left over is profit. Then we take that profit and add back whatever wages we paid ourselves as a doctor. Now we’ve got this optometric net. We’ll have to make a little adjustment for an associate, but nonetheless, we come to understand the true profitability of the business for a single owner-operator business.

So what are the things that are gonna impact profit? Revenue, right? If we have the same expense setup and ratios, and our revenue increases, that’s gonna result in an increase in profit. By the same token, what if revenues remain stagnant? Can we grow profitability? We can — but how do you grow profitability when revenues are stagnant? We need to find ways to lower expenses. So if we’re looking at what to do to drive profit, we’ve got [00:11:00] revenue growth and expense reduction. Low-hanging fruit on the expense reduction side — I would imagine our listeners out there are familiar with the concepts of benchmarks and expense benchmarks. And as a matter of fact, Evon, I think I may have joined the show in a prior episode where we talked about expense benchmarks.

Evon: I believe so.

Erich: Huge opportunity for anyone eyeing an exit in the next five to 10 years. Dare I say, if you’re only a few years into ownership and you’re not looking to exit for the next 30 years — roll your sleeves up and let’s see what we can do to fix your benchmarks.

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How to Analyze The Expenses in Your Optometry Practice to Prepare for Exit

Erich: So we look across your different expense categories. You’re gonna have cost of goods sold — what is this? These are the costs you’re paying for any items that are selling through your practice: frames, ophthalmic lenses, lab costs, contact lenses. [00:12:00] If you are a member of an alliance buy group, you definitely wanna include those fees in COGS as alliance fees, because that’s gonna paint a more realistic picture of exactly what’s going on with the COGS. But we have COGS — cost of goods sold. Next up is gonna be occupancy. Think here: anything that goes into the physical space — rent, repairs and maintenance, utilities. Then we jump into non-doctor payroll. Who’s that gonna be? Everyone on payroll who’s not a doctor. And lastly is gonna be general overhead.

For all intents and purposes, Evon, when you’re looking at practices, there are different benchmarks depending on how big the practice is. So without going into the granular details of the differing benchmarks, generically speaking: [00:13:00] for COGS, we’re looking for 25 to 30%. For occupancy, we’re looking at 6 to 9%. Non-doctor payroll, about 18 to 24%. And lastly, general overhead being 3 to 5% of operating expenses.

So all of this to say: if you’re five to 10 years out and your COGS are at 33%, there is money on the table. Get those COGS not only below 30% — see how close you can get them down to 25%. Opportunity cost reductions in COGS go straight to the bottom line, straight to the profit.

Next up is gonna be occupancy. Occupancy is an interesting one because — how easy is it just to go in and renegotiate a lease midterm? [00:14:00] Depends on who you ask. By the way, there are some commercial realtors out there that do amazing jobs of negotiating leases. But for all intents and purposes, in many cases going in and adjusting occupancy expense is off the table. So when we look at adjusting the occupancy expense, it’s not so much a matter of reducing that expense — maybe we can, depending on where we are in the terms of the lease and if we’ve got a commercial realtor in our market that really has the chops. But for all intents and purposes, occupancy is one of those levers you can’t easily move like COGS.

So when we look at occupancy — how do we move that expense benchmark? We gotta grow the revenue.

Evon: I was just gonna say that.

Erich: Shining a light: if we’re seeing occupancy is 12%, I would argue that means this location has the [00:15:00] ability to generate more revenue. We gotta figure out how to do that.

Evon: That makes perfect sense. Cost of goods sold being a typically variable cost that’s going to change based on gross revenues and patient activity. Occupancy costs being a fixed cost — unless you own your own building and are willing to adjust the rent you’re paying yourself — typically there’s not too much wiggle room, perhaps utilities, janitorial services. But for the most part, occupancy cost is gonna be a fixed cost. But as you mentioned, you can adjust the percentage of revenue that occupancy costs represent by increasing revenue. So that opportunity is really more on the improving-the-revenue side, not necessarily strongly on the improving-the-expense side.

And then you mentioned non-OD staff costs, which may be fixed or partly variable depending on incentive structures. Talk to us about non-OD staff costs.

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How to Determine if Your Optometry Practice is Too Staff-Heavy

Erich: Okay, so when we’re looking at our non-doctor staffing costs, these are gonna range between 18 and 24% of [00:16:00] expenses. So there’s a remarkable opportunity here to get in line. And this is another one of these examples where I’ll say: if we’re looking at our non-doctor payroll costs and we’re up at 28 or 29%, what does this mean? It can mean a number of things. And by the way, one thing it does not mean is — do not go and clean house. So please, if you’re doing a benchmarking analysis of your practice and you’re seeing your non-doctor payroll is above this range, don’t think that Erich was on Evon’s show and said you can just start firing people. No, that’s not what we want.

Evon: But Erich, we magically brought non-OD staff costs from 25% to zero — doesn’t that work?

Erich: Unfortunately, no. [00:17:00] So the way to look at this: if you’re five to 10 years out and you see that your non-doctor payroll is above benchmark — that benchmark limit being 18 to 24% — if it’s above that, I would argue that means this team can produce more.

Now things do get interesting, Evon, when you dig a little bit deeper into that payroll side of things. For example: do we have two staff members that we are paying $15 an hour for performance, where we could alternatively have one staff member that we’re paying $27 an hour who’s able to accomplish everything they can do and do it more efficiently?

What we have discovered in our work here at Akrinos is that many practices finding their non-doctor payroll is out of whack — along with some other HR issues — [00:18:00] are ready to take the step and graduate into more professional support in their office. And if you’re out there and I’m speaking your language and you’re looking around like, “Erich, yeah, my non-doctor payroll is close to 30% and yeah, I have a lot of staff members in my office” — do a quick calculation. Take your gross revenue, your gross collections for the year — maybe look back at 2025 — what were your gross collections? Look at that non-doctor payroll. See what percent of total collections is non-doctor payroll.

But then I’m gonna want you to take it a step further. Take that gross revenue collected and divide it by 200,000. What is this 200,000 figure? It’s generic — and by the way, this is very generic, so if you want to get more granular into your market specifics, I’d love to explore that with you. But generically speaking, [00:19:00] a staff member is gonna generate around $200,000 of revenue for the practice. On the lower end, it’s more like $155,000 to $160,000. On the higher end it may be pushing upwards of $250,000.

What are the differences there? Well, if we take our gross collected revenue and divide it by our headcount of full-time non-doctor employees, and that figure is coming in around $155,000 to $165,000 compared to a practice where it’s coming in more like $235,000 to $245,000 — effectively, in the first practice you’ve got a lot of staff members to achieve your revenue. There’s a lot of inefficiency, probably a lot of redundancy. And I’m willing to bet there are a lot of folks who are amazing people — we’re not saying anything about people as humans — but in the context of the [00:20:00] workplace and executing the responsibilities of the role, there’s opportunity for improvement.

Whereas in that second practice with the same collected revenue but fewer staff members — that means they have a more proficient and more competent staff.

Evon: Got it. Okay.

Erich: That is huge. That is a huge exercise. What do you got, Evon?

Evon: So what it sounds like is that improving the percentage of revenue going towards non-OD staff costs isn’t about clearing house — it’s not necessarily just about removing that investment altogether — but it’s about increasing the efficiency with the staff that you have. And maybe similar to the occupancy costs, it’s about finding ways to use that investment line item on your profit and loss more efficiently.

I really appreciate you providing some [00:21:00] benchmark numbers there to think about in terms of revenue per full-time equivalent staff member. But it does sound like some part of that, at least, is looking at the team as it is and making sure the right people are in the right seats — that you have the proper people in the proper roles doing the right work. Is that right?

Erich: Yeah. And in so doing, Evon — look, if you’re listening to us and you are five to 10 years from exit and you do have a bit of a turnover issue in your office, and you don’t have those rock stars who really know how to run your office, and if everything is still falling on your shoulders — [00:22:00] these are all the signs that we see. And I’ll tell you right now: if I just identified you, I’m willing to bet that you are overstaffed and underpaying.

Evon: Overstaffed and underpaying.

Erich: And your benchmarks are out of whack. And it seems really counterintuitive — “wait, Erich, what do you mean? I’m paying as cheap as I can pay somebody that’s willing to take a job.” Yeah, that’s exactly my point. Because now you’re needing two times the headcount to do that, and everything cascades from there.

So that’s where we’ve realized: what if we tighten up HR? And by the way, Evon, it’s not as simple as just the right butts in the right chairs. I know the Gino Wickman book — [00:23:00] great book, the Entrepreneurial Operating System, great concepts — and I know it’s something that much of optometry has embraced. But dare I say, it’s not as easy as that. We discover at times that’s actually some of the issue — folks think it’s as easy as just that. No, it’s a heck of a lot more complex than just reading a paperback and thinking it’s gonna happen like magic.

Specifically, we get into job descriptions and organizational structure: who is doing what in your office, how are they doing it, and who are they reporting to? Team meetings. Training. What are the levels of competency and how are we developing our people? How are we developing individual people to become better at what they do?

Let’s stop looking at our staff as a $15-an-hour necessity and start looking at our staff as a $25-an-hour investment. And that’s the kind of stuff — people ask me all the time, “Erich, you’ve only been at this five years and you’re doing amazing things. What is it?” It’s things like this. It’s challenging the status quo. It’s helping doctors look at [00:24:00] the business as a business — not as a practice, but as a business.

So really great stuff here. Next up is general overhead. We touched on non-doctor payroll — by the way, any listeners who would like to unpack this one-on-one, I’d love to, because this is a really fascinating arena, the whole world of non-doctor payroll. But last but not least, let’s get to our general overhead. That general overhead should be in the 3 to 5% range. So if you’re running an expense analysis and you’re seeing that general overhead is 8%, 10%, 12%, 15%, 16% — I’m willing to bet that you’re doing a lot of personal living through your business. While that personal living through your business may have been great for all these years — allowing you to pay less taxes — as you’re looking to exit in the next five to 10 years, running personal expenses through the business [00:25:00] just makes your business look less profitable.

Evon: Yeah.

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Why Optometry Practice Owners Should Keep Personal Expenses Separate from the Business

Erich: If you think back to how we started our conversation around fair market value — profitability is number one. It’s very important that you are honest with yourself in evaluating what expenses you’re putting on your business credit card versus your personal household credit card, and that you start to get a bit more disciplined about those. If you find yourself behaving that way because of how your CPA is running your business financials, that may be a sign that you need to find another CPA to work with.

Follow me on this: if we’re running household expenses through our business because our CPA isn’t good at tax strategy for us, then we’ve got to get your household expenses out of your business. It’s gonna destroy your fair market value — [00:26:00] you’re gonna have to argue for the add-backs. And Evon, maybe that’s a separate episode altogether: what are add-backs in a valuation?

Evon: I think so.

Erich: You don’t want to be justifying your add-backs. That doesn’t look good to a prospective buyer. Think about it — you’re having to write a story about the reason why your financials look that way. It’s not a good look. Also, banks hate it. Lenders hate it when you’ve got a seller that has more add-backs than there are days in the calendar year. That’s just not a good look.

So if we wanna be serious about selling our business, we gotta get serious about cleaning the business up. Get those personal expenses — also known as discretionary spend, owner discretionary — get that slush fund out of the business. And [00:27:00] because it means you’re gonna be paying a bunch of taxes, I think you probably need to find a new CPA who is a bit more proactive on the tax strategy side of things.

Evon: No, I fully agree. I am in favor of a pretty clean separation between business activity and household spending for a number of reasons. I think very often we are too keen on pushing the boundaries between what is legitimately a deductible business expense versus what is in reality a personal expense — and that’s not usually on the tax professional, that’s most often on the optometrist.

So I think we need to be a little bit more honest about that and lean on the guidance of our professionals. But that’s number one. I think number two, as you mentioned, [00:28:00] it becomes difficult to know what the practice is spending and what the household is spending. And without clarity on both, it becomes more difficult to plan financially. We don’t really know what’s being spent in the household because a lot of it’s mixed in with what’s in the practice. You don’t have clarity around what your available cash flow is to do stuff with.

For me, I see both sides because I’m looking through the practice financials and the household financials, but if that’s not happening, it’s hard to connect those two and pull out what’s real. So if you want real clarity on what’s going on financially in the practice separately and in the household separately — and to make really good decisions — you gotta separate those out.

And it does impact the value; otherwise you have to start to argue for those add-backs like Erich says. So I appreciate you bringing that up. That’s a huge opportunity to just clean things up. And a lot of that starts with having clean books in the first place to even be able to look at and know what’s going on. Or at a minimum, optometrists — have those come out as distributions, not as expenses, because usually they’re not real business expenses.

Glad you mentioned that. We’ve talked through all these different categories. It does sound like the two opportunities to [00:29:00] directly improve the expenses themselves are in cost of goods and in general administrative expenses. It sounds like when you are trying to improve the percentage of revenue going towards occupancy costs and non-OD staff, very often it’s more about improving efficiency — which really means improving the revenue side, not necessarily the expense side.

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How to Improve the Gross Revenue of Your Optometry Practice as You Prepare for Sale

Evon: So let’s talk a little bit about revenue. How are we thinking about improving the revenue side of the profit and loss?

Erich: Outstanding question, Evon. Jumping into revenue — you’re five to 10 years out. Make these the best damn five to 10 years your business has ever seen. And you might be thinking, “Erich, dude, I’ve been working my ass off for decades — I don’t think I got it in me.” Doc, I hate to say it, but one of two things is gonna happen. One, [00:30:00] you’re gonna take your foot off the gas and decades of working your ass off is gonna go up at a fraction of what it could have been. Or two, do it — and you’ll see that you’re gonna be able to sell this thing for a hell of a lot more than you would have had you let it glide. And that’s really the point I want to make here.

Evon, it has to do with growth versus stagnation versus comparison to benchmark. Put yourself in the shoes of a buyer — whether that buyer is independent or a consolidator or private equity — and think through their lens. What do they want to see? Do they want to see something that is stagnant, teetering on the brink, that has these things all over the place — even if it’s making decent money? [00:31:00] Like, even if the business has strong benchmarks, you could have the best financials in the world — if your business has been flat and stagnant for the last five years, you may have to do some explaining and justifying if you’re gonna want to dig your heels in on negotiation. Because any buyer that knows what’s up — certainly any buyer working with Akrinos — is gonna pick your practice apart and find their buyer a hell of a good price in the process.

So make sure that revenue continues to grow. Does it have to grow double digits? Does it have to grow 15 or 20% the way it did back when you were in your prime? No, it doesn’t have to do that. But if you could just show some nice single-digit growth — heck, I think the industry last year grew what, low single digits? So even if you could show like 5 or 6% growth of collected revenue, that’s nice.

So please don’t think that when I’m saying revenue’s gotta be growing, it has to be growing like crazy. Just a nice steady approach — do the basics. [00:32:00] Increase your professional fees. Work on the basics with handoffs and sales in your optical. What’s your AR looking like? Let’s get that revenue in the door. Let’s get rid of that biller who’s notorious for writing things off but you never had the courage to tell them they need to get their act together. This is the kind of stuff, Evon — five to 10 years out, [00:33:00] you have the opportunity to fix that stuff.

But also something else on the revenue side that I think is really important — Bob Dylan lyric: the times, they are a-changin’. As it pertains to revenue and payor mix.

Evon: Okay.

Erich: This is something that I think is really important, and that as an industry — particularly as a profession — we really need to get serious about. We can’t rely on managed care anymore. We just can’t. I don’t know how many of you caught this headline, but last year — it was either Q3 or Q4 of 2025 — there was news released where CMS announced a change they were making with regard to Medicare Advantage plans. When CMS — the Center for Medicare and Medicaid Services — released this statement, [00:34:00] United Health stock plummeted by 20% in a single day. I actually dropped a little video on LinkedIn with one of my personal commentaries on this. But if you read between the lines of what this is saying, it’s saying the market does not like managed care. Think about it: if CMS makes a big announcement and it shakes the stock price of one of the biggest insurers to that degree, we need to realize what the free market is telling us.

Evon: Yeah.

Erich: So wake-up call here. We want as much revenue as possible flowing into this business directly from patients.

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Why Your Patient and Payor Mix is Important to the Value of Your Optometry Practice

Erich: We want to minimize the presence of insurance when managed care is involved in our practice. We want to minimize vision plans and favor medical plans. So it’s really important, as we’re looking to increase revenue, that we’re not doing it in a way that actually shoots ourselves in the foot. Because if we’re thinking we’re gonna increase revenue by pulling out all the stops — [00:35:00] getting on all the vision plans and treating any patient that comes in the door — revenue may grow, but are we really growing revenue in the way we want? Or are we simply digging our hole deeper and faster than others?

That’s an analogy I love to use. We’re digging a hole. We feel like we’re working hard. How deep are we going? We’re working hard, but we’re also digging a big old hole.

So it’s really important — consider this: if you had an opportunity to buy a practice that was 100% managed care versus 100% cash pay, which would you take and why? We need to look at that and realize that payor mix — cash, vision plans, medical, government — [00:36:00] depending on how that payor mix is constructed, it will have a material impact on the value of the business, and it will absolutely have an impact on your ability to maintain posture when it comes time to negotiation.

And I’ll tell you: if you are one of these practices looking to sell and your buyer works with a group like Akrinos, we’re gonna pick this thing apart and get our buyer a really good price. It’s really important that everyone understand — we don’t just wanna start growing revenue, but we want to grow the right revenue through the right channels.

Evon: I’m curious. When I think about a framework for what impacts gross revenue in a practice, it’s: revenue per exam or revenue per patient, times the number of patients per doctor day, times the number of doctor days per year. You can boil down the amount of gross revenue you might earn in a year to that very simple formula. So you can look at each of those and say, which of these do I have the ability to improve most?

One way it sounds like [00:37:00] you can improve revenue per exam or revenue per patient is by improving the patient mix — improving the types of patients you are seeing and gaining revenue from — because that’s gonna have a direct impact on how much revenue you actually collect. And when you’re looking at that from your perspective, if you’re helping a buyer, are you looking at the patient mix directly? Is the patient mix directly impacting the price a buyer is reasonably willing to pay? Or is it simply that it’s impacting the revenue, and the revenue is really what you’re basing the valuation on? How much are you looking directly at the patient mix?

Erich: Yes, and yes. [00:38:00] It ties back to risk. And this is something I’m realizing — perhaps I’ll have to do another conversation just around valuations: what are these things, how do they work, what are all the variables being pulled in? Because it all ties back to risk.

Consider this: a practice that is 100% cash pay versus a practice that is 100% vision plan. 100% vision plan is radically riskier than 100% cash pay. So that will play out in the valuation — it can play out when we’re building up the discount rate, the equity discount rate, where the risk of the individual practice is ramped up. It would also play on the other side with negotiation. And this is where things get really interesting. I don’t wanna go off on another tangent here, but it really is fascinating how all this stuff operates.

The importance though of realizing that when we can tie it [00:39:00] back to these business basics and look at it that way and get diligent about doing the things that need to be done from the business standpoint — this has nothing to do with patient care, with practice — I’m talking just the pure business side of things. It can be huge.

But please do understand that payor mix and patient mix matter enormously. On one side, you have a patient mix of commercial vision plans, Medicaid, Medicare, maybe a little bit of major medical, and then a little bit of cash pay — a fairly diverse but insurance-heavy pool. Then over here you have a practice that may be generating the exact same gross revenue, [00:40:00] but with one commercial vision plan that so happens to be the best one for that market. And by the way, that is gonna vary by market. I know in past episodes we haven’t even talked about geospatial market analysis, but that plays a huge role in all this.

When we look at that second patient mix — maybe we have one vision plan we’ve aligned with strategically because of things we know they’re doing in the market. And then maybe one or two major medical plans we’ve aligned with strategically because we know there are a couple of big employers in town that carry them, and oh yeah, we do have some cool equipment — OCTs, the cameras — to be able to do a lot of major medical care. And then maybe they’ve had a lot of fun doing specialty contact lenses.

So in this first practice, you’ve got a lot of insurances with 15% cash pay. [00:41:00] Over here you’ve got just a few insurances, but they are strategic — meaning better reimbursements — and then you’ve got 45% of the revenue coming in as cash. These two businesses may look identical. They may even have the same exact expenses and maybe even be out of benchmark on expenses. But the one with three times the cash pay receivables is going to get a better price than the one that does not.

So it’s important, as we look at this, that we’re not just growing revenue — we’re growing it in the right way.

Evon: In a way that’s more sustainable.

Erich: Exactly. And by the way, this wouldn’t be the case if we saw historically that healthcare insurance and vision plan reimbursements were going up. But the fact is, they’re not. [00:42:00] They’re not. The brightest minds in the world of medical billing and coding are having to update their stuff multiple times a year just to keep up with the changes. Think about how many resources you’re expending trying to figure out what modifier to put on something this year. For what — $2.50? We can grow these businesses by a hell of a lot more than $2.50 at a time.

Evon: Okay. So I really like how you’ve broken this down. Ultimately this all comes down to improving cash flow. How do we do that? We can look at improving revenue — cash dollars coming into the business. We can look at improving expenses. We have these different expense categories we can impact in a variety of ways,

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How Does Hiring an Associate Optometrist Impact The Value of the Practice?

Evon: which ultimately impacts earnings, which ultimately leads to cash flow. [00:43:00] A couple of follow-up questions here. For this single doctor, single owner practice — how much does hiring associate doctors impact the potential outcomes when they’re thinking about that?

Erich: Yeah, that’s a really great question, and this is all gonna really be based on the need in the practice. There are a lot of practices out there right now where we’ve got sellers who are really ready to get out. They’re the single owner-operator, but they are no longer working five days a week — maybe they’re only in the office seeing patients two days a week, then they have fill-ins or associates seeing patients the other two or three days a week.

So it’s really important that we look at this through a full-time equivalent lens [00:44:00] and realize that a $1.3 million practice with an owner-operator and then two associates — that is still a single doctor practice. If it’s not a single doctor practice at $1.3M in revenue, something’s wrong. And by the way, the only way it would be a non-single-doctor practice at that revenue is if revenue per patient were so low that you really needed all that coverage just to get the patient throughput. And if that’s what’s going on, there are other things that can be done to improve that business — actually pretty simply, believe it or not.

But getting back to hiring associates — for these purposes, it’s six of one, half dozen of the other, because really what we’re looking at is the full-time equivalent lens. You wanna pull in all of those wages. Any doctor wages — whether going to the owner-operator or to associates — we wanna lump all doctor wages together [00:45:00] when evaluating the true cash flow. But I cannot stress this enough: it’s really important we look at this through the lens of what is the actual required doctor coverage of this practice.

Evon: Some examples that come to mind: if an owner wants to maybe bring down their time in the practice but wants to maintain a full-time equivalent amount of doctor hours to at least maintain or grow gross revenue and earnings — then that associate doctor might just fill in for the time the owner doctor wants to step back from. That keeps it within one full-time equivalent OD. On the other hand, if they want to move beyond one full-time equivalent OD because there’s patient demand for it, then that additional associate is adding to the gross revenue and likely adding to the earnings and cash flow of the practice. [00:46:00] Two very different needs of the business, and that associate doctor is impacting it in two different ways.

Erich: Yes. Now it is vital that appropriate doctor wages are being factored into these equations.

Evon: Got it. Okay.

Erich: And I know we didn’t do a deep dive on exactly all the steps of how we construct a fair market valuation, but the importance of realizing that — hey, doctor owner, many years into ownership, you’re presumably paying yourself a good bit more than benchmark. As a matter of fact, according to the American Optometric Association, doctors in ownership earned upwards of 50% more than those who are not. So there’s a lot of upside there, but it’s really important that we look at this based on equivalence [00:47:00] and how those things factor into the valuation, because they will have a significant material impact.

It’s also vital that we’re honest with ourselves about this stuff. To think we have a $2 million practice with a single FTE and we’re paying that doctor $140,000 a year — no, I’m gonna call shenanigans on that one. And presumably many banks will call shenanigans on that one as well. So it’s really important we look at this the right way to be sure we’re pulling in the right add-backs into the equation.

And I’m realizing that is a topic we had not touched on prior, but that’s definitely something, Evon, I would love to spend a little bit of time on — add-backs, and also talking about capital expenditure, because these are things that will have a material impact on that valuation of that practice.

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How Add-Backs Impact the Valuation of Optometry Practices

Evon: Let’s dive into add-backs then. What are they? Just run through what those are.

Erich: Yeah. So add-backs are gonna be adjustments made to the financials that reflect more of the true performance of the practice. Common add-backs [00:48:00] would be doctor salary. Your single doctor owner — your tax team, your CPA and your financial planner — have set you up drawing a salary out of the business. Let’s say you’re a single doctor, single location, grossing a million dollars, and you’re paying yourself a $300,000 a year salary. That’s an expense to the business. But we’re gonna add that back — why? Because you’re the owner-operator. So we’re gonna add back that $300K.

Now in so doing, we’re also going to pull out of the business what we’d have to pay a doctor to be in there. And this is a really good example: if you are an owner paying yourself a $300,000 a year salary — first and foremost, congratulations. You’ve built your business to a point where your financial planner or CPA are advising you to pay yourself that. That’s incredible. [00:49:00] And that’s where you realize you worked your tail off to get your business where you could pay yourself a $300,000 a year salary — but in your market, you can hire in a full-time doctor for $150,000. We’d add back that $300K salary of the owner, then we’d subtract out that $150K full-time equivalent.

And that’s gonna show what? That’s gonna blow up the value of the business. Because now we’ve got that $150,000 delta — that $150,000 overage that the owner was paying themselves above what they would have paid a full-time fill-in — and that now goes straight into profit. And that’s a beautiful thing.

So a few other things on add-backs. Earlier we were talking about the general business overhead — we want that to be in the 3 to 5% range, but it’s not uncommon that this is 8%, 10%, 12%, even 18%. When does this happen? [00:50:00] When you’re living a good life through your business. You’re going on trips on the business. You’re buying cars on the business. You got teenage kids learning how to drive — you gotta buy a car, and hey, now the practice has another vehicle. It feels good in the moment because it doesn’t hit personal finance. You don’t see those expenses flow through personal finance. You’ve reduced some taxes for the tax year. But lo and behold, we realize these are things we’re gonna have to do add-backs for. We wanna try to minimize add-backs of seller discretionary spend. Why? Think about it — if you were gonna go buy something and you start getting all these additional details only after you submitted a letter of intent, you’d be like, “What the hell’s going on?”

So in the world of add-backs, it’s also imperative that doctors understand the following: if your COGS are out of [00:51:00] control, that’s on you. There’s no adjustment we can make to valuation to justify the fact that you were overspending on COGS for all those years.

If you pay below-market rent — for example, I own my building and I pay myself very little rent, just the way I’ve been doing things. You’re paying yourself $1,500 a month, that’s fine and good. But you wanna sell your practice, and market rent for a space your size would be $4,500 a month. We are going to add $36,000 of expense into your financials to account for that — because you, as the owner of the real estate, were going to lease it to the new owner at a way [00:52:00] below-market rent, which I know you’re not.

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What Expenses Can’t Be Adjusted as an Add-Back In Your Optometry Practice?

Erich: So we need to be sure that’s factored in. It’s really important that everyone understand: some of these expenses we do add-backs to in order to hit profitability. Some of these expenses we can make adjustments to. But other expenses we can’t.

Rent is one. Another one we really gotta look at is non-doctor payroll. For example: you are an established practice — it’s you, a few staff members, and maybe one of those staff members is your spouse or a child, and you’re paying them something other than what would be the appropriate market wage. Maybe it’s your spouse and they’re not on payroll at all. So when we look at your benchmarks, your non-doctor expense benchmark may be around 14%. [00:53:00] The range is 18 to 24%. We have got to move those expenses up into the range of what they should be. Why? Because we can’t assume that the buyer is gonna have a spouse who works in the practice for free.

Evon: You’re gonna have to replace that spouse.

Erich: Yeah. So we really have to be sure the right adjustments are being made so that we can start negotiating around an actual fair market value — one that, by the way, is also gonna be the range that banks are looking at.

And that is how and why Akrinos gets quite a bit of buyers contacting us after they’ve signed a letter of intent — [00:54:00] they engage with Akrinos, we get all the financials, we run the valuation, we start doing the work, and we are finding deals going to active sale for $150,000 to $200,000 below what the original asking price was. There are a number of reasons for that.

So it’s really important that everybody get real about this stuff. It does no one any good when everybody’s been working their tail off for the last six months — buyer and seller negotiating — only to get to the bank saying, “Oh, we can’t write that loan. It’s not cash flowing sufficiently.” [00:55:00] That does no one any good.

So it’s really important, for our listeners out there who are prospective sellers eyeing that five-to-10-year exit: now is your time to start making these changes. Because when it comes time to go, there are a lot of things at play that you’re not gonna have control over. But right now, when you’re five to 10 years out, you have the opportunity to get those expense benchmarks under control. You have an opportunity to grow revenue — but grow it around a service mix and payor mix that’s going to drive value.

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How Do Capital Investments in the Optometry Practice Impact Its Valuation?

Erich: Something else we didn’t touch on at all, Evon — capital expenditure. Sure, it’s been a great practice for all these years, but oh my gosh, that exam lane looks like it’s barely functioning. That OCT — you gotta hit it on the side and do all these things just to get it to operate right. If you follow where I’m going here: CapEx. We can’t be selling something that needs new equipment, new furniture, where all the inventory in the optical is old stuff that nobody wants. We gotta be sure this thing [00:56:00] has merit.

Equipment and diagnostics. Non-medical technology. Leasehold improvements. Furniture and fixtures. Know, as a seller five to 10 years out: you’re not gonna get away with selling something to the next generation that can barely function. It’s not gonna happen. And by the way, it’s not just because a buyer working with Akrinos is gonna pick the practice apart — the banks are gonna laugh you out of the office.

Again, Evon, it’s an amazing time we’re living in right now. But I also feel like now more than ever, doctors really need to understand the facts. And the facts are not fluff. The facts are not coming from an online community. The facts are not coming from whatever ChatGPT, Claude, or OpenAI or whatever we’re calling these things is telling you. The facts are: this is how the system works. So it’s really important to understand where you can have an impact on things so that your practice is set up so that when it goes through the system, it’s gonna be favorable for all parties.

Evon: One of the questions I had written down is: [00:57:00] can you be too profitable? If it shows that you’re not investing in the practice, you just touched on that, right? You may have a very profitable practice above and beyond benchmarks, but if the buyer is looking around and everything in the practice is outdated — you haven’t invested in the practice for the last 10 years — that’s gonna impact the value.

So it’s an interesting question: is there a point where you may be too profitable if it means you’re not reinvesting back into the business? The way I want owners to think about this is that you have to market your practice for sale. You have to present it and prepare it in a way where a buyer is going to be as comfortable as possible and as ready as possible to step in and go to work.

If the future cash flows — and the certainty of those future cash flows — are what’s going to determine a fair price, and you have all of these things in the business that make it very uncertain, or if the buyer is going to perceive a lot of risk [00:58:00] for the same amount of revenues or profits coming in — that’s gonna impact that buyer’s willingness to buy your business. Whether it’s not having clean and accurate financial statements and record keeping, whether it’s having out-of-date technology or equipment, whether there are too many add-backs and too many questions — that buyer is going to start to feel like things are not very likely to continue on as they are.

So we gotta prepare. And we can’t sell the buyer on potential. If there’s potential opportunity in the business, why aren’t you taking advantage of that potential yourself? We have to think about it like preparing a house for sale: let’s prepare this really important asset that you’ve built up over years and decades so that the next buyer can step in and feel really confident about the revenues and earnings you’ve built up.

Just out of respect for time, Erich, I think this is a pretty good place to stop. We’ll tackle the remaining questions in a future episode — specifically diving into valuations. But I know you have a resource for listeners. Tell us about that. [00:59:00]

Erich: Yeah, Evon, we’ve got a ton of resources, but we did put together something specifically for listeners of your show — a little 360 due diligence asset. Basically what this is: if you are one of these listeners five or so years out, it’s just some nice bullet points looking at the five-to-three-year mark, then two years out, then one year out, then six months out. Kind of a little desktop reference as you approach those next few years.

Hey, look, Evon — if anybody would like to claim it, they can reach out to Evon and he’ll send you on over. Or you can shoot us an email at contact@akrinos.com. Let us know that you tuned into this episode of the Optometry Money Podcast and we’ll get those assets over to you.

Evon: I appreciate it, Erich. As always, it was a pleasure. I’ll put all of your information and resources in the show notes. And for everyone — really appreciate your time listening today. [01:00:00] The earlier you can start planning here, both in the business and financially outside of the business to get ready for that point, the much more freedom and flexibility you’re gonna have as you get there. We will catch you on the next episode. In the meantime, take care.