The Optometry Money Podcast

How to Maximize Your Optometry Practice Value Before You Sell with Erich Mattei

• Evon Mendrin • Episode 160

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Whether you're five to ten years from exiting your optometry practice or just starting to think about it, the decisions you make right now have a major impact on what your practice is ultimately worth. 

In this episode, Evon is joined by Erich Mattei of Akrinos — a returning guest who specializes in practice transitions and valuations — to break down the key levers practice owners should be focused on long before they're ready to sell. From profitability and expense benchmarks to payor mix, capital expenditure, and add-backs, this conversation gets into the mechanics of how fair market value is actually determined and what you can do to improve it.


What You'll Learn

  • How fair market value for an optometry practice is determined
  • The two primary drivers of practice value: profitability and capital expenditure
  • Key expense benchmarks for COGS, occupancy, non-doctor payroll, and general overhead
  • Why growing revenue matters — and why growing the right revenue matters even more
  • How payor mix and cash pay percentage affect practice value and buyer negotiation
  • What add-backs are and why minimizing seller discretionary spend before exit is critical
  • How associate doctors and full-time equivalent coverage factor into valuation
  • Why outdated equipment can undermine an otherwise profitable practice

Key Takeaway

The time to prepare your practice for sale is long before you're ready to sell. The ODs who get the most at exit are the ones who ran their businesses like a business — with clean financials, controlled expenses, growing revenue through the right channels, and a practice that a buyer can step into with confidence.

Resources

Want a more proactive approach to your planning?

You can schedule a no-commitment introductory call to discuss what's on your mind financially and learn how we help optometrists navigate those same decisions nationwide.

👉 Schedule an introductory call


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. 

Evon

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(TM) 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 and 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. And Eric'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 the practice. And whether you're someone 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 outta this episode and I'll put all of Erich's contact information and all the resource 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. 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 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, to work with our firm, and that's planning for the eventual exits outta their practice. And we are, usually talking through in the context of planning for retirement preparation, we are modeling out different scenarios. 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. Okay, 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, Eric, are right up your alley. you 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. I just want to start with the first question to sort of lay the groundwork a little bit. And that's. 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 sort of determine what a fair price of a practice should be?

Erich

Yeah, Evon, I tell you that is. An excellent question, and I think a question that as an industry, we need to all be really tuned into because, why? 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, as we've seen this decline, 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. I, again, I, all of these reasons, I think this is really important right now that we unpack this. So, to kick this off, this is vitally important, that everyone understand what are we looking to accomplish in deriving a fair market value? And fair market value, by definition would be the price. That 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 an 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, which we're seeing continue to accelerate as far as doctors entering private sale versus private equity sale, which we're seeing continuing to be on the decline. Okay? 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? That a willing enabled buyer can come in, secure financing, purchase from the seller, able to pay themself, the new owner, a living wage as a doctor. Don't worry, you're high on the hog. Wages will come down the line when you're further into ownership. But effectively, out of the gates, we're looking at this through the lens of what is the price where a buyer can borrow money, pay the seller, and based on how the business performs, that buyer can pay themself a living wage as a doctor and have sufficient funds remaining to cover the debt. And Evon. I gotta, I gotta tell you, there's a lot of things we could have hours upon hours of episodes where we're weaving in and out and talking about add backs and talking about all these little intricacies, but at the end of the day. This is all extremely basic math, concepts, and perhaps in the course of this episode, I'll help it help more doctors

Evon

Right.

Erich

A little bit more. But really the first key piece that I want everybody to understand and tie back to you is that it's gotta be about cash flowing.

Evon

Yep.

Erich

And that's what we're gonna spend this episode talking about is 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. matter who is buying that practice, right? If it's between two willing buyers, it does sound like it matters who those two willing buyers are. Obviously the selling doctor is that first willing buyer. 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, between those two parties and when you think about a, 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 their business improvements in their business, financially, operations wise? What should they be looking at? Improving or changing that have the highest impact on that price later on.

Erich

Yeah, that is a really great question. That is very much a loaded question

Evon

Okay.

Erich

because believe it or not, it's gonna vary by the doctor. Yes, you can have two doctors. Imagine this. Imagine two single owner practices in virtually identical markets grossing the same. But this is where we start to get into differences. Okay? Because there, 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's two things that matter. Profitability and capital expenditure.

Evon

Okay.

Erich

So when we talk profitability, is what I was referencing earlier, we were talking about fair market value and how do we construct a fair market value on a business? And it's based on how these things are cash flowing. we use a process. Typically we'll use a process known as capitalization of earnings, but that's one of only a few different methods that are used that need to be selected based on the merits of the project and exactly what are the objectives on the project. If we're looking at these two single owner practices, we're talking profitability, we're talking capital expenditure. So let's think of all of those things that impact profitability. remember, profit, we have revenue dollars coming in, we have expenses, dollars flowing out, and what's left over is profit. And then we take that profit and we add back whatever wages we paid ourselves as a doctor. Now we've got kinda this optometric net. We'll have to make a little adjustment for a, for an associate. But nonetheless, we come to understand is 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 set up ratios, and our revenue increases, that's gonna result in increase in profit. Now 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 revenue growth, we've got expense reduction, low hanging fruit on the expense reduction side, I would imagine our viewers out there are familiar with these concepts of benchmarks and expense benchmark. And as a matter of fact, Evon, I think I may have joined the show in our prior episode where we're talking about expense

Evon

benchmarks.I believe so..

Erich

Huge opportunity for anyone eyeing exit in next five to 10 years. Dare I say, y'all, 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. 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 lens. if you are a member of Alliance Buy group, you definitely wanna include those fees as alliance fees and COGS.'cause that can, that's gonna shoot paint a, a more realistic picture, exactly what's going on here with the COGS. But we have COGS, cost of goods sold. Next up is gonna be occupancy. So think here anything that goes into the physical space. Our rents, repairs and maintenance. Utilities. Then we jump into non-doctor payroll. Who's that gonna be? take a guess.

Evon

Yes.

Erich

on payroll who's not a doctor? And lastly is gonna be that general overhead. So for all intents and purposes, Evon, when you're looking at practices, there are different. Okay, that one is gonna wanna fall in based on how big the practice is. So without going into the granular details of the differing benchmarks, as the business grows, generically speaking, for our COGS, we're looking for 25 to 30% expense. For our occupancy, we're looking at six to 9% in expense. Our non-doctor payroll about 18 to 24% of our expense. And lastly, general overhead being three 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. Do it. 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. Now occupancy is an interesting one because occupancy, how easy is it just to go in and renegotiate a lease midterm? 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, and for many cases going in and adjusting occupancy expense, it's off the table. So when we look at adjusting the occupants, 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 and understands how to do this. But for all intents and purposes, occupancy is one of those that it's not one of those levers you can easily move like COGS. So when we look at occupancy, how do we move that expense benchmark? We gotta grow the revenue.

Evon

was just gonna say, I.

Erich

shining a light. If we're seeing occupancy is 12%, would argue that means this location has the ability to generate more revenue. We gotta figure out how to do that.

Evon

So I was just gonna say That makes perfect sense. cost of goods sold being a, typically a variable cost that's going to, change based on gross revenues based on your. patient activity, right. occupancy costs being a fixed cost unless you own your own building are willing to adjust the rents that you're paying yourself. Typically, there's not too much wiggle room, perhaps utilities, things like that, 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 are going to by increasing revenue. So that opportunity is really more on the improving the revenue side. Unfortunately, not necessarily too strongly on the improving the, expense side. And then you mentioned a few others, you mentioned non OD staff costs, which may be fixed may be partly variable depending on perhaps optician, pay depending on the, incentives there. Talk to us about non OD staff costs.

Erich

Okay, so when we're looking at our non-doctor staffing costs, these are gonna range between 18 and 24% of expenses. So remarkable opportunity here to do what? Get us in line. And this is another one of these examples of where I'll say, look, if we're looking at our non-doctor payroll costs and we're up at, 28 or 29%, what does this mean? What can mean a number of things This, and by the way, one thing that 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. we're going for, don't think that, oh, Eric was on Yvonne's show and said, I can just start firing people. No, that's not what we. wanna

Evon

But Erich we, we magically brought non RD staff costs from 25% to zero and Doesn't that work?

Erich

unfortunately

Evon

Okay.

Erich

So, um, so the, the way to look at this then, 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, this is where I would argue that means that 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 that's able to accomplish everything they can do and do it X percent

Evon

Ah.

Erich

What we have discovered in our work here at Akrinos is that many practices that are finding their non-doctor payroll is outta whack and some other HR type things. Many of these are ready to take the step and graduate into more professional support in their office. What do I mean by that? And by the way, if you're out there and I'm speaking to you, I'm speaking your language and you're looking around and you're like, dude, Eric, yeah, my non-doctor payroll is close to 30%. And dude, yeah, I have a lot of staff members in my office do a quick calculation. Y'all take your gross revenue, so your gross collections for the year. So maybe look back at 25, what were your gross collections you brought in for the year? 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 a step further. I want you to take that gross revenue collected and divide it by 200,000. What is this 200,000 figure I speak of? It's a 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 ha, I'd love to explore that with you. But generically speaking, a staff member is gonna generate around 200,000 of revenue for the practice. By the way, on the lower end, it's more like 155, 160. On the higher end it may be pushing upwards of 250. What are the differences there? Well, if we take our gross collected revenue divide it by our head count of full-time non-doctor employees, if that figure is coming in at around 155, 160, 165 compared to that figure coming in more in like the 235, 240, 245, effectively what you've got is here where we have a lot of staff members to achieve our revenue. Here. There's a lot of inefficiency. There's probably a lot of redundancy, and I'm willing to bet there's a lot of folks who are amazing people. We're not saying anything about people as humans, but in the context of the workplace and executing the responsibilities of the role, there's opportunity for improvement. Whereas you look at this practice over here that may have the same collected revenue, but is operating with less staff members. That means what? they're a more proficient, and more competent staff,

Evon

Got it. Okay.

Erich

that is huge. That is a huge exercise. What you got, Evon?

Evon

So I, so what it sounds like is that, a, as you mentioned, improving the. Percentage of revenue going towards non OD staff. Cost isn't about clearing house, right? 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, right? it's about finding out ways to use that investment line item on your profit and loss more efficiently. And I really appreciate you providing some benchmark numbers there to think about in terms of. revenue per, full-time equivalent staff. But it does sound like some part of that, at least, is, at is looking at the team as it is and making sure that the right butts or on the right seat in the bus, so to speak. Like that you have the proper people in the proper roles, doing the right work for that person. At least a part of it is evaluating the team and just making sure you have the right people there in the right roles. Is that right?

Erich

Yeah. and in so doing Evon, what that does. So look, if you're the, if you're, listening to us and you are five to 10 years from exit and you do have a little bit of a turnover issue in your office, and you don't have those rock stars that really know how to run your office, and if everything is still falling on your shoulders, these are all of 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 you are underpay, overstaffed and underpaying. And in, as, in as much, your benchmarks are outta whack.

Evon

Ah.

Erich

And it seems really counterintuitive. wait up Eric. 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 x the headcount to do that. And all of the things, everything cascades from that. So that's where we've realized, whoa, 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. And I know, look, hey, look, the, what the Wickman book, Gino Wickman book,

Evon

Right.

Erich

great book, right? Entrepreneurial operating system, great concepts. I know it's something that much of Optometry has embraced, but dare I say, it's not as easy as that. As a matter of fact, we discover at times that's some of the issue is that 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 then thinking like it's gonna happen like magic. So specifically we get into job descriptions and organizational structure. Who is doing what in your office and how are they doing it and who are they reporting to? Team meetings. Training organizer. What are the level of competencies and how are we developing our people and development? How are we developing individual people to become better at what they do? Let's stop looking at our staff as$15 an hour necessity and start looking at our staff as$25 an hour investment. And that's the kind of stuff like Evon. People ask me all the time, Erich, y'all have only been at this five years. They're doing amazing things. What is it? It's things like this. It's challenging the status quo. It's helping doctors look at the business as a business, not as a practice, but as a business. So really, great stuff here. up is general overhead. So we touched on our non-doctor payroll. By the way, any listeners out there would like to unpack this one-on-one would love to.'cause this is a really fascinating arena, right? This whole world of non-doctor payroll. But last but not least, let's get to our general overhead. And that general overhead should be in the three to 5% range. So if you're running an expense analysis 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, that you've been able to pay less taxes as you're looking to exit in the next five to 10 years running personal through business. Just makes your business look less profitable.

Evon

Yeah.

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 are you putting on your business credit card versus your personal household credit card. And that you start to get a bit more disciplined with those. if you find yourself behaving in such a way because CPA is running your business financials the way they are, that may be a sign that you need to find another CPA to work with.

Evon

Mm-hmm.

Erich

So follow me on this. If we're running a lot of, we're running household expense through our business because our CPA isn't good at tax strategy for us, then I'm gonna say, we have got to get your household expenses outta your business. It's gonna destroy your fair market value, you're gonna have to argue for the add-backs and Evon. Maybe that's a separate episode altogether. What are add-backs in evaluation?

Evon

I think so.

Erich

don't want, as a

Evon

so.

Erich

you don't want to have 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 got a seller that has more add-backs than there are days in the calendar year. That's just not a good look

Evon

Yeah.

Erich

So if we wanna be serious about selling our business, we gotta get serious on cleaning the business up. So get those personal expenses also known as discretionary Spend owner discretionary, get that slush fund out of the business. And

Evon

I fully agree.

Erich

because it means you're gonna be paying a bunch of taxes, I think you probably need to find a new CPA that is a bit more proactive in 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's in reality, a personal expense that's not usually on the tax professional that is most often on the optometrists. So I think we need to be a little bit more honest in that and lean on the guidance of our professionals. But, that's number one. I think number two, as you mentioned. 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 And we don't really know what's being spent in the household. Because a lot of it's mixed in with, with what's in the practice. You don't have clarity around what your available cash flow is to do stuff with, and. for me, like I see both of it.'cause I am looking through the practice financials and the household financials, but if that is not happening, it's hard to connect those two and to 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 make really good decisions, you gotta separate those out And, 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. I think that's a, a huge opportunity to just clean things up. And a lot of that starts with having like clean books in the first place to know, to even be able to look at and know what's going on. Or at a minimum optometrists, like, have those come out as distributions and not as expenses.'cause usually they're not real business expenses, Glad you mentioned that. we've talked through all these different categories. it, it does sound like the two opportunities to improve the expenses themselves. are in cost of goods or in inventory costs and 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 it sounds like it's really more about improving the revenue side, not necessarily the expense side. So let's talk a little bit about revenue. how are we thinking about improving the revenue. side of the profit and loss?

Erich

Yeah. Yeah. Outstanding question there, 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 to yourself, 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 gonna happen. One, you're gonna take your foot off the gas and

Evon

Yeah.

Erich

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've had you let this thing glide. Okay? And that's really that, those are the points that I wanted to make here. Evon, it has to do with growth versus stagnation versus comparison to benchmark.

Evon

Okay.

Erich

yourself as a seller, IE five to 10 year exit. Put yourself in the shoes of a buyer, whether that buyer is independent or if that buyer is a consolidator, a a private equity. Think through their lens. What do they want to see? Do they want to see something that is stagnant, that is teetering on the brink, that has these things over the place, even if it's making decent money. Like even if the business has strong benchmarks, you could have the best financials in the world. if your business has been flat stagnant for the last five years, woo hoo. You may have to do some explain. And to justify if you're gonna want to be really digging your heels on negotiation, because any buyer that knows what's up, certainly expect any buyer that's working with Akrinos, we're gonna pick your practice apart. and find our buyer a hell of good price in the process. as it were, right, sure that revenue continues to grow. Does it have to grow double digit? Does it have to grow, 15 and 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 a five or 6% growth of just collected revenue, that's nice, right? So please don't think that when I'm saying, Hey, we gotta be sure revenue's growing. It doesn't have to be growing like this. Just a nice steady, do the basics. Increase your professional fees, work on the basics with handoff, with, sales in your optical. What's that AR looking like? Let's get that revenue in the door. Let's get rid of these days of having some. the biller that we know is notorious for writing things off, but we never really had the to go and tell them they need to really get their act together. this is the kind of stuff Evon five to 10 years out,

Evon

Yeah.

Erich

opportunity to fix that stuff,

Evon

Yeah.

Erich

but also something else on the revenue side that I think is really important. Oh, Bob Dylan Lyric. the Times they are a change in the times. They are a change in, as it pertains to revenue and payor mix.

Evon

Okay.

Erich

And this is something that, that I think is really important, that as an industry and particularly as a profession, y'all, we really need to get serious about this stuff. 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 in, I forget if it was Q3 or Q4 of 2025, but there was news released where CMS announced that they were not increasing. There, there was something about a change that they were making with regard to Medicare Advantage plans. And when CMS Center for Medicare and Medicaid Services. When CMS released this statement, again, it was either in Q3 or Q4 of 2025, but CMS released this statement and then United Health Stock, United Healthcare stock plummeted by 20% in a single day. I actually dropped a little video in LinkedIn on this, just one of my personal commentaries. But y'all, 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, the Center for Medicare and Medicaid Services makes a big announcement and it shakes stock price of one of the biggest insurers to that degree, we need to realize the free market, right?'cause stocks, United Health is traded. I forget it's on the NASDAQ or the New York Stock Exchange or what have you, or the Dow, right? But nonetheless, it's traded on this public market. It and the public market ain't liking it.

Evon

Yeah.

Erich

So wake up, call here, wake up call. We want as much dollars as we can to be flowing into this business directly from patients. 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. It's not done 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, get on all the vision plans and just treat 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 whole deeper and faster than others? That's like right as we, as, that's the, by the way, that's an analogy. clients out there know that, this is an analogy I love to use. We're digging a hole. We feel like we're working hard. how deep are we going? Okay, we're working hard, but we're also digging a big old hole. So it's really important. and consider this, to, to any of our listeners out there, if you had an opportunity to buy a practice that was 100% managed care versus 100% cash pay, which would you take and why? So we need to look at that and realize that payor mix, cash, vision, plans, medical government. Depending on how that payor mix is, 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 and you're looking to sell and you buyer works with a group like aos, we're gonna pick this thing apart gonna get at a really good price. 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

So I'm curious. So when I, think about a framework that I've adopted from others of what impacts gross revenue in a practice, it's revenue per exam or revenue per patient times the amount of patients per Dr. Day times the amount of doctor days per year. And you can boil down, this very simple formula to boil down the amount of gross revenue you might Earn in a year. 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 to improve the revenue per exam or revenue per patient is by improving the patient mix, is by improving the mix and types of patients that you are seeing, and gaining revenue from, because that's gonna have a direct impact on how much revenue you actually collect, not necessarily bill on, but actually collect. And, and when you're looking at that from your perspective, like if you're helping a buyer, are you looking at the patient mix directly and is that patient mix directly impacting the price that buyer's reasonably willing to pay? Or is it simply that it's impacting the revenue and the revenue's really what you're basing that on, like how much are you looking directly at the patient mix and thinking about what price is fair for the buyer to.

Erich

yes, and yes

Evon

Okay.

Erich

it ties back to risk,

Evon

Yep.

Erich

and this is something I'm realizing, perhaps I'll have to have another conversation. Totally. Just around valuations. What are these things? How do they work? What are all these variables that are being pulled in? because it all ties back to the risk. So what happens is that consider this a practice that is 100% cash pay versus a practice that is 100% vision plan. 100% vision plan is radically riskier than a hundred percent cash play. So that will play out. It can play out in the valuation when we're building up the discount rate, the equity discount rate, where that risk of the individual practice is, ramped there, right? It would also play on the other side with negotiation, and this is where things get really interesting when we look at some of the, let's let our conversation continue to unfold. I don't wanna go up on another tangent here, but it's really fascinating man. It really is. It's fascinating how all this stuff operates. And the importance though, of realizing that when we can tie it back to these business basics and look at it in that way and get diligent about doing things that need to be done from the business standpoint, this has nothing to do with patient care, with practice, with all that stuff. I'm talking just pure the business side of these things. it can be huge, but please do understand that payor mix and patient mix, We 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, and we have a, fairly diverse pool of patients regarding what they're coming into for primary care versus medical. Then over here we have a practice that may be generating the same exact gross revenue. But over here you have 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 geospatial market analysis in this conversation, but that plays a huge role in all this

Evon

Yeah.

Erich

in your market? What are they doing? How are we showing up to them? But when we tie it over here, we're looking at that patient mix of, if we had this insurance practice over here, maybe we have one vision plan that we've aligned with strategically because of things that we know they're doing in the market. And then maybe one or two major medical plans that we've aligned with strategically because maybe we know there's a couple of big employers in town that have them and Oh yeah, we do have some cool equipment. OCTs, right? The cameras to be able to do a lot of major medical. Care. And then, I don't know, maybe they've a lot of fun doing, specialty contact lenses. So in this practice over here, you got a lot of insurances with 15% cash pay. Over here you've got just a few insurances, but they are strategic insurances. IE better reimbursements, But then you got 45% of the revenue coming in as cash. These two businesses looking identical. They may even have the same exact identical expenses and maybe they're out of benchmark on expenses too. Maybe they do have their colleagues or off the rails and all these other things. But you have these two practices with everything identical, but one of them simply has three x the cash pay receivables that is gonna get a better price. Then that practice that, that does not have as much cash receivables. So it's important as we look at this, and we're not just growing revenue, but we're growing it in the right way.

Evon

in a way that's more sustainable, it, it improves the reliability of that revenue continuing.

Erich

Exactly. And by the way, this wouldn't be the case if we saw historically, if we saw historically that healthcare, health insurance and vision plan reimbursements were going up, then perhaps we'd be talking about something totally different. But the fact is, they're not. They are not, they're not the brightest minds in the world of medical billing and coding. They're having to update their stuff multiple times a year to keep up with the changes. So think about that. how many resources are we expending trying to figure out what kind of modifier do we need to put on it this year?

Evon

Yeah.

Erich

For what?$2.50 cents like y'all. 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 cashflow. And how do we do that? we can look at improving revenue. So that's cash dollars coming into the business. We can look at it in terms of improving expenses. We have these different expense categories we can impact in a, in a variety of levels. which ultimately impacts earnings, which ultimately leads to cash flow. And a few just follow up questions here. So, you know, number one, for this single doctor, single owner practice, how much does hiring associate doctors impact the potential outcomes here when they're thinking about that?

Erich

Yeah, that's a really great question and this is all gonna really based on the need in the practice. There are a lot of practices out there right now that we've got sellers who are really ready to get out. So they are the single owner operator, but they are no longer working five days a week. Maybe they're only in their 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 though, that we look at this through a full-time equivalent lens, right? And realizing that, you got a$1.3 million practice with an owner operator and then two associates. That's a single doctor practice. I will tell you right now, it's a single doctor practice. If it's not a single doctor practice, something's wrong. And by the way, the only way it would be a non single doctor practice 1.3 rev if rev per patient were so low that we really needed that, all of that coverage just to get the patient throughput. And if that's the, 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, but getting back to the whole thing regarding hiring associates, for these purposes, it's six, one way half dozen the other because really what we're looking at, we wanna look at it through the lens of full-time equivalent. You wanna pull in all of those wages. So any doctor wages, whether it's going to owner, operator, or those associates, we wanna lump all of the doctor wages together. Okay? In evaluating the true cash flow of that, but I cannot stress it enough. It's really important. We look at this through the lens of is the actual required doctor coverage of this.

Evon

it. So some examples that come to mind hearing you talk about that are that if a, if an owner is wanting to maybe bring down their time in the practice, but want to maintain a full-time equivalent amount of doctor hours in the practice to at least maintain or grow that gross revenue and earnings at the same rate. then that associate doctor might just fill in for the time the owner doctor wants to bring down for themselves. So that's, but that's keeping it within one full-time equivalent OD. And on another example is that 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 cashflow, the practice. So two, as I mentioned, two very different needs of the business and that associate doctors impacting it in two different ways.

Erich

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

Evon

Got gotcha. 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, you're presumably in a position of 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 that, that, that are not. so there's a lot of upside there, but it's really important that we look at this based on equivalence. 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. So to think that we have$2 million practice with a single FTE Uhuh, that ain't gonna cut it, right? To think, oh, we have a$2 million practice with a single full-time doctor that we're paying$140,000 a year. No, I'm gonna call shenanigans on that one. and presumably many people, the 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, the right add-backs into the equation. and I'm realizing that is a topic that we had not touched on prior, but that is definitely something Evon I would love to spend a little bit of time touching on add-backs, also talking about capital expenditure.'cause these are things that will have a material impact on that. Valuation of that. practice?

Evon

let's dive into add-backs then. Let's, talk about how add-backs impact all this. What are add-backs? 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 would be, doctor salary, your single doctor owner, your tax team, your CPA and your financial Planner. Have you set up as drawing a salary out of your And let's say your salary that you're drawing, let's say you're a single doctor, single location, grossing a million dollars, 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 you're the owner operator. So we're gonna add back that 300 k. Now in so doing, we're also gonna then pull out of the business though what we gotta pay a doctor to be in there. But this is a really good example where if you are an owner and you're paying yourself a$300,000 a year salary, first and foremost, congratulations. built, you've got your business to a point where you can, your financial Planner or CPA are advising you to, to pay yourself that. That's freaking amazing, okay? And that's where then 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, we can hire in a full-time doctor for 150,000. we'd add back that 300 k salary of the owner, then we'd subtract out that 150 k full-time equivalent. And that's gonna show what, that's gonna blow up the value of the business. Why? Yeah, because now we got that 150 delta, that$150,000 overage that the owner was paying themself above what they would've paid a full-time fill in that now is going straight into profit. And that's a beautiful thing. So a few other things on add-backs, other add-backs I had mentioned earlier, we were talking about the general business overhead that we want that to be in three to 5%, but it's not uncommon that this is 8, 10, 12, hell, 18%. When do these occur? When you're living a good life through your

Evon

Yeah.

Erich

you're going on trips on your business, you're buying cars on your business. You got teenage kids that are learning how to drive. You gotta buy a car. Hey, look now the practice has another vehicle. okay. So all that stuff, it feels good when you're there because it doesn't hit personal finance. You are not gonna see any of those expense flow. Personal finance, it feels good. We've reduced some taxes for the tax year, but lo and behold, we realize that these are things that we're gonna have to do. Add backs. We wanna try to minimize add backs of seller discretionary spend. Why questions. Think about it. If you were gonna go buy something and then you start getting all these additional details, only after you submitted a letter of intent or something like that, you'd be like, what the hell's going on? Gimme all the facts on the

Evon

right.

Erich

So in the world of add-backs, it's also imperative that doctors follow, understand the following. If your COGS are outta control, that's on you. There's no adjustment we can make to valuation to justify the fact that you are overspending on COGS for all those years. If you pay below market rent, we have got to add back. Or should I say adjust that rent to a market rent, for example, I own my building. I pay myself very little rents. just the way I've been doing things. You're paying yourself$1,500 a month rent, that's fine and good. You wanna sell your practice. But market rent is, let's say market rent for a space, your size would be 4,500 a month. we are gonna have$36,000 of expense added into your financials to do what? Account for that. you, as the owner of the real estate, were gonna lease it to the new owner at a way below market rent, which I know you're

Evon

Yep.

Erich

So we need to be sure that's factored in. So it's really important that everyone understand that some of these expenses. we do add-backs to, to hit profitability. Some of these expenses we can get into doing adjustments, but other expenses we can't. Right? So rent is one another also that we really gotta look at is that non-doctor payroll, example, you are an established practice. It's you, a few staff members, maybe one of those staff members is your spouse or a child, and you're paying them something other than what would be the right wage to pay. Maybe it's your spouse and they're not on payroll. So when we look at your benchmarks, your expenses, your non-doctor expense benchmark may be around 14%. The range is 18 to 24. We have got to move those expenses up into the range of what it should be. Why? Okay. We can't assume that the buyer is gonna have a spouse that's gonna work in the practice with no wage.

Evon

You're gonna, you're gonna have to replace that spouse

Erich

yeah. So we really have to be sure that the right adjustments are being made so that we can start negotiating around an actual fair market value. That, by the way, is gonna be the range that banks are looking

Evon

Yeah.

Erich

and that is how and why Evon Akrinos gets quite a bit of buyers contacting us after they signed a letter of intent, but then they engage with Akrinos, and they get us all the financials, and we run the valuation. We start doing the stuff. we are finding deals that are going to sale, going to active sale. For$150 and$200,000 below what that original asking price was. And there's a number of reasons for that. So it's really important that everybody get, 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 for the last six months, only to get to the bank saying, oh, we can't write that. It's not cash flow insufficiently

Evon

Yeah.

Erich

that does no one any good, one any good. So it's really important also that our listeners out there that are prospective sellers eyeing the five to 10 year exit. Really, now is your time to start making these changes. Because when it comes to be go time. 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 do what? Get those expense benchmarks under control. You have an opportunity to do what? Grow revenue, but grow it around a service mix and a payor mix that's gonna be, that's gonna drive value. 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 was out of, barely a, it's barely functioning that OCT. You gotta hit it on the side. Do all these things just to get it to operate right. If you follow'em going here, CapEx, we can't be selling something that needs new equipment, needs new furniture. All that inventory in the optical is old crap that nobody wants. We gotta be sure that this thing is, it has merits.

Evon

Yeah.

Erich

Equipment and diagnostics. Non-medical technology, right? Leaseholder improvements, furniture and fixtures. Know as a seller, five to 10 years out, Know As a seller, you're not gonna get away with it. You're not gonna get away with selling something to the next generation that can barely function. It ain't gonna happen. And by the way, it's not that it's not gonna happen because if a buyer works with a credo and we're gonna pick the practice apart, it's not gonna, banks are gonna laugh you out of the office. again, Evon a lot, 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 is not fluff. The facts is not coming from an online community. The facts are not coming from whatever ChatGPT or Claude, or Open ai, or whatever the hell we're calling these days. What it's 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 that I did have written down, is can you be too profitable if it's, if it shows that you're not investing in the practice and 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, right? So that, it's an interesting question. I dunno how you feel about that, Erich, but, maybe you just told us how you feel about that, it, it does seem like there's a point where you may be too profitable if it means you're not reinvesting back into the business. The way I once owners to think about this is that you have to market your practice for sale. You have to market it, and you have to present it and prepare it in a way to where a buyer is going to be as comfortable as possible, as ready as possible to step in and go to work. And if, if the future cash flows and the uncertainty or certainty of those future cash flows are what's going to determine some fair price? if you have all of these things in the business that make it very uncertain or if the buyer is going to perceive that there's a lot of risk in this business for the same amount of revenues coming in or the same amount of profits coming in. That's gonna impact that buyer's willingness to buy your business. And whether it's not having clean and accurate financial statements and, and record keeping, whether it's having out of date technology or equipments. if there's too many add-backs and too many questions start coming in, that buyer's going to start to feel like things are not going, are not very likely to continue on as they are. And so we gotta prepare and we can't sell the buyer on potential. if the, if there's potential opportunity in the business, why aren't you taking advantage of that potential? why aren't you doing it? So we have to think about it as something we need to market and sell just like we prepare our houses, right? We're preparing our houses for market and for sale. Let's look at this really important asset that you've built, you've built up over years and decades. and let's get it ready so that the next buyer can step in and feel really confident. About the revenues that you've built up and the earnings you've built up, and, just outta respect to time, Erich, I think this is a pretty good place to stop. I've got a couple questions, but We'll, I think we'll tackle that in a future episode, specifically diving into to valuations. But, I know you have a resource for listeners of the show. Tell us about that.

Erich

Yeah. Yeah. Evon, we've got, we got a ton of resources, right? But we did put together something for listeners of your show. little 360 due diligence asset, y'all. And basically what this is, it just kind of sets things up. If you are one of these listeners five years out, just some nice bullets looking at, five to three years out, then, two years out, then one year out, then six months out. Kind of just some nice little things. You can have a little, guess we'll say it a little desktop reference for you as your, approach to those next few years. hey, look, Evon, if anybody would like to claim it, y'all can just reach out to Evon and he'll send you on over. Or you can shoot us an email contact@akrinos.com. Let us know that you tuned into this episode of Optometry Money Podcast and we'll see about getting those assets on over to you.

Evon

appreciate it, Eric. as always, it was a pleasure and I'll put all of your information and resources in the show notes and, for everyone, really appreciate your time. the earliest, the earlier you can start planning here, both in the business and financially outside of the business, getting you ready for that point. the much more freedom and flexibility you're gonna have as you get there. for everyone, really appreciate your time in listening today. We will catch you on the next episode. In the meantime, take care.

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Evon Mendrin CFP®, CSLP®

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