Private Equity in Optometry: An Inside Look with with Dr. Benjamin Chudner (Part 2)

This is the second part of my conversation with Dr. Benjamin Chudner, an optometrist and Chief Medical Officer at AEG Vision, a PE-backed, independent optometry practice consolidator.

Dr. Chudner provides more insight into the landscape and dynamics of private equity in optometry. This has been a fascinating conversation for me as PE has had a significant impact in our field. 

I hope that you enjoy part 2 of our conversation below.

I've read that PE trends are cyclical. In your opinion, are we nearing the end of the PE cycle in optometry? How much longer could we expect the buying of practices by PE groups to continue?

This current cycle started in 2001 when the first group started consolidating optometry practices and it has only accelerated since then. There are now approximately 10 groups buying up optometry practices. That being said, PE groups only own about 10-11% of all independent practices, so I believe there is still a long runway for PE groups. It’s hard for me to predict, but at this time I don’t believe it will end in the near future.

What is the ultimate goal of a PE organization? Is it to sell to a larger entity, similar to how MyEyeDr sold to Goldman Sachs? What type of larger entities would be interested in buying a consolidation of eye care practices?

The goal of a PE group is fairly simple – sell for more than what was invested. It seems there are groups that tend to focus on different-sized businesses. For example, there may be a PE group that prefers to build a business to about $50M in EBITDA and then sell to a group that focuses on taking businesses from about $50M to $100M in EBITDA. Each of the main PE groups in optometry are at different sizes, so I think it’s possible for a main investor to exit one that they have grown to a certain size and re-enter another that is smaller so they can build it up before exiting again. As long as these businesses continue to grow each year, there will be large investors who will want to purchase them.

One aspect of PE groups that younger ODs are disappointed about is the smaller market to buy optometry practices. Moreover, the inability to compete with prices that PE organizations are able to pay for a practice. Do you have any comment on this? 

It’s very easy to blame PE for younger ODs being unable to purchase optometry practices, but the reality is that the rise in PE groups in our profession is, in part, a reaction to younger ODs not being willing/able to purchase practices and not necessarily the cause. The demographics of ODs entering the profession has changed. Less and less appear to be interested in owning practices and one of the main reasons for that is the increase in the amount of student loan debt. Obviously, there are still a lot of ODs that want to purchase practices, but even for them, student debt has made it difficult to obtain financing to pay as much as selling ODs want. That’s not to say there aren’t situations where PE outbids a younger OD for a practice. It’s true that practices are actually worth more to PE because they can realize significant increases to EBITDA which nets down the multiple paid for the practice, so PE can pay more. What I would say is that there will always be opportunities for younger ODs to purchase practices. There are owners that will never sell to PE on principle and there are practices that will never be considered by PE. Like with every other “disruptor” that came before, such as Lasik, big optical and online companies, private practice optometry will not only survive, but continue to be very successful.

Our unique brand family leverages the strengths and capabilities of the AEG common platform but still maintains the local identity that makes each brand special. We truly are better together.

Are you able to comment on how AEG's philosophy differs from other PE groups?

It’s hard for me to comment on how our philosophy differs because I have never worked in a practice that was run by any of the other PE groups. We each have a different approach to consolidating practices, from MyEyeDr. who converts every practice to their national branding to Keplr who makes very little changes to the practices they acquire. AEG Vision tends to skew more towards Keplr in that we only change the practice name if we are unable to purchase it with the practice, but we will require every acquired practice to switch to our EHR and point of sale systems.

As for our philosophy, we are a caring community of local eye care providers that improves the health of our neighbors, helping them see better and look their best, one patient at a time. We deliver remarkable experiences to our patients, customers, and teams. Our unique brand family leverages the strengths and capabilities of the AEG common platform but still maintains the local identity that makes each brand special. We truly are better together. I can also say that AEG Vision takes a fairly hands off approach to how our doctors manage their patients. We are there to support our ODs and help them expand the level of care they provide as opposed to telling them what to do or how to practice.

I'm sure there is no way to answer this simply, but if you HAD to be concise, could you walk us through the typical steps of a PE acquisition of a practice?
For example, PE opens up discussions with a private practice owner, then a practice valuation is done, then a contract is drawn, etc. You are correct in that this is not easy to walk you through typical steps in a concise manner, but I will try.

It will start with a conversation with the PE group. This can be initiated either by the seller contacting the PE group, or a cold call from the PE group. If there is interest, a letter of intent (LOI) is signed. This basically outlines the process and expectations and contains an exclusivity clause for a certain period of time so the PE group can do its due diligence without concern that the deal will go to another group.

After the LOI is signed, there will be lots of information requested so the practice can be valued. Once the seller and the PE group come to an agreement on terms, contracts are drawn which include several documents including the purchase agreement and the employment agreement.

Once everything is signed, the deal closes and proceeds are received.

I would love to hear more about the stock option of a selling owner's ability to maintain financial stake in the purchasing PE group after the sale. Could you touch on this, please?

A seller may be given the opportunity to invest a percentage of their proceeds in the PE group. The units purchased with these proceeds are valued at the time the seller elects to invest, which determines the number of units received. While technically not stock, it works very similarly. If or when the PE group sells the business, the units will have a value that is based on the purchase price minus any liabilities that must be satisfied. In theory, the seller’s units will now be worth more than they were valued when they invested.

Can you speak on how AEG differs from a Management Services Organization (MSO)? 

I am not as familiar with MSOs, but I believe when a practice utilizes one, they pay a small percentage of revenue as a fee for management services that are provided. AEG Vision provides all of the management services required to run our practices, but since we own them we also receive all of the revenue generated.