Private Equity in Optometry: An Inside Look with Dr. Benjamin Chudner (Part 1)

I am very fortunate to have had the opportunity to chat with Dr. Benjamin Chudner, an optometrist and Chief Medical Officer at AEG Vision, a PE-backed, independent optometry practice consolidator. Throughout his career, Dr. Chudner has served in a variety of roles throughout the eye care industry and now finds himself smack dab in the middle of the hottest topic in eye care - private equity. These private equity groups are made up of investment funds that are organized as limited partnerships. As the name would imply, these groups are not publicly traded. The investors are typically large institutional investors, university endowments, or wealthy individuals. They have become interested in medicine because there are a lot of inefficiencies in individual medical practices that can be leveraged to produce increased value when these practices are combined into groups.

For optometry, in particular, the number of full-time equivalent providers is expected to increase by about 15% by 2025, while full-time equivalent ophthalmologists are only expected to increase by 4% in the same time period.

What is it about optometry (and ophthalmology) that piques the interest of PE groups? 

Optometry, and to some extent ophthalmology, are fairly recession-proof professions. The aging population will continue to drive the need for ongoing eyecare. For optometry, in particular, the number of full-time equivalent providers is expected to increase by about 15% by 2025, while full-time equivalent ophthalmologists are only expected to increase by 4% in the same time period. This positions optometry very well to meet the escalating needs for medical eye care. At the same time, independent optometrists are challenged to upgrade their practice management systems and billing and coding procedures to ensure compliance and maintain maximum revenue flow. This provides an opportunity for PE.

Why should a practice owner consider selling to a PE group?

First, let me just say that selling to a PE group is not the right decision for everyone. I like to think there are three main considerations an OD should think about as they evaluate whether or not to sell to a PE group. These considerations are financial needs, professional needs and personal needs. Financial needs are fairly obvious and include how much your practice is worth, but also how much you will make as an employee once you sell as well as what opportunities there are to invest in the PE group that purchases your practice. Professional needs include how your practice’s culture will change, what happens to your staff and how patient care will be impacted. An additional professional issue to be considered is how much you want to be involved in the day-to-day management of your practice once you sell. Depending on the PE group, this could range from no responsibility to only slightly less than what you had when you were the owner. Another consideration here is how much the PE group will continue to invest in your practice and your people. As for personal needs, these include how many years do you want to work before you retire, can you handle losing operation control of the practice and being just an employee, as well as what will happen to the legacy you built.

Probably the biggest opportunities seem to be in marketing and customer relationship management (CRM).

Part of the operation when a PE group buys a practice is to improve efficiencies. What types of practice inefficiencies does PE tend to target? How can these operations be improved by operating under a PE entity?  

I’m not sure I would say that PE groups target any specific inefficiencies, but there are always opportunities to improve the businesses we purchase. Probably the biggest opportunities seem to be in marketing and customer relationship management (CRM). Most practices purchased by PE groups see increases in marketing spend that is more effective because it can be done at a regional level that covers dozens of practices in the same area. We also have very robust systems to interact with patients and increase the effectiveness of recall. Cost of goods is typically another large opportunity we look at.

What will a PE group NOT change after taking over a practice?  

This will depend on the PE group so it ranges from changing just about everything to almost nothing. I think the sweet spot is somewhere in between. Changing everything, including the practice name, can sometimes have significant negative effects on the practice, while changing almost nothing makes it more difficult to improve business operations.

What type of practice does a PE group typically target? Is it mainly based on finances? How much of a role does location play (i.e. rural vs urban)? Is an optical-heavy practice favored over a medical practice? How about a specialty practice (i.e. specialty contact lenses, vision therapy, etc.)?  

This also depends on the PE group, but in general, we are all looking primarily at the financials. At the end of the day, this is an investment meant to provide a return. A practice with poor financials is not attractive to PE groups. Location does play a role to some extent, but not necessarily in terms of rural vs urban. It tends to be more about where other practices are located within the organization. PE groups will not avoid practices in very rural areas if the deal makes sense and especially if it helps increase scale in the area. This is also true for optical heavy vs medical practices. While some PE groups focus more on medical practices, optical heavy practices can be great investments as well. Most PE groups will not shy away from specialty practices, although there are some that may not want to get involved. I think it mainly depends on whether or not the PE group believes they can run a specialty practice post-acquisition, but I have seen some of the largest vision therapy, medically necessary contact lens, and myopia management practices sold to PE.

It is fairly well known that PE groups calculate the value of a practice in large part due to EBITDA.

How many multiples of EBITDA are practices that sell to PE usually going for? How can a practice improve itself in the eyes of PE to increase that multiplier? 

We hear a lot today about multiples, but at the end of the day, the amount of money you will walk away with is far more important that what multiple you were paid. Remember, you can’t put your multiple in the bank and because there are so many factors that go into calculating EBITDA, it’s hard to compare multiples paid for different practices. That being said, I understand why we get asked this question so much. What I can share is that I have seen practices sold for multiples that range from 3x to 10x.

Again, I wouldn’t think of how to increase your multiple, but rather how to increase the amount paid for your practice. I’m not sure if there are any specific actions someone can take to increase their multiple. My advice is to focus on improving EBITDA as that’s primarily what the purchase price will be based on.

Can you speak on how a typical payout works for the selling practice owner? In other words, do they receive the full payout upfront? Divyed up over a few years? What circumstances could prevent the full payout from being distributed? 

Typically, sellers will not receive the full payout upfront. In most cases, there will be certain holdbacks required. These include money held for indemnity clauses to protect the buyer from unforeseen liability as well as a holdback to ensure the practice continues to perform post-acquisition. Holdbacks are typically paid out over 2-3 years. In addition to holdbacks, many sellers can elect to invest a percentage of their proceeds in the PE group as equity so that when it sells, they receive additional profit.

Thank you Dr. Chudner for the great insights! We’ll be publishing the second part of our conversation shortly.