You just signed a Letter of Intent from a corporate vision group and the offered purchase price looks incredible. You might feel like you just crossed the finish line and it is time to start planning your retirement. But the reality is that the most dangerous phase of selling your optometry practice is just beginning.
That phase is called due diligence and it is where corporate buyers make their money.
When private equity platforms and corporate vision consolidators issue an LOI they lock you into an exclusive negotiation window. Once you are legally barred from talking to other buyers they send in teams of third-party accountants and healthcare attorneys to review every little detail of your business. They are not doing this just to verify your numbers. They are actively checking for any operational weakness or accounting discrepancy they can use to justify lowering that purchase price before closing day.
If your financial records are disorganized then the buyer will use those things to lower your valuation and shift financial risk right back onto your shoulders.
Surviving due diligence requires total preparation months before the buyer ever requests a single document. Here is the comprehensive due diligence checklist for optometry practice sellers and exactly how you need to prepare to defend your payout.
1. The Financial and Quality of Earnings (QoE) Audit
The very first thing a corporate buyer will do is initiate a Quality of Earnings report. This is a massive forensic accounting audit where the buyer’s financial team reconstructs your profit and loss statements from the ground up. They want to verify your EBITDA because your entire purchase price is based on a multiple of that specific profit number.
Buyers will heavily scrutinize your add-backs. As a practice owner you probably run plenty of personal expenses through the practice to minimize your tax burden. You might run your family cell phone plan or your personal vehicle lease through the clinic accounts. While you and your CPA know these are discretionary expenses the buyer’s accountants will demand proof that these costs are not necessary to run the practice. If you cannot absolutely prove an add-back is legitimate the buyer will strip it out of your EBITDA and your valuation will drop immediately.
You must prepare the following financial documents in advance –
- Profit and Loss (P&L) statements and balance sheets that tie perfectly to your filed tax returns.
- A detailed schedule of all owner add-backs with supporting bank statements and receipts ready to prove they are discretionary.
- Monthly revenue reports broken down by provider so the buyer can see exactly who is generating the cash flow.
- Detailed Cost of Goods Sold (COGS) reports separating your frame purchases and contact lens costs from your clinical medical supplies.
2. The Optical Dispensary and Dead Stock Trap
Optometry practices are completely unique in the healthcare transition space because a massive portion of your revenue comes from a retail optical dispensary. Corporate buyers evaluate your optical department with extreme scrutiny because frame inventory is basically cash sitting on a shelf.
During due diligence the buyer will conduct a rigorous inventory audit. They will look at your frame board and your back stock to see exactly how quickly your inventory turns over. If you have hundreds of frames that have been sitting in a drawer for three years because they went out of style then the buyer will classify that as dead stock.
They will refuse to pay you for dead stock and they will deduct the value of those useless frames directly from your working capital.
3. Clinical Equipment and The CapEx Deduction
Private equity buyers expect to take over a modern and fully functional clinical facility. They will send equipment inspectors to walk through your exam lanes and evaluate your diagnostic technology.
If your slit lamps are falling apart and you do not have a functional OCT or retinal camera the buyer knows they will have to write a massive check to upgrade the facility on their very first day of ownership. They will not pay for those upgrades out of their own pockets. Instead they will estimate the cost of the new equipment and subtract that amount directly from your purchase price. This is called a Capital Expenditure or CapEx deduction.
You absolutely must ensure your core diagnostic equipment is fully functional and well maintained.
- Gather all equipment warranties and maintenance logs to prove your technology is in good working order.
- Compile a complete fixed asset list detailing the make and model and age of every major piece of equipment in the practice.
- Ensure your practice management software is up to date because buyers hate walking into clinics that still rely heavily on paper charts or obsolete legacy software servers.
4. Active Patient Counts and Revenue Mix
Corporate buyers do not care if your practice management software claims you have ten thousand patients if only two thousand of them have actually been seen in the last eighteen months. Buyers will run aggressive data extractions on your software to determine your true active patient count.
They also want to look incredibly closely at your revenue mix. The optometry industry has shifted heavily toward the medical model. If your practice relies almost entirely on low-margin routine vision plans and you do very little medical billing for dry eye or glaucoma management the buyer will view your practice as a lower-tier asset. Medical optometry commands higher profit margins and creates a much stickier patient base.
- Run an active patient audit defining an active patient as anyone who has completed a comprehensive exam or made a retail purchase in the last eighteen to twenty-four months.
- Pull reports on your managed care and vision plan revenue so the buyer can see exactly what percentage of your cash flow is tied to specific insurance networks.
- Highlight your medical billing metrics to showcase the clinical depth of your practice beyond basic refractive exams.
5. Associate OD Contracts and Staff Stability
To a corporate buyer the single biggest risk in any optometry acquisition is staff turnover. They are terrified that they will hand you a massive check on closing day and your top producing associate optometrist will quit the following week to open a competing clinic down the street.
During due diligence the buyer’s legal team will demand to see the employment contracts for every single associate doctor working in your practice. If your associates do not have non-compete agreements or if their contracts lack clear transition language the buyer will panic. They will likely demand that your associates sign new restrictive covenants before the deal can close which creates massive friction and threatens the entire transaction.
- Audit your associate employment agreements to ensure they contain enforceable non-compete and non-solicitation clauses that protect the practice.
- Prepare a complete employee census listing the hire dates and hourly rates and benefit packages for every optician and technician and front desk employee.
- Keep the sale strictly confidential from your general staff because early leaks create panic and lead to key employees quitting right in the middle of the due diligence audit.
6. The Real Estate Lease and Facility Audit
If you lease your clinic space from a third-party commercial landlord your lease agreement is a massive hurdle in the due diligence process. Corporate buyers will not acquire an optometry practice unless they can secure a long-term lease guarantee. They usually demand at least ten years of guaranteed lease term remaining including renewal options.
If your current lease expires in two years and your landlord refuses to negotiate a long-term extension the corporate buyer will walk away from the deal entirely. They cannot risk buying a business only to be evicted by a hostile landlord twenty-four months later.
- Review your commercial lease agreement to understand the exact terms required to assign the lease to a new corporate entity.
- Check for demolition clauses or relocation clauses because buyers will demand these be removed before closing.
- If you own the real estate yourself you need to decide early if you want to sell the building with the practice or execute a sale-leaseback where you become the commercial landlord to the corporate buyer and collect steady rent through your retirement.
7. The Working Capital Peg Negotiation
As the due diligence process wraps up the corporate buyer will introduce the final and most dangerous financial hurdle. It is called the working capital peg.
Buyers require you to leave a specific amount of cash and inventory inside the business on closing day so the clinic can continue to operate and make payroll without requiring a massive cash injection from the buyer. The buyer’s accountants will use the data they gathered during due diligence to calculate this required peg.
Corporate accountants will almost always try to set this peg artificially high so they can keep a massive cash cushion funded entirely by your retirement proceeds. If you do not have an advisory team fighting back and auditing their math you will end up leaving tens of thousands of dollars of your own cash sitting in the clinic bank account when you hand over the keys.
Why Practice Elite?
Navigating corporate due diligence is a grueling and exhausting process. Private equity firms and DSO acquisition teams have entire departments dedicated to auditing optometry practices. They know exactly how to use confusing accounting terminology and aggressive legal demands to wear you down so you accept a lower purchase price just to get the deal across the finish line.
You should never face a corporate due diligence team alone after you have spent decades building a highly profitable optometry practice.
At Practice Elite we act as your strategic advisors to level the playing field and protect your wealth. We do not just list your practice and hope for the best. We work with you well before you ever go to market to audit your financials and clean up your optical inventory and bulletproof your operations. When the buyer’s accountants show up we sit on your side of the table and fight back against aggressive CapEx deductions and predatory working capital pegs to ensure your money stays in your pocket.
If you are planning to sell your optometry practice in the near future and you want to make sure your payout is completely protected book a free strategy call with our advisory team at Practice Elite today. We will review your numbers and evaluate your operational readiness to help you build a custom blueprint for a wealthy and unrestricted retirement.
