Luxottica – Essilor Merger

This is my opinion, and “not necessarily the opinion of our sponsors.”

What will the merger of Luxottica and Essilor mean for the eye care industry?

1. Increased pace of consolidation for ECP’s.

There has already been a lot of activity in this sphere, with companies such as MyEyeDr and Clarkson Eyecare buying many independent ECP’s as well as smaller regional chains.

If and when “EssiLux” merge, count on this entity also to dramatically increase its’ footprint in the “retail” landscape.

Why?

Because ultimately they want to buy and control the patient’s eyewear choices. If they own the retail location then they can dictate which frames, lenses, contacts, etc. will be made available to the patient.

Needless to say, the vast majority of products offered would be their proprietary products, much like a current LensCrafters.

2. Increased pace of consolidation for vendors.

The consolidation of vendors has been taking place for years, with Essilor, Zeiss, Hoya, and VSP buying independent optical labs.

The large frame companies and especially Luxottica have been buying the rights for designer brand names, and consolidating the brands under their portfolios.

This consolidation will increase, with some vendors selling to larger companies, and some unfortunately not able to compete and closing down.

The reduction of independent ECP’s will have a dramatic effect on the abilities of independent vendors to remain viable.

3. A reduction in Managed Vision Care (MVC) providers.

As ECP’s consolidate, they large players will exert more control over MVC’s.

If EssiLux and the other large players (such as Walmart, National Vision, Costco, etc.) continue to grow and independent ECP’s shrink, they will have an increasing amount of leverage over reimbursement levels and which plans are able to empanel a significant enough number of ECP’s to support any business that may be acquired by the MVC.

4. “Offshoring” of lab work and frame production will continue.

The large labs (including Essilor) already do much of their laboratory work internationally (mainly in China and Mexico).

There has been a small rebound in frame manufacturing in the USA, but so far to an insignificant level.

As ECP consolidators get larger, they will send more of their lab work overseas to reduce their costs.

5. Decreased levels of customer service to the patients.

As offshoring grows, turnaround time will suffer. Especially for jobs that have a “spoilage”, as now it will have to travel to different countries multiple times.

These are just a few of the foreseeable trends.

What do you think?

What other effects would this merger have on the eyecare industry?

Advantages to Owning the Practice

I speak to some of the Colleges of Optometry in the United States, and without fail get asked what is the advantage of owning your own practice, versus the advantages of working for someone else. My reply to this question is usually pretty long, but I’ll try to shorten it for this blog.

The obvious advantage to working for someone else is that you don’t have to worry about paying the bills, staffing the practice, marketing the practice, etc. You basically get to do the “doctor” stuff and go home. When you own the practice, you also have to deal with all of the other “business” stuff.

Advantages to owning the practice are primarily these four things:

1. Money.

Most commercial practices these days pay the OD a percentage of revenue produced by their patients, usually 14-16% of the net collected. As an example, if that number is 15% and the revenue produced by patients from Dr. Amblyopia is $1,000,000.00, then Dr. Amblyopia will be compensated $150,000.00. On the other hand, if Dr. Amblyopia owned the practice, the typical “target” for owners is about 31% of net revenue, so he would earn $310,000.00. More than twice the figure for an employed OD.

2. Tax advantages.

As the owner of the practice, you get to make decisions on what is “company” business and what is personal business. Many practice owners deduct car payments, cell phone payments for family members, and have family members on payroll for peripheral support positions. All are tax advantages.

3. Self-determination.

When you own the practice, you get to choose when it is open, which managed care plans to accept, when to go on vacation, who to hire, which charities to support, etc.

4. Equity.

If you own the practice, you build equity in the value of the business. When it comes time to sell, you get to reap the profits.

Maximize the Holiday Season

The period between Thanksgiving and New Year’s Day has been known for years as the top shopping period of the year. Thanks to insurance and flex spending accounts, it is also a great time of year to boost sales in the eye care field. Make sure you are contacting your patients with your holiday sales during this time of year! Sunglasses, nutriceuticals and accessories are great products to advertise, as well as computer glasses, blue light blocking lenses, and just eyewear in general. Help your patients get the benefits they have paid for with their vision plans! It is also a great time to go through your files and contact patients that have missed appointments or haven’t been seen in a while. Make the effort to finish the year strong!

An easy way to determine Managed Vision Care (MVC) profitability

Have you ever wondered if you are making a profit with certain MVC plans? In order to know if you are profiting, you need to know two things: your cost per hour to keep your doors open, and your reimbursement per hour for patients of the MVC seen by your practice.

To calculate your cost per hour, look at your profit and loss report for last year. Look at expenses, including cost of goods sold and the doctor’s salary. Do not include excessive profits that may be taken as a year-end distribution. For illustration purposes, we will use $380,000.

Now that we have the expenses, we need to get the hours for the year. Take the number of hours the practice is open per week, and multiply by 50 weeks to allow for holidays. For example, if the practice is open Monday, Tuesday, Wednesday and Friday from 9:00 am to 5:00 pm and Thursday from 10:00 am to 7:00 pm, then the total hours per week would be 41 hours. Multiply the total of 41 hours per week by 50 weeks and the result is 2,050 total hours.

To arrive at the cost per hour to keep the practice open, we use the following calculation:

$380,000 / 2050 hours = $185.37 per hour.

Now that we know it costs $185.37 per hour to keep the practice open, we need to know how much per hour the MVC pays. A good way to do that is to take the next 12 patients that carry the MVC and track the total payments on their behalf to the practice. Include any co-pays from the patient, and deduct any chargebacks. Make sure you allow at least a month for each patient in case they come back for further services.

Once you have this total, factor in the typical number of patients you see per hour. If you see 2 patients per hour, divide the total by 6. If you see 3 patients per hour, divide the total by 4.

For this illustration, we will use $850.00 total revenue for the 12 patients contributed by the MVC and patient co-pays. We will also stipulate 2 patients per hour, so the total will be divided by 6. Here is the math:

$850 / 6 = $141.66 per hour total income for this MVC.

In this case, with costs of $185.37 per hour and revenue of $141.66 per hour, the practice is losing $43.71 per hour to see these patients. Now its up to you to decide: keep the plan for the additional volume, or leave the plan and work on increasing volume from other patients.

Appraisals

I have read articles published in many eye care publications including Review of Optometry, Eyecare Business and others discussing the value of getting a professional appraisal. I have read some “experts” opinions saying that practices should sell for 55% to 65% of the last three years’ average gross collections. Others say that practices will sell for anywhere from 16% to 82% of the last three years’ gross collections. Yet another says 40% to 60%.

A 2015 article under the umbrella of one of our major associations suggested just starting with a selling price between 55-65% of gross receipts and negotiate from there, because “appraisals can be expensive”. If we use $400,000 as an average collections number, then the range for selling price would be $220,000 to $260,000. Most appraisers in the eye care field charge less than $2,000 for an appraisal, so in this case the cost would be less than 1% of the selling price. I would certainly say that the appraisal fee is a good investment to protect both the buyer and the seller from making a several hundred thousand dollar mistake.

When my career started in the eye care industry, the typical selling price was 100% of the previous year’s gross collections. That was 1984. Since that time there have been many changes in the field that have affected profitability, most notably the growth of managed vision care (MVC). Other changes include increased competition from chains, retailers, big box stores, and internet sales.

I would advise clients to ignore gross collections when setting value. I have seen practices with gross collections of $675,000 that lose money with the owner taking no salary, and I have seen other practices that gross $300,000 that bring in over $150,000 in net profits to the owner. In this day and age, profitability is much more important than gross sales. Having said that, it is easier to be profitable if you are bringing in gross collections of $1,000,000 than if you are bringing in $200,000.

An appraisal is a cost-effective way to begin the process of selling an eye care practice. It is inexpensive insurance to assure both the buyer and the seller that the practice is a worthwhile investment. Without an appraisal, both sides are just hoping that the transaction will make sense. The appraisal should include a “sanity check” to make sure the buyer will be able to be paid a salary, pay off the indebtedness of the purchase, and have a cushion to maintain cash flow. Moving forward without an appraisal is risking the future of the practice.

Service

How can you thrive in today’s marketplace? A huge part of developing a successful practice is service. Service can take on many forms, but we all know when we are getting good service or bad service. Think of the last time you went to a restaurant. Was your service good or bad, and what were the criteria that influenced your answer? Think about that for a minute.

Typical answers might be attentiveness, time to be served, cheerful attitude, knowledgeable about the menu, helpful, checking your table frequently, suggesting menu items, telling you about their specials, and good answers to your questions.

Many of these same criteria are also important in an eye care practice.

For example, look at attentiveness. At the restaurant we want the wait staff to be cheerful, check on us to make sure the meal is going ok, the food is tasting good, etc. This applies to eye care practices as well. If a patient (Patient X) comes through your doors and is not greeted in a timely way, this could be the start of a service failure. The front desk is busy with phone calls so the patient sits down in the waiting room. (We would usually call this the reception area, but today it feels like a waiting room for Patient X). Then the doctor is running behind due to the previous patient’s late arrival, so the staff isn’t too worried about Patient X since they have other things going on, and besides they have had a busy day. When Patient X is finally finished with the exam, the opticians are already busy with other patients and walk-ins, and don’t take the time to talk to the new patient. Eventually Patient X has had enough and walks out the door, saying they will be back another day. Maybe they will come back another day, maybe they won’t.

According to a study by U.S. News and World Reports from 20 years ago, the top reason customers quit a business is due to an attitude of indifference by an employee of the company. The numbers from the study:

-67% leave due to an attitude of indifference on the part of an employee

-14% leave due to dissatisfaction with the product

-9% leave due to competition

Every business has “the big three” things to offer their customers: price, quality and service. (Common wisdom is you can only offer two of the three). If we look at the above three reasons, they basically ARE price, quality and service. An attitude of indifference is service, dissatisfaction with the product is quality, and competition is price. So basically the most important factor in retaining customers is service, and in third place is price. Is this what you would think, or would you think that price was more important?

The first thing on which every eye care practice should focus is customer service. Make sure your service is state of the art, proactive, and delivered to each and every patient. You will not only retain your current patient base, you will also gain new patients through the word of mouth advertising your happy patients freely provide.

Welcome Post

Welcome to OptiRova LLC and the Professional Practice Marketplace. We are here to serve the Eye Care marketplace and the Eye Care Professionals that care for their patients’ vision. We look forward to assisting many ECP’s to achieve their goals, be it buying a practice, selling a practice, or improving a practice.

During the past 30 years there have been many changes to the eye care industry. There have been technological and instrumentation improvements that allow for better diagnosis and care, pharmacological advances that offer better treatment of diseases, and advances in lens design and manufacturing methods that correct vision defects to a higher degree than ever before.

At the same time we have been challenged by the growth of Managed Care Plans (MCP’s) and the lower reimbursements, increased expense of processing claims, and additional paperwork that go hand in hand with MCP’s. Internet purchases of eyewear have also taken a small piece of the eyecare pie.

The next threat on the horizon is commercially-available autorefraction. There is already a company looking to put kiosks in malls and other shopping areas and do autorefractions on people walking by. It’s there to give them a prescription so they don’t have to go to the doctor, but part of their disclaimer is to go to an eye doctor at least every two years.

With all of this as the backdrop, there are still great opportunities to thrive in today’s marketplace. How do you do it? Three words: service, quality and value. Look for the next blog to continue with more on these thoughts.