BUSINESS Panel Explores Private Equity’s Evolving Role in Vision Care By Mark Tosh Monday, October 22, 2018 12:15 AM RELATED CONTENT Private Equity Takes Root LAS VEGAS—A full house of several hundred optometrists, practice management executives and retailers gathered in a Sands Convention Center meeting room here late last month for a panel discussion focused on the role of private equity in the eyecare business and the decision-making process ODs need to consider when examining future options for their practice. The session, “Private Equity Takes Root: What Does it Mean for Optometry?” featured three optometrists with extensive experience related to the role of PE in eyecare, and four chief executive officers representing the leading PE-backed management companies with extensive holdings in eyecare. Jobson senior vice president and editorial director Marge Axelrad and Roger Mummert, editorial director of Jobson’s Review of Optometric Business, provided the framework for the discussion and moderated a series of questions directed at the panelists, many submitted by interested ECPs in attendance. The session was presented as a cooperative effort among Review of Optometric Business, Vision Expo and Vision Monday. The management panel included: • Sue Downes, chief executive of MyEyeDr., which owns and operates more than 420 offices in the Mid-Atlantic, Northeast, Southeast and Midwest. The company is backed by Altas and CDPQ private equity firms. • Kelly McCrann, chief executive of EyeCare Partners, backed by FFL Partners, which has grown to about 280 locations under several practice names. • Eric Anderson, chief executive of Dallas-based Acuity Eyecare Group, which operates about 70 practices, and is backed by Riata Capital • Bob Barton, president and chief executive of Total Eye Care Partners (Total ECP), backed by Imperial Capital, which launched as a management platform in September 2017. Mark Wright, OD, FCOVD, professional editor of Review of Optometric Business, kicked off the session with an overview of the current market landscape for optometry and sprinkled in key data about median revenue and other operating metrics. Richard Edlow, OD, a long-time practitioner and noted “Eyeconomist,” reviewed the financial and investment backdrop that is one of the factors driving PE investment in eyecare, and practicing optometrist Michael Kling, OD, chief executive of San Diego-based Invision Optometry, took the audience through the decision tree that he used to guide his decision on whether to remain independent. New Models of Ownership Emerge Mummert noted that the traditional view of optometry is changing and “that today the line between independent and corporate optometry has blurred, new models of practice ownership have emerged [and today] practice ownership is transferred not just upon retirement, but at all stages of a career.” He noted that in today’s marketplace, ODs at all career stages are presented with an opportunity to partner with a network with greater resources and a network backed by private equity funds. Wright, who has extensive experience in practice transitions and is a founder of OptometryMatch.com, provided a series of metrics that independent practices can use as a benchmark to determine how their practice compares to others in eyecare. For example, he noted the median gross revenue for a U.S. practice today with one full-time equivalent (FTE) optometrist is about $700,000. A total below that would indicate some operating problems. The high-water market for an average practice with one full-time equivalent optometrist is about $1.4 million, he said, but there are outliers with higher revenue totals. The operational efficiency in the average U.S. practice is about 29 percent, Wright said. “Value, in business terms, is a function of how well you are bringing income into the practice and then how well you manage your expenses,” he said. “What’s left over is the net, and that’s really what you are buying when you buy a practice.” Wright noted that the consolidation across optometry is “history repeating itself” and follows waves of consolidation among hospital systems and other areas of health care. Ownership transfer in this environment is “a core issue that we have to think about as a profession,” he said, noting that another profession in health care, pharmacists, are primarily employees of other companies today. Edlow, who has a 30-year career in optometry, noted that health care businesses, including optometrists, are experiencing favorable economic trends. “No matter how we look at it, we are in a great industry,” he said. “Health care in the U.S. is growing much more rapidly than any other industry.” The favorable trends in health care are helping to drive the interest of PE investors in the eyecare sector, he noted, since these PE firms are looking for the best way to deploy their capital. Cash Flow Is the Key Factor For independent ODs who are considering the option of transferring ownership control to an investment group, the key metric is cash flow, or EBITDA (earnings before interest, taxes, depreciation and amortization), Edlow said. “When you start having conversations with PE firms, they are going to be looking at your cash flow, or normalized EBITDA, which is the really clean version of your earnings,” he explained. In addition to a sale price, another key factor for ODs to consider before consummating a deal is the tax implications and/or capital gains of the proposed deal, Edlow said. ODs who are negotiating a sale of their practice should calculate the after-tax amount of funds they would receive “because that can drive a very different picture of what you are doing,” he said. Edlow noted that the “consolidation of multiples,” or the increasing value of practice groups as they roll up into larger groups in successive PE-backed deals, also are an important factor to consider in evaluating the value of the proceeds of a sale. This would apply to practices who, for example, receive a percentage of equity (perhaps 20 percent) as part of the purchase agreement. Still, at some future point, Edlow said he expects PE-backed deals will slow as the price multiples approach the PE ratio of stock traded on the S&P 500 and other exchanges. PE-Backed Firms Build New Models In setting up the panel discussion among the PE-backed management firms, Axelrad noted that the private equity topic is “a very rich subject that people want to know a lot more about.” She added, “We think it’s very important to the optical community for people to have an understanding of some of the things that optometry is thinking about as it looks at its future [and] we want to better understand the goals, aspirations and capabilities of the private equity-backed firms that are building new businesses in the market.” McCrann acknowledged the private equity investment trend and said he believes it will have a growing impact over time. Yet, the workings of PE investment are largely unknown among many ECPs, he added. “I see that every day when we meet practices and they are asking us questions that reflect a lack of understanding. The important matters are not well understood, and what often results are anxiety and [misconceptions],” McCrann explained. The EyeCare Partners structure includes a central support group along with the field supervision and district managers (DMs), a total of about 500 people. The DMs typically oversee six to eight offices, McCrann said. Overall, the firm has about a 2,500-person organization, with 2,000 people working in the medical offices and 500 supporting them. In addition, there are about 400 practicing optometrists and ophthalmologists in the organization. At Acuity, the total head count of the organization today is about 1,000 people, with the back-office staff and support teams representing about 150 to 200 positions, Anderson said. Acuity also has its own internal lab and a distribution center. “We love the DNA of the businesses that join the [Acuity] family,” Anderson said. “We try to take as many of those people and bring them into our organization. Our regional vice presidents come from Crown, they come from Eyetique and they come from the different businesses that we have brought in. We are stronger if we have that nice blended culture and intermingle that DNA with the really smart people on our general staff.” Focusing on Three Core Strengths Downes said the concept of MyEyeDr. is to bring great eyecare professionals together and to be able to offer “a management platform in which the doctors could focus on the patient care” and other parts of the company focused on elements such as claims, credentialing, systems, compliance, equipment and innovation, among other things. MyEyeDr. focuses around three core strengths, she said. They are health care or clinical care (it’s up to the OD how they practice in the exam lane), practice management (how do we make it easy and seamless for the ECPs) and, third, building a strong operational strategy and platform for the ODs. “We started to expand in 2012 and now have over 420 practices in 20 states and Washington, D.C.,” she said. Among its most recent transactions, MyEyeDr. has affiliated with Ossip Optometry, which has 36 locations across Indiana, and Schaeffer Eye Center, a Birmingham, Ala.-based practice with 18 locations. Total ECP, which has acquired such high-profile practices as Gailmard Eye Center of Munster, Ind., Gaddie Eye Centers of Louisville, Ky., and Alan Glazier’s Shady Grove Eye & Vision Care outside of Washington, D.C., has taken “a little bit of a different approach” to building a practice group, Barton said. “We started from a what-would-be the best-case scenario for key opinion leaders in the industry,” he said, noting that Total ECP spent a lot of time talking to ODs to determine what their hesitations were as it related to private equity and why they hadn’t already joined a PE group. “The doctors got together and said here’s the things that are important to us,” Barton said. “They were very medically focused in their practices, and they wanted to continue to be medically focused. They didn’t want to be put into a position where they had to take away from that in any shape or fashion.” Two other key components of the Total ECP model, according to Barton, are helping the ODs continue their practice legacy and building upon existing practice culture. “You work hard to build a culture and big organizations can come in and really disrupt that,” he said. “Because our operation is more of a partnership, we don’t want to disrupt that culture at all. As a matter of fact, if anything, we want to go out there and enhance it.” Barton said Total ECP’s executives “spend a lot of time trying to connect with the associates and the associate doctors” as a way of growing the overall company culture. In the late summer, the firm conducted an OD summit in Atlanta and brought in the key opinion leaders from within the organization for various presentations. One objective was to expand the knowledge of the ECP associates. “At the end of the day, we want to keep strong roots in the community. I think it’s what the youth of today is looking for” rather than a nationwide branded approach, Barton said. More Acquisitions on the Horizon Acuity, which was launched in early 2017, manages 70 practices today but expects to announce a series of acquisitions shortly, Anderson said during the panel discussion. He said Acuity is in “a different life stage than some of the other folks at the table,” but that the firm’s parent company, Riata Capital, has “some heritage” with independent optometrists. (Riata is the PE firm that held a stake in Vision Source before selling it to Essilor of America.) “Our philosophy and our mission statement will tell you that we are a ‘community of neighborhood providers,’” he added. “We’re small and up and coming with 70 practices today. I can tell you there are five more under [Letter of Intent] so we will be up to 100 practices by the end of the year. We are very active in this space right now.” Acuity views culture and DNA as important elements of each acquired practice, Anderson noted, and works toward maintaining these traits. “Because we are ‘community neighborhood providers,’ we will keep the name, keep the doctors and keep the DNA that makes [a practice] special,” he said. “We bring our own common platform and vertical integration to help the doctors and the associates practice better medicine.” Anderson said that because Acuity is “new and we are starting from scratch,” the firm focuses heavily on customer and patient satisfaction. This includes reviewing “promoter scores” and the experiences patients have. “We reverse engineer how we deliver spectacular outcomes for [patients] and we make sure the patients are happy,” he said. On the dispensary side, because of its product supply chain, Acuity can promise quick turnaround on every single item it sells. “For a lot of places that we get involved with, this is a whole new ballgame for them,” Anderson said, noting that quick turnaround times is a key factor for increasing customer satisfaction. Optometric Advisory Council Provides Direction One of the things that makes Acuity different is its optometric advisory council, which includes its medical director and a committee of six to eight internal ODs and two to three external ODs, Anderson said. This council provides direction, advice and “the voice of the doctor in all the things we do on a day-to-day basis,” he added, including such factors as standard of care. “We are all about full-scope optometry in the lane or the investments needed to practice that,” he said. Anderson also noted that each of the practices that Acuity has added has come with a different ownership structure. The eyecare practices that have an ownership stake in the overall business view this as “an opportunity to get in on the ground floor and into a business that is going to be at 100, 200 or maybe 250 locations in the next couple of years,” he said. MyEyeDr. also has characteristics that differentiate it from the other PE-backed management firms, Downes said. MyEyeDr. is “connected and partnered with what I think are more long-term investors,” Downes said. She noted, too, that MyEyeDr. has a complete support center that focuses on taking everything out of the office that takes the doctor or staff away from patient care. MyEyeDr. also considers a practice’s legacy as a key operating element, Downes said. “I think legacy is important, but I think there is a way you can integrate the doctor and the culture into the legacy. Our teams are [committed] to helping understand that culture and to make sure it is integrated.” Addressing the Misperceptions One of the misperceptions of PE-backed transactions is the way in which investment firms address staffing issues and staff deployment upon the closing of a deal, McCrann said. He noted that “a lack of information leads to misunderstandings.” The misperception is centered on the idea that after an acquisition, the investment firm changes all of the acquired practice’s existing staff. “There appears to be a presumption that we have a warehouse and employees sitting in Topeka, Kan., ready to be deployed into your practice at the moment that we affiliate,” McCrann said. “That’s not true. Our employees, voila, are your employees…… Our team is your team, and we start there and we build from that organization.” During a Q&A portion of the discussion, Axelrad asked about “the blurring of independent and corporate optometry” and whether the boundaries between the sectors begin to change over time as PE-backed firms play a larger role in eyecare. Barton said he believes the answer to this question will emerge over a period of 10 to 15 years, and that ultimately patients/customers will have input on how eyecare practices look in the future. “The patient will dictate where we are going to be,” he said. “They are the ones who will decide whether the chain [store] environment will be 100 percent retail focused or [whether] there is a need for medically focused care. ….. The big chains [also] will have to decide where they want to play and whether they want to be only in one space or whether they want to be more involved like we are at Total ECP in terms of providing that 100 percent scope of medical optometry.” In response to another question from Axelrad about the future of eyecare and the forces likely to buffet the optical space, Anderson said he believes eyecare is “ripe for digital disruption” and that it will come up in a couple forms. “I don’t think [digital disruption] has fully hit optometry yet,” he said. Telemedicine (a type of digital disruption) also is something that eyecare executives should be aware of, including how it might progress and what it might look like in various iterations, Anderson said. “From our standpoint, we are all about patient outcomes,” he added. “If telemedicine, for example, is used as a screening tool and gets more people in chairs to get actual eye exams, that’s fantastic. Who wouldn’t want that? But there’s a lot of controversy there. In our category, we’ve been a little sleepy for a lot of years and these are some of the big topics that we are going to have to discuss.” McCrann of EyeCare Partners identified consolidation across health care as a key force to watch. “It’s all about scale and efficiencies and the ability to compete in a marketplace on an equal basis with the other players in the space,” he said. “What we are doing with independent providers is part of an entire tidal wave of consolidation that is occurring in health care. I think we are on the leading edge of it. You are not just seeing this in optometry, but in all of the medical specialties and across all of American health care.” Still, even with consolidation taking place all around them, there are independent optometrists who are committed to remaining in private practice and establishing and/or continuing a legacy. This was one of the factors that Kling said convinced him to remain independent, yet he acknowledged that each practice owner should consider his or her own situation. ”For some practitioners, private equity makes a lot of sense,” he said. “For me personally, it didn’t.” Every OD Practice Situation Is Different Independent optometrists take a lot of pride in being independent and being able to make their own decisions, Kling, who owns and operates a single-location practice near San Diego, said at the outset of the discussion. “With that independence comes power,” he added. Kling noted that during his career he has purchased five practices and consolidated all five into one location over 20 years. He noted that every deal, or acquisition, tends to look different and there is not a template or model that an OD can use for guidance. “One of the things that I think is the most important in the consideration [of selling] is the timeline,” he explained. An OD who is close to retirement or exiting the field may find selling the practice more advantageous, while someone at the beginning of their career might be sacrificing future income by selling the practice and taking on a role as an employee of the operating company. For those with a 10-year timeline for retiring, it becomes a difficult decision on whether to sell a practice, he noted. Kling advised ODs to consider “three buckets of possibilities” before entering into a deal with a private equity firm. They are: operational issues (including regulatory factors), personal objectives and financial considerations. “A lot of times we think about private equity only from a financial standpoint,” he said, noting that there are other factors that are critical and should be considered in the decision-making process. “We as independent optometrists take a lot of pride in being independent and being able to make our own decisions,” he said.