Using Leverage to Acquire an Optometry Practice

Using Leverage to Acquire an Optometry Practice

In a previous post about the reasons, an Optometry practice would need a loan we emphasized that buying a new practice may put you in a position where you need a long-term loan. Even if you have ample cash to buy an Optometry practice without recourse to leverage, it is advisable to take a loan.

The reason behind leveraging when acquiring a practice is related to the return on investment ROI estimation. Suppose you want to acquire a business valued at $500,000 which has a 20% return. You have the choice of paying cash $500,000 and getting a 20% return on your cash invested or down-paying $50,000 and getting a 200% return on your asset investment. Maximizing debt maximizes your ROI in the case of acquiring a practice. Now that does not mean that it is safe that everyone should go on at a 90% debt, but if you are sure that your returns are enough to service the debt, you will have enough cash flow in a short period of time. The Small Business Administration (SBA) in most of cases backs loans up to that level.

The concept of leverage is used by private equity firms, they typically place 40 to 60 percent equity into leveraged buyout (LBO) acquisitions to increase the stability of their investment.

A 10% investment in the purchase of the practice may very well have a payback of a year or less or more. This means that all cash flow after this period of initial investment payback is a cash flow that can be used in other investments forever. Moreover, if you have not that 10% to pay or aren’t able to secure by the time the deal is closed, you can find an investor to sell him 10% of your practice if you are sure that the practice is generating the right amounts of cash flow. Your job as a CEO is to be able to secure the loan and be able to convince investors of your project and sell them your idea.