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ODs Review their Options as Private Equity Looks for a Larger Role in Optometry

By Mark Tosh
Monday, April 16, 2018 12:09 AM
NEW YORK—To sell, or not to sell? That is the question that many independent eyecare professionals are wrestling with today as a broad group of investors and management firms seek to capitalize on what they believe is a profitable opportunity to consolidate the fragmented eyecare and optical retailing businesses.

The implications of private equity’s growing involvement in the vision care business received a thorough examination at a recent two-hour industry session devoted to exploring this question from all sides. The session featured an all-star panel of executives with hands-on experience in dealing with private equity investment in optometry.

The special session, “Private Equity Takes Root – What Does It Mean for Optometry?” was held March 17 in conjunction with Vision Expo East at the Javits Center here and drew an overflow crowd of interested executives from across the optical industry. The session was a joint effort of Jobson’s Review of Optometric Business and Vision Monday, in partnership with Vision Expo.

Mark Wright OD, FCOVD, professional editor, Review of Optometric Business, gives an overview of broad trends impacting optometry to the packed room.
Michael Kling, OD, talks about the decision process he made in exploring if the sale of his practice made sense at this phase of his career.
The panel of ODs featured Mark Wright, OD, FCOVD, professional editor of Review of Optometric Business; Brian Chou, OD, FAAO, an optometrist who sold his practice, EyeLux Optometry in San Diego to Inland Eye Specialists, an affiliate of EyeCare Services Partners, in 2017; and Michael Kling, OD, founder and chief executive of Invision Optometry, a cutting-edge practice in San Diego with five ODs on staff.

The investor/management group panel included Sue Downes, chief executive officer of MyEyeDr./Capital Vision Services; Kelly McCrann, chief executive officer of EyeCare Partners, which is backed by FFL Partners; Justin MacCormack of Toronto’s Imperial Capital, which recently formed Total Eye Care Partners and acquired HW Holdings; Jeff Fronterhouse, managing partner of Riata Capital, which formed Acuity Eyecare Group in 2017; and Eric Anderson, the new chief executive officer of Riata’s Acuity unit.

Owning their own practice has long been the dream of many ODs. Ownership allows the OD to operate the practice as they see best. In this traditional scenario, the owner-OD builds value in the practice over 30 to 40 years, and then transitions out via a sale to an associate or another buyer. Thus, the independent OD receives value accrued from a lifetime of work.

However, business today is changing as is the competitive landscape as new practice models are launched, as Review of Optometric Business editorial director Roger Mummert explained in his opening comments. Today, the lines between independent and corporate optometry have blurred, and new models of ownership are emerging, including the PE-driven ownership model.

ODs, now facing complex business decisions, often are presented with an opportunity to partner with a network that has greater resources and is backed by a private equity group. In short, what the private equity groups are offering is the basic proposition that the ECP can sell his/her practice and continue on in the business. “They are saying ‘Let us handle the business decisions and you, the OD, can be the doctor that you were trained to be,’” Mummert noted.

Wright, building upon these comments and the recent changes in the marketplace for independent practices, set the stage for further delving into exploring this topic with opening comments on the state of the eyecare business today. He detailed the issues that independents ODs are grappling with in developing a long-term plan for their practices, and noted that the situation today is not unlike the quandary other health care professionals have faced in the recent past as consolidation set in. “We’ve seen this picture before,” he noted.

The consolidation trend is playing out against a positive climate for eyecare, and at the same time there is an investment community that, in some cases, is flush with cash. It’s a growing economy and patients are visiting their ECP with more money in their pockets and are willing to spend more, Wright said. He also noted that competition in the eyecare sector is changing and “getting sharper.” He added, “Therefore practices have to be smarter in the way they are working. Many people are frightened by these changes.”

Still, there are many options for independents to consider when planning for their future, Wright noted. These options include joining an ECP alliance or buying group, acquiring another practice and combining it with the existing business, transferring the practice to a family member, or selling—with the choices for the latter ranging from selling to a competitor or a corporate entity or selling to an investment firm.

Brian Chou, OD, reflects on the choices he made in selling his practice.
ROB’s editor, Roger Mummert, probes the issues surrounding PE with the OD speakers.
“There’s a whole world of investors out there with a lot of money that was sitting around for a while,” Wright said. “They are looking at eyecare practices and saying, ‘This could be a good investment.’ And so we are beginning to see some forays.” He also noted that not all optometry practices are viable candidates for PE consolidation, and that many ODs are not aware of the appropriate valuation of their practice.

A private equity transaction has two sides, of course, and the audience at the special session was also interested to hear the perspective of two independent ODs, one who had sold his practice and another who has opted to retain ownership control.

Chou, who sold in 2017, discussed his rationale for the decision and some of the subsequent changes to the practice. “In a nutshell, my experience has been a mixed outcome,” he told audience. “I was grateful to take some chips off the table,” but he also noted that “new stresses” and new, unintended consequences have arisen following the sale.

Chou said he believes there are ECPs who are better-suited for working with a private equity ownership group and that there are others who should consider alternate strategies to “reduce their business management issues.” He added, “The thing about private equity is that you can’t undo it. Once you’ve sold a practice, that’s it and there is no turning back.”

Kling, who continues to own and operate his San Diego practice, said he expects to see across optometry “what has happened in other specialties, [such as] dentistry and dermatology, with probably about 15 percent to 20 percent moving this way. After that, there is still going to be this entrepreneurial spirit and there is still going to be practice ownership. The point is that we will absolutely survive this,” he said.

He also noted that independent ODs must think about their practices from a cash flow standpoint. That was one of the biggest things he learned from going through the process of considering a sale. “Little tiny improvements in cash flow result in massive changes to the valuation,” he said, noting that valuations are based on a multiplier factor.

In explaining why he has chosen to stay independent, Kling said he discovered that he’s “kind of a control freak, and I was uncomfortable giving up some of that control.”

Kling said he believes a key factor for ODs to use in determining whether to continue as a practice owner or to transfer ownership to an investment firm is their personal “timeline” and how close they are to retiring from the profession. An OD who is 10 to 15 years away from retiring might be risking future income if they sell 10 to 15 years ahead of their planned retirement.

“Here’s what happens financially as an owner: you start to see a divergence in the income the longer your timeline to [retirement],” he explained. If your timeline is short, then when you receive up-front money from the sale of the practice, “the delta between selling and not selling is not so great. But as you get further into the time horizon, that financial delta is significantly different,” he said. This hypothetical financial scenario “played a very important part in my decision to hold onto the practice,” Kling said.

“If I were five years from being done practicing, [selling] would be extremely interesting to me,” he said, noting that his “timeline” for continuing to operate his practice is in the 10- to 15-year range. “The timeline for me was a really big part of my decision-making.”

After the OD participants made their opening remarks, moderator and Vision Monday editor in chief Marge Axelrad asked the investor panelists to talk about their companies’ approach to eyecare and managing a consolidated group of practices.

(L to R) Mark Wright, OD; Michael Kling, OD; Brian Chou, OD; and Review of Optometric Business’ Roger Mummert headed up the OD panel at the session.
MyEyeDr. chief executive officer Sue Downes said her company was one of the first to initiate what has become this trend toward consolidation. She noted that she sees MyEyeDr. as “sitting between the two panels [independent ODs and investors] because I was on the side where many of you are today asking myself should I be joining private equity or a financial supporter.”

Downes began her career in vision care nearly 30 years ago working at the front desk and she launched MyEyeDr. 17 years ago. The parent company, Capital Vision Services, subsequently received investments in 2015 from Altas Partners of Toronto and CDPQ (a Canadian pension fund). “My investors are probably just a little bit different,” Downes said. Andrew Sheiner, a founder of Altas, left private equity because “he didn’t want to be in a position where he was constantly flipping businesses. He wanted to create an experience of a long-term investor of building great businesses,” she added.

The objective at the launch of MyEyeDr. was to create a really unique experience and to offer the finest in eyecare, Downes told the audience. The goals today are much the same and begin with the concept of providing excellent patient experience. “As we initially grew in the Washington, D.C. market to 38 offices, I loved our brand and I believed in it,” she said. “We started doing acquisitions in the first six months that we were open.” However, Downes said neither her nor her team had the appropriate experience to tackle the challenge of entering new markets. “That was really the key decision [criteria] for us to join a financial backer,” she said.

MyEyeDr. prides itself on being strong in practice management and understanding how to make the eyecare experience easier for doctors and patients and easier for the office’s associates to facilitate. “We also pride ourselves in really understanding the complexity of managed care and making it more simplistic to manage for our offices and our staff,” she said.

Sue Downes shares the approach of MyEyeDr.
EyeCare Partners’ CEO, Kelly McCrann, discusses the group’s goals.
One of the newer management/investor groups to enter the eyecare market is Eye-CarePartners, which was founded in the spring of 2015 with Clarkson Eyecare at its core. EyeCare Partners is now operating in nine states with about 240 practices and 350 doctors, according to chief executive officer McCrann. “We’re expanding rapidly,” he said at the session. The company expects to have roughly 275 eyecare offices under its umbrella by year’s end, and it seeks to form vertically integrated networks in the markets in which it operates.

McCrann, who got his first taste of practice management in health care more than 20 years ago when he founded a dental practice-management organization in Boston, said he sees similarities between the dental care sector in the late 1990s and eyecare today. “If you look at dentistry as an analog, there are now 75 sponsored business partners in the dental world,” he said. “They have become part of the fabric of the dental profession and they are viewed as a very viable alternative, both to retiring and young associates…that’s what 20 years [of consolidation-type activity] has done in dentistry,” he noted.

EyeCare Partners, which is backed by the investment firm FFL Partners of San Francisco, is fully committed to offering exceptional patient care and an exceptional patient experience, McCrann said. “We pursue that by seeking to affiliate exclusively with full-scope medical practice optometry,” he explained.

“There’s a lot of things that we are not, but that is precisely [who and] what we are.” To achieve its objectives, EyeCare Partners focuses on three primary strategies. They are: acting as a growth-oriented, world-class business support partner; offering resources as a capital partner that can expand, enhance and/or liquidate the equity the original shareholders have built up; and demonstrating a deep commitment to the partnership between ophthalmologists and optometrists, which can improve patient care and the lives of both sets of practitioners, McCrann noted.

Under EyeCare Partners’ ownership, the doctors’ job is to focus on the exam lane and to provide exceptional patient care. The role of EyeCare partners is to oversee and manage all the business aspects of the practice, he said.

Another fairly recent arrival to the eyecare business in the U.S. is Toronto-based Imperial Capital. Justin MacCormack has been with the investment company 11 years and he has made 10 health care investments during this time. The previous investments focused on opportunities in the dental and veterinary care sectors, he noted. These investments have performed well and “we have learned over the years what not to do and what to do right,” MacCormack said. The “one hallmark between it all,” he noted, is to be true to your word and take a collaborative approach to deal making.

Imperial Capital’s Justin MacCormack talks about two approaches being taken with Total ECP and HW Holdings.
Riata Capital’s Jeff Fronterhouse talks about the formation of Acuity Eyecare Group a year ago.
Acuity Eyecare’s new CEO, Eric Anderson.
“Our interest in optometry really got started in 2016,” MacCormack said at the PE session. “We looked at the sector and realized what was taking place in the industry had already taken place in the dental and veterinary [businesses], so we came up with a model that we believed was unique in the industry, and hence Total Eye Care Partners (Total ECP) was our first foray into this industry.”

A year later, Cincinnati-based Total ECP made its initial investment via a partnership with Ben Gaddie, OD, and his Gaddie Eye Centers, which owns four offices in the Louisville, Ky., area. “What Total ECP really centers around is offering best-in-class, full-scope medical optometry and best-in-class retail,” MacCormack said. “We think the two go hand-in-hand.” He noted that by partnering with leading ODs such as Gaddie, Alan Glazier (who joined Total ECP in a March 2018 deal) and Paul Karpecki [medical director of Total ECP] the firm has established a foundation for creating a full-scope medical eyecare business.

“The second thing that would differentiate Total Eye Care Partners is that we are looking for a partnership,” MacCormack added. “Our interests are aligned with our doctors, in that we want them to retain a stake in their clinics.”

Total ECP also has invested in HW Holdings, an optical retailer operating under the trade name All About Eyes with 24 locations in Iowa and Illinois. This is a separate investment that centers on “optimal customer experience and much more of a retail focus,” MacCormack said. “We are very bullish on the sector. We think that these management services organizations that you are hearing about today are very positive for the industry,” he added.

Riata Capital’s managing partner Jeff Fronterhouse noted that his first investment in the eye-care business came in 2011 with Vision Source. He termed this “a very successful investment and a great opportunity for Riata. “Through that [investment] we really developed an affinity and appreciation for the eyecare industry,” he said. “We like to invest in growing businesses, and that’s what we are focused on. We are not distressed investors.” He also noted that Riata looks for companies with solid growth prospects, strong people and a strong market position that it can develop, and that the firm is “excited to be back in this space.”

Riata Capital led the formation of Acuity Eyecare Group last year, bringing together Crown Vision Centers, Eyetique and International Eyecare Center. After two transactions earlier this year, Acuity now operates more than 75 eyecare locations across eight states. “We’ve been on a growth path to build this company and we want to get it up to 200 to 300 locations,” he said. “Private equity is one of the options… It’s one way for [independent ECPs] to explore their next steps for their practice.”

Fronterhouse said he believes that collaboration between the investor group and the ECP is a key factor in the success of any deal. “Private equity can play a role in different markets, but it’s not a fit in every market,” he noted. “It is a way to create value or unlock value. We want to build good businesses and be a positive for the industry,” he said, noting the advantages a private equity investment may bring include expanded patient access and improved patient care.

To oversee its operations and expansion efforts, Riata recently named Eric Anderson as chief executive officer. He has 20 years of optical retail experience, including a stint as president of LensCrafters, and expressed a passion for people and patient outcomes. “I think what sets our team apart is that we are small, fairly new and very nimble,” he noted. “What we bring to the table is a platform that we’re still in the process of building… But it’s a platform that includes fantastic lenses and frames, full-scope optometry, [the right] equipment and a way to help people navigate [the system].”

The Acuity model is flexible, which has allowed the firm to plug in three very diverse ECP businesses under its operating umbrella, Anderson said.

In a follow-up portion of the discussion with the management panel, Axelrad asked the panel to identify a few of the expectations that ECPs of partner or acquired businesses should expect to occur following the closing of the transaction.

MyEyeDr.’s Artis Beatty, OD, addresses an attendee’s question.
Dr. Ben Gaddie, of Total ECP, speaks to a question from the audience.
At MyEyeDr., Downes said one of the first things ODs should expect is that there will be no changes to the office or OD’s commitment to patient care. She said MyEyeDr. tries to provide a “concierge service” of resources that the OD and his/her team can use so they can “think only about the patient while they are in the office” and other things that make the practice more patient-centric. “That way [the OD] practice is going to stay the same,” she said. “We’re here to provide resources to make it easier for you, and not to change the way you practice, the tests you do or any of that. Those will continue.”

One of the things that likely will change, Downes said, are in-office systems so that MyEyeDr. can take care of the patients and the staff that assures “the service I am talking about. All acquired practices will move to the MyEyeDr. human resources and point-of-sale systems “at some time, which has to be the right time so that we can understand the practice and help you manage it more effectively,” she said.

At EyeCare Partners, McCrann said that while some things may change under the new ownership, one thing that won’t change is the practice’s clinical independence. “Inside the lane is completely [the OD’s] responsibility,” he noted. “We may seek to enhance some of the equipment offerings, for example. We’re introducing Optos machines in all 240 of our locations. We will seek to upgrade and enhance, but clinical independence remains completely with you.” On the administrative side, there are changes made that include payroll systems, benefit offerings, and accounts payable processes, among others.

He said acquired practices can expect a number of administrative changes, “but not really those that impact culture. He added, “We will not change people unless those people need to be changed. And we will make that decision in partnership with you.”

Practices acquired by Acuity Eyecare Group can expect some operational changes “at some point” after the transition is under way, Anderson said. These include IT system changes touching upon centralized resources for retail CRM and POS systems, lab routing systems and recall processes. “We have a strong IT team working in those spaces right now,” he said.

What selling ODs should not expect, he said, is a “boilerplate” approach to the sale process. “In the six different deals we’ve done over the past 11 months, I don’t think there’s a boilerplate, but there are best practices,” he said. “The best practices are making sure the deal is customized depending on the situation the doctor is in. Do they want to maintain an ownership stake? That’s a possibility. If they don’t, that’s a possibility.”

The key consideration, at the end of the process, he noted, is that it’s in “all of our best interests to make sure that when something occurs, whether it’s a merger or an acquisition, that it goes really well.” He added, “It’s a small community and it only takes one or two examples of things not working out to make our lives really difficult. So we’re all very much incentivized to preserve culture and to preserve the doctor and to make the transition as smooth as possible and obviously offer [the ODs] the ability to leverage the platforms that we share.”

(L to R) VSP’s Matt Alpert, OD, Michelle Skinner and Ryan Wineinger, OD, Wineinger Eye Care.
E. Dean Butler, Neurolens with Pantex Partners’ Gary Tillman.
Under the Total Eye Care Partners’ ownership umbrella, MacCormack said the preference is for ODs to work with clinical autonomy, and that acquired practices continue to operate under their existing name. The name of the office stays the same “because we think it’s a local market business,” he explained. “You get to keep your identity.”

ECPs also have an opportunity to retain an ownership stake in the business that will enable some type of role in decision-making. MacCormack said one of the objectives of the retained ownership model is that the selling ECP does not have to feel like they are EyeCare Partners’ CEO, Kelly McCrann, discusses the group’s goals.“being removed and somehow their culture is being impacted.”

For independent ODs, there likely are many other questions to be posed before they have a thorough understanding of the options that are available for ensuring the long-term success of their practice and making the appropriate choices for the direction of their eyecare career. As Wright noted at the outset of the session, this discussion at Expo East represents just a “beginning to the conversation” that is going to take place more frequently going forward.

“I want to remind you that this isn’t our first rodeo,” he added. “All of you who were around 25 years ago remember when hospitals were buying up ophthalmology practices to form circles around their surgery suites. And you remember when ophthalmology practices were buying optometry practices to form circles, or ‘feeders’ if you will, into their cataract practices. Those have come, and those have gone. We’ve learned from history. This is a new wave that we face now, so let’s begin the conversation.”
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