The vision care sector continues to attract increasing interest from private equity investors. The optometry industry is highly fragmented compared to optical retail, with more than an estimated 10,000 independent optometric practices in the U.S. and a limited number of platform-sized opportunities. This fragmented market presents a highly compelling consolidation opportunity for investors across the full spectrum of eye care services.
Private equity investors are attracted to the eye care physician practice space because of the aging U.S. population. Optometrists (ODs) typically couple primary eye exams and preventive services with optical stores within their practices or at retail locations to allow for dispensing of glasses, contacts, and frames (which normally have above average profit margins). A PE investor’s typical strategy is to combine or unify them under franchise-like agreements with the goal of raising profit margins by cutting administrative costs or changing business strategies. The PE investors often then resell the practices at a higher price to the next bidder. These investments from private equity groups also help doctors market and expand their practices, as well as negotiate better prices for drugs and supplies.
The Journal of the American Optometric Association notes that the average valuation of an optometry practice is 58.7% of the gross income for the year before the sale of the practice. Valuations generally range between 40% and 70% of the prior year’s gross income.
Practices are most commonly valued based on their EBITDA. The average independent practice has 1.5 OD’s, 6 staff, and generates $1.35 million in revenue. The average practice has a 20% EBITDA, and oftentimes higher. Investors generally pay more for a multi-location practice and even more for a large group practice. According to an article in eyeoneyecare.com, “a traditional OD-to-OD sale may go for two to three times EBITDA, a common optometric practice may go for three to six times EBITDA, and a mega practice might go for six to 10 times EBITDA.”