This is article #2 of the 4-part “Practice Valuation Series”. It will explore the process of valuing an optometric office. Specifically, this valuation methodology will follow the same metrics as article #3, which explores the valuation strategy for a dental practice. Not surprisingly, article #4 will compare the valuation of an optometric practice to the valuation of a dental office.  If you have or when you do read Article #3, you may notice some similarities, which is intentional.

Many appraisers and practice brokers suggest that an optometry practice is worth about 80% of its gross revenue, with an expected return on investment (ROI) of around 50%. However, this valuation significantly undervalues optometry practices. A 50% ROI suggests either an extremely risky investment or an incorrect valuation. Let’s examine the true value of an optometry practice using a more reliable valuation formula.

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The Valuation Formula

The universal formula for valuing a business is:

Value = Profit × Earnings Multiple (Risk Factor)

Where:

• Profit = Adjusted or Normalized EBITDA
• Earnings Multiple = Inverse of the Target ROI

Investors expect a certain level of financial return based on the risk involved. For example:

• Low-risk investments, such as utility companies, yield a 5–10% ROI.
• High-risk venture capital investments expect over 100% ROI.

The key question is: where does an optometry practice fall on this risk scale? By determining this, we can establish a more accurate value for your practice.

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Step 1: Calculating Adjusted (Normalized) EBITDA

What is Adjusted EBITDA? Adjusted (or Normalized) EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization from which (the Normalized part) one-time or irregular expenses have been removed. According to Investopedia, this standardization makes comparisons across similar businesses more meaningful.

The Business Development Bank of Canada states the following with respect to the Valuation Formula:

“The most common method used to determine a fair sale price for a business is calculating a multiple (Earnings Multiple) of EBITDA (earnings before interest, taxes, depreciation, and amortization), which is a measure of a company’s ability to generate operating earnings.”

Determining an optometric practice’s normalized EBITDA is relatively easy from a methodology perspective. An appraiser would typically start with the financial statements produced by the practice’s CPA. These statements will be prepared in accordance with generally accepted accounting rules and should be comparable from one practice to another. Using these statements, the appraiser first removes the EBITDA-related items (Acquisition Interest, Income Taxes, Depreciation, and Amortization), followed by adjustments for non-recurring, irregular, and one-time items.

Example Calculation: For this article, we assume a Normalized EBITDA of $479,400 (see Appendix 1 for details).

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Step 2: Determining the Earnings Multiple (Risk Factor)

The Earnings Multiple is calculated as the inverse of the expected ROI and considers various risk factors. We have used the “Build Up” method to determine our overall risk factor.  This method of risk determination is accepted and widely used by professional business valuators and works well for our example:

Buildup Method Formula

The Earnings Multiple = 1/(Rf + ERP + SRP + IRP + CSPR – AAG)

Where:

Example

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Step 3: Calculating the True Practice Value

Combining the Normalized EBITDA of $479,400 and an Earnings Multiple of 5.14, the Valuation Formula yields a suggested value of $2,466,000.

Value = Normalized EBITDA × Earnings Multiple

• Gross Revenue = $1,800,000
• EBITDA = $479,400
• Earnings Multiple = 5.14
• Calculated Value = $2,466,000 ($479,400 × 5.14)
• Value as a % of Gross Revenue = 137%
•  

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What the Market Says About Optometry Practices

There are several optometry practice appraiser/brokers in Ontario, and they have very different ideas about what an optometry practice is worth.  On average, a sampling of their listings suggests the following:

Appraiser 1 suggested average values with a 1.89 Earnings Multiple, which means they expect a practice to provide a 52.9% ROI. In other words, if a practice had an EBITDA of $479,400 (our example), they would suggest that its value would only be $906,000. Appraiser 2 suggested an average Earnings Multiple of 4.66 (ROI of 21.5%), which, on an EBITDA of $479,000, would indicate a value of $2,234,000, which is closer.  Using our metrics of a 5.14 multiple and an EBITDA of $479,400, our suggested value would be $2,464,000 (about 10% higher than Appraiser 2)

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Conclusion: Find Out What Your Practice is Really Worth

If you are an optometrist, your practice may be worth significantly more than you have been told. Whether you are buying, selling, or planning for the future, an accurate practice appraisal is an essential tool.

We have 40 years of experience in practice enhancement and valuation. If you would like a full appraisal or a second opinion, contact Derek Hill (derek@derekhill.ca) or visit www.derekhill.ca. I’d be happy to help!

Appendix 1 – Normalized Earnings (the full schedule of the following can be viewed as a schedule using a computer screen format at derekhill.ca/blogs)

Doctors Compensation = 360,000 (20.0%)

EBITDA (Normalized) = 479,400 (26.6%)

Appendix 2 – Earnings Multiple Notes

Note 1.       The Buildup Method starts with a Risk-Free Premium of 3.22%, which is based on the Government of Canada’s 10-year Bond Yield. As of February 18, 2025, the rate was 3.22%.

Note 2.       The Equity Risk Premium (4.22%) is the difference between the risk-free rate of 3.22% and the 10-year rate of return for the S&P/TSX Composite Index, which was 7.44% (www.ychartsw.com/indices/%5RTSX).  This is the measure of the extra risk assumed by investing in equities as opposed to risk-free debt.

Note 3.       The Size Risk Premium is used to differentiate between small and large capitalized companies, is mainly used for stock market calculations and is not relevant to private, professional practices.

Note 4.       The Industry Specific Risk Premium (12.00%) represents the risk related to each specific industry type. Every industry has its own unique expected return on investment. For example, a new start-up industry will have a higher Industry Specific Risk factor than an established public utility company. The Industry-Specific Premium measures the return risks inherent in an individual, unique industry sector. A more detailed explanation of this risk factor can be found in Appendix 3 below.

Note 5.       The Company (Practice) Specific Risk Premium (10.00%) measures the relative risks unique to each company or practice being appraised. For example, a practice with a very low new patient flow will have a riskier profile than a practice with a high new patient flow. The Practice Specific Risk profile attempts to quantify specific practice risks by analyzing the objective and subjective practice KPIs. As a general comparative factor, we have assumed a normal risk factor of 10.00%.

Note 6.       The Capitalization Rate (19.44%) includes two concepts: earnings return on investment and the risk of receiving the expected earnings. Factoring in the anticipated growth is part of the risk function. (If interested, the theory behind this can be found online.) What is important to know here is that anticipated growth has a bearing on the overall earnings multiple; however, for our example, we have assumed growth expectations of 10.00%.

Note 7.       Dividing the Normalized EBITDA by the Capitalization Rate provides the same result as multiplying the Normalized EBITDA by the reciprocal of the Capitalization Rate. (Most people find multiplying easier than dividing.)

Appendix 3 – Industry-Specific Risk Premium Factors

 Industry-Specific Risk Premium: The Industry-Specific Risk Premium metric measures the differences in the risks associated with each “industry type”—essentially, which business type is riskier in terms of maintaining its targeted Normalized EBITDA. Here are a few examples of the types of metrics that affect the Industry Specific Risk Premium:

Growth: What is the relative growth expectation of the appraised Industry?  For example, holographic TVs could have a high growth factor, while buggy whips would have a low growth factor.

Educational Barriers: Some industries could have very high educational barriers, while others would have low ones. High educational barriers would increase the industry-specific risk premium.

Profit Margins: Some industries enjoy higher net profit margins than others. Industries with very high-profit margins would have a lower risk premium than businesses with low-profit margins.

Third-Party Competition: Industries with significant third-party competition would have a higher risk factor than industries with little competition.

Geographical Factors: Industries with very unique and rare geographical requirements would have a high-risk factor and thus require a higher ROI in order to attract investors