Financing a Sustainable Optometry Practice

Many of the optometrists who have been Owners of practice for more than five years may probably be familiar with the notion of balancing debt and equity and leveraging. However, when it comes to new entrepreneurs or new graduate students, things differ between what they knew as student loans and the debt they run through in an established or newly launched business. Many newly graduate students avoid leveraging because of the experience they had with student loans, however, sometimes they may be missing an opportunity to grow a successful business beyond what their capital allows. The most important difference between debt and equity is in the way finance is done and what happens if the practice fails. A debt provider gets a predetermined rate of interest and has a priority payment position in case the practice fails. An equity holder may be the last to be paid out if the practice fails and does not get interests. However, since he holds part of the ownership, this could be highly rewarding in case the business turned out to be successful, provided shareholder value, and paid dividends.

Leverage is the relationship between total debt and total equity. The Weighted Average Cost of Capital (WACC) is the overall cost of capital computed by averaging all sources of capital (debt and equity). Independent of how the capital structure is balanced between debt and equity, the only way a business can survive and become successful is by generating a return on investment (ROI) that exceeds the WACC of the practice. In order to achieve this: The practice owner should be able to identify and decide on the appropriate investments in the right tools, equipment, and assets that generate the highest ROI on one hand. And he should also be able to optimize funding through a well-balanced debt and equity leverage that provides the least WACC on the other hand.