Nikki Nitz, CPA, CMA
Who Can Afford to Buy
We get asked regularly, “Are there buyers who can afford to buy?” The quick answer is YES!
When a practice is priced fairly the profits of the practice cover the debt payments the buyer needs to make as well as provide them a reasonable return on their investment for making the practice purchase.
Profit is money that is available after all normal operating expenses have been deducted from revenues including:
1. Fair compensation for the owner for being a revenue-generating veterinarian in the practice
2. Fair compensation for the owner for their management responsibilities in the practice
3. Fair market rent no matter who owns the real estate (the owner or a third party landlord)
Many sellers and buyers have concerns about student loan debt. The veterinary lenders understand the industry and know most buyers have student loan debt. Their four biggest concerns are:
1. Does the buyer have a good credit history? Do they have a proven track record of repaying their debts timely?
2. Have they proven they can generate reasonable revenues as a doctor?
3. What is the monthly financial need of the buyer to cover their personal expenses (this would include their student loan payments)?
4. Does the practice they are looking to purchase provide enough cash flow to cover these financial needs?
If the practice does not generate enough cash flow to cover the buyer’s needs this does not necessarily mean the practice is priced incorrectly. This could be the case, but it could also mean that this is simply not the right practice for this particular buyer.
For example: I had a buyer that had six small children at home and his spouse was a stay-at-home mom (no secondary income). Therefore the personal needs of this buyer were higher than the typical buyer. Even though I priced the practice appropriately, it did not produce sufficient cash flow for this particular buyer.
We also get asked regularly, “Can a buyer afford the real estate and the practice?” The quick answer again is YES!
The buyer has to pay for the use of the facility one way or another. Either they are paying rent or they are making mortgage payments on the real estate. If the rent is at fair market prices, the rent and debt payment figures end up being very close to the same amount. So if the buyer can afford to rent, they usually can afford to buy. An exception would be if the total debt load gets to be too high for the lender to accept the risk. This outcome is rare.
Of course corporate purchasers can afford to buy as well. One of the benefits of corporate purchasers is that they pay cash. This removes lenders from the process and the result is usually a shorter period of time to close the transaction.
A few challenges of corporate purchasers are that many of them don’t purchase real estate. This could mean you become a landlord if you own the real estate. We are starting to see the corporations recognize this hurdle. Some of them have built relationships with outside investors who are willing to purchase the real estate and then rent it back to the corporate purchaser.
The corporate purchasers usually require the seller to become their employee for a period of time post-sale. The culture of the practice will change with corporate ownership and this is sometimes a tough pill to swallow for the seller when they are now an employee and are not in a position of control.
Nonetheless, corporate purchasers are becoming great options for many sellers.
Can You Afford to Wait to Sell
We, veterinary practice brokers, have been predicting for the past few years how the market is going to shift. It is simple economics. It has been a seller’s market where we’ve experienced more buyers than sellers. Eventually it will shift to a buyer’s market where there are more practices for sale than we have buyers. I’m already seeing it in the Pacific Northwest.
Why is this happening? I feel it is because there are many veterinary practices owned by baby-boomers and they are all reaching retirement at the same time. That time is now!
How is this going to affect future practice sales? I do not feel it is going to affect the value of the practice itself. What it is going to affect is how long your practice is on the market. If you need or want to sell your practice quickly, you may have to lower the price in order to entice buyers.
The buyers are going to be able to cherry-pick the best practices. By best I mean the most financially healthy, in their preferred geographical location, and with the most modern facility and equipment.
Interest rates are another huge factor in deciding if you can wait to sell. Right now lenders are typically offering 4-5% interest rates. This is very cheap money. What this means to you is that the buyers can afford to buy more practice now than they could with a higher interest rate.
Remember when a practice is priced fairly it produces enough profit to cover the practice debt payments and provide them a reasonable return on their investment. The higher their debt payments because of higher interest, means the less practice they can afford to purchase.
We all know that interest rates have only one way to go and this is up. With a new administration coming into office in January this may affect the interest rates.
Can you afford to wait to sell? You may be better off putting your practice on the market sooner rather than later to beat the rush of the retiring baby-boomers and the increase of interest rates.
Who can afford to buy? Independent veterinarians (even those with student loan debt) and corporations.