Can I, Should I, or Do I Even Want to Own a Practice?

Western Veterinary Converence – 2008 (speaker notes)
Dr. Dave Gerber, Simmons Northwest
Dr. David King, Simmons Southcentral

"I am an excellent practitioner; therefore, I am a poor businessperson. I am an excellent businessperson; therefore, I am a poor practitioner. – a veterinarian

First, we need to dispel the notion that being a savvy businessperson is incompatible with outstanding medical care. They are not mutually independent and, in fact, unless the business part of the practice is healthy, financially, it is often difficult to be able to afford to provide top quality care to your pets and clients.

The August, 2007, Veterinary Economics, had statistics regarding associate interest in owning a practice from their 2007 Veterinary Economics Business Issues Study, and I would urge you to read it. Lots of good stuff relating to reasons to own, reasons NOT to own, gender differences, and time-in-practice differences. See how you fit into these statistics.

Are women becoming practice owners?
An interesting stat was the percentage of women interested in ownership. For several years, many in our profession have been saying that "women won‘t buy and own practices. That certainly has not been my experience here in the Northwest. This stat in VetEc shows that 41% of the women polled plan to own a practice. It is lower than for their male counterparts, with 52% of them expecting to be owners. So, considering that about 80% of new grads are now women, we can expect a smaller OVERALL percentage of DVMs wanting to own, but it clearly refutes the notion about women not entering practice ownership.

So, why own a practice?
The VetEc article sited previously asked respondents why they might want to own a practice. The main reasons revolved around control (of management, of medical policies, of life goals) and the financial rewards.

So, why NOT own a practice?
The same study asked why they DON‘T want to own a practice. These reasons mostly centered on personal issues, such as stress, limitation on personal life, and long hours. Also important were financial risk and focus on management instead of medicine. Interestingly, the men were concerned about the uncertainty of an exit strategy (50%) while only 13% of the women felt that was an issue.

What is your mindset?
Whether an owner or an associate, each requires a completely different mindset. Not everyone can or even has a desire to become a practice owner. So, what is YOUR mindset? It is determined by your goals, both professionally and personally, and your basic personality.

Owner Mindset – Owners typically want to be "their own bosses, enjoy and have an ability for management, are not intimidated by the risks of ownership, realize that ownership restricts geographic mobility, and appreciate that, at least in the early years, personal life must take a back seat to practice responsibilities.

Associate Mindset â€" Associates don‘t mind letting others make the business decisions. They don‘t want the hassles and responsibilities of ownership, and they value their mobility and personal time over practice ownership. They would rather concentrate their time and efforts on medicine and family than on operating a business. Although veterinary medicine is important to them, it is usually not THE MOST important aspect of their lives.

One viable and common compromise is to become a part-owner. It provides some of the benefits of full ownership and some of the stresses as well, but it can work nicely, assuming there is compatibility among the owners. Sometimes that can be quite a challenge.

How do you define yourself?
When I graduated in 1978, prior to the invention of the wheel, most of us defined ourselves by what we did as a profession. If someone were to ask me, "Who is Dave Gerber?, my first response likely would have been, "I am a veterinarian. That is changing both for men and women, but, women tend to do a much better job than men at seeing themselves as multifaceted and well-rounded. If you ask the same question to new grads, and especially women new grads, they are likely to list other qualities about themselves ahead of being a veterinarian, such as skier, hiker, artist, mother, wife, and, oh, yes, veterinarian. This is probably much healthier and will result in less burnout. But, it also means fewer veterinarians want to become practice owners.

Preparing yourself
Medical Experience It is important that the potential owner have sufficient medical experience. Typically, that will take a minimum of 2-3 years after graduation. Naturally, if the experience is in a similar practice, it will be most helpful, and, even better, if it is in the same locale.

Know what you want Buyers who formulate the kind and location of practice they want have a huge advantage when they are finally ready to make the decision. They will recognize a good opportunity and not be left with nothing when another buyer moves more quickly.

Don‘t aim too low Many buyers think they can only afford to buy small practices. The debt payments come out of the practice profits while still providing you, the buyer, with a reasonable salary. Remember, if properly priced, the practice "buys itself no matter if it is small or large. In reality, the larger practices typically have better cash flow, which gives them an added "cushion in rough times. The most common resistance that buyers have to purchasing large practices is a psychological one related to the large debt they face. A debt of $1 million or greater CAN be scary and it requires a solid understanding of the financial information to be confident that it is "doable.

Be realistic Many young buyers try to hold out for the perfect practice. It is great to have a wish list, but equally important to know what is and is not negotiable on that list. Excellent practices have been passed over because they weren‘t perfect. Remember, many things about a practice can be altered once a new owner is at the helm as long as it is a reasonably good fit.

Assembling the team Much the same as we chide our clients for acting as their own veterinarians, it is important to use professionals to assist in the purchase. That allows everyone to do what they do best. Once the type and geographic location of a practice are determined, contacting a broker or other acquisition consultant can save countless hours, since they will attempt to match a practice with a buyer‘s needs. Some brokers work as "buyer agents representing the buyer in the transaction. As the transaction progresses, an attorney will be a vital member of your team, and it is best to choose someone familiar with veterinary medicine. It is advisable to contact an accountant early as a resource to help in reviewing the financial information. This is also a good time to make an initial contact with one or two lenders to become pre-qualified. All of the above advisors can and should work together to help bring the transaction to closing, each doing what he or she does best. This is an area where trying to save a few dollars can prove very costly. An excellent source for identifying these professionals is the Association of Practice Management Consultants and Advisors at www.avpmca.org.

Rules of thumb What about using "rules of thumb for establishing the practice‘s value. This question comes up frequently on VIN so I won‘t belabor it. DON‘T. It simply doesn‘t work. Every practice is unique. You could easily end up paying WAY too much for a practice or foregoing an stunning opportunity by relying on these ineffective methods. You are contemplating an investment of several hundred thousand dollars or even millions. PLEASE don‘t shoot yourself in the foot. Get your team of advisors working for you.

But, how do I get financing?
There are several possible sources of financing. The most obvious is the selling owner, and, if that can be worked out, it is often the most attractive for the buyer. The up front costs are minimal and the time to complete the transaction is likely the shortest. Local banks are usually not too helpful for practice loans because of the large amount goodwill, which they don‘t like to finance. They can be a good source for financing the real estate, however. A strategy we have used recently, and quite successfully, is to obtain cash from a commercial lender for the practice and ask the seller to carry the promissory note for the real estate.

Commercial lenders There are two classes of commercial lenders. The first, and most common, are "asset lenders and most commercial banks fall into this group. They want enough tangible assets (equipment, furniture, building, land, personal assets) to cover the amount of the loan in the event of a default. Unfortunately, most young buyers have few assets and large student loans. Often they have a negative net worth. Additionally, since the bulk of most practice sales involve sizable intangible assets (goodwill, non-compete agreements), the tangible assets available, both personal and practice, rarely provide enough value for the "asset lenders.

The second class of lender is the "cash flow lender. They are not so concerned with the value of the assets, but want assurance that the practice will produce sufficient income to pay the practice expenses, the loan payments, and the buyer‘s salary.

Loan Brokers Another consideration is whether to use a primary lender or a loan broker. In most instances, the primary lender can offer a better package because there is no "middleman to pay. There can be exceptions, but it is prudent to ask lenders their sources of funding.

Specialty lenders As for commercial lenders, we have had the best success using "specialty lenders. These are lenders who concentrate on lending to veterinarians. Because they know and understand the profession, it is usually much easier for these lenders to approve a loan. SBA (Small Business Administration) does NOT lend money. It is government sponsored loan guarantee program operated through commercial lenders. So, an SBA loan is a loan obtained from one of the sources above, but it provides a partial guarantee to the lender in the event of a default. There is significant paperwork involved as well as the "loan guarantee fees. However, the rates are usually attractive and sometimes a loan can be approved using the SBA route when it can‘t be approved any other way.

Finally, a lender can, to some degree, act as a buyer‘s consultant. After all, it is THEIR money and they want to be pretty sure there is sufficient cash flow to pay back their loan and to provide an adequate income to the buyer. So, they will always perform their own analysis of the financial data to be sure it works.

In Summary

Practice ownership offers a whole additional dimension to our great profession. It does require fortitude, willingness to go the extra mile, and developing a clear vision before the process begins. Being well-prepared will make the whole process more rewarding. Some final comments…

  • Academic success does not equal financial success in business ownership.
  • The most challenging part of acquiring or starting a veterinary practice is accepting the responsibilities of ownership.
  • Keep your credit clean!
  • Set realistic expectations for yourself.
  • Know your tolerance for risk.

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