Byron Farquer, DVM, AVA
Simmons Pacific | Simmons Southwest –
I have little or no money for a down payment; can I still buy a practice?
Zero to 5% down is an achievable arrangement, so not having a down payment is not the biggest hurdle in purchasing a practice. Lenders are interested in your experience, credit and the “fit” between you and the practice as much as they are interested in a down payment.
Is it true that all practices are worth 70% to 80% of gross?
FALSE. In fact, some are worth as little as 25% and some as much as 125%. Practice profits, not just gross revenues, are the decisive measure. Many factors influence value in addition to profit including location, growth, species served, history and future opportunities. The best way to determine practice value is an appraisal.
I take cash out of my practice (non-reportable) can I add it back to profit?
Then you have essentially sold your practice on the installment plan. A veterinary appraiser can’t work off of unreported money. Every unreported dollar represents a tax savings of 25-35%. On the other hand, every reported dollar will net a seller three to five times that amount in practice valuation. Taking $20K in unreported cash out of the practice might save an owner approximately $6K in taxes, but could cost an average $60K to $100K in value. This is a big mistake, so don’t do it.
My practice is “different”, “special”, “best in the area”. How do you account for that?
Everybody thinks their practice is special. However, rarely is a practice so well managed in medicine, business and marketing that it would receive high marks in all areas. Although it may be nicer than some others in the community, it probably still has some management deficiencies compared to other practices. Realistically, most practices are often average but owner over-valuation is quite common because owners are rarely exposed to enough other practices to compare accurately. If your practice is truly special, it will be recognized as such in its valuation and interest from buyers. Pride in ownership is a great thing, so long as the view is clear and realistic.
I’ve been told that large practices are only for very experienced veterinarians, because they are ten times more difficult to manage than a $200K practice. True?
Although larger staffs do require more work, it’s not vastly more work. Five staff members can be just as demanding as 25. Big practices can usually afford to handle the challenges: sending staff to HR training advanced marketing to improve profits, staff training, hiring more staff to ease the workload and stress, and employing middle management like an office manager, inventory clerk, and chief of staff. The margins are usually greater, so these practices tend to tolerate more fluctuations in financial performance. If you’re going to buy a small practice, your practice-management skills will have to be at their highest level, because your margins, at least initially will be tight.
No one can afford to buy my high-grossing practice?
Actually, almost anyone can. Higher gross (assuming correspondingly higher earnings) means the practice has that much more profit to use on a bigger loan. If the practice has $500K in cash flow and buyer’s income needs of $100K, it allows $400K to go toward the loan. Also, one might think that a $1,500,000 practice requires a $300K down payment (people frequently equate it to 20% down on house loans). This is not true, as buyers can often buy a practice with less than 10% down. That means the buyer could likely make this type of investment with only $50,000 down. High-grossing practices often sell to corporate (consolidator) buyers simply because individual veterinarians believe the myth that they can’t afford them or can’t get financing for them. Many commercial lenders are eager to work with buyers of large practices. For some sellers, a consolidator is a good fit, but many would like the practice to stay in private hands long term. This is certainly possible, and occurs successfully every year.