David King, DVM, AVA ~ Simmons Southcentral
Dave Gerber, DVM, AVA ~ Simmons Northwest
What Is Your Mindset?
In the private practice arena, there are, essentially, three career choices, those being associates, relief DVMs, and owners. Each requires a different mindset. Not everyone can or even has a desire to become a veterinary practice owner. So, what is YOUR mindset?
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 – 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 and time efforts on medicine and family than on operating a business.
Even if one desires to become a practice owner, there are prerequisites necessary to have in place prior to entering an ownership role. It is important that the potential owner have sufficient medical experience. Typically, that will take a minimum of 3-4 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. Being financially healthy is also a must. Excellent credit is key. Having some liquid assets can also be helpful when negotiating with an owner or lender, although it is not always mandatory to have a sizable down payment.
The Value of Equity
One of the most misunderstood and undervalued benefits of practice ownership revolves around the value of the equity created by owning a practice. If properly priced, a practice should “buy itself. In other words, after the owner takes out a reasonable salary for himself or herself (this often exceeds what an associate would make) and also pays all of the normal practice expenses, there should still be enough profit in the business to pay for the debt payments to purchase that business. The practice buys itself. This is truly the Holy Grail of ownership, but, sadly, this fact is often lost to potential buyers.
As an example, let‘s assume a practice has a cash flow to the owner of $164,000 after expenses and before paying any debt. Let‘s also assume that this new owner was earning $70,000 as an associate and needs to continue to make that same amount. That would then leave $94,000 available to pay the debt payments for the practice. Considering reasonable loan terms, this $94,000 would be sufficient to make the payments for a practice selling at $500,000 and with NO down payment. So, after paying off the practice (in this case, seven years), the buyer has an asset worth $500,000 PLUS any amount it has increased in value, AND he or she has continued to take home the same amount as he or she would have as an associate. And, then, every year after the practice is paid off, there will be an additional $94,000 available to the buyer. Yikes!
What is the downside? There is risk of ownership, added management responsibility and usually less personal time in the early years. But the rewards . . .
One exciting path to becoming an owner is starting a practice “from scratch”. Because of the high costs and the lack of income in the initial period, this option is becoming less common in recent years. This is, in part, due to the financial pressures created by large student loans, which were not present twenty years ago. As a result, it has become hard for young practitioners to have little or no income for any extended period.
Things that must be considered are location, demographics, a business plan, financing, negotiating a lease or real estate purchase, employing an architect and builder, purchasing inventory and equipment, hiring employees, and securing the necessary permits and licenses. In a word, it can be daunting. The advantages are that the new owner can choose the exact location, floor plan, equipment, and immediately personalize the practice to suit his or her needs. The disadvantages are the initial cost with no income, and the more restrictive financing options available. This is the riskiest strategy because of no previous practice history.
Cost for a start-up would likely range from a low of $150,000 up to $450,000 for a leasehold practice and even more if real estate is purchased, so this is often a limiting factor, considering there is no instant income stream.
Start up – Pros
- Pick your location
- Build what you want
- Be solely responsible for your success
Start Up – Cons
- Often very expensive to build
- Construction time (delays)
- No initial income
- Limited financing options
- Be solely responsible for your failure
Buying into an existing practice, especially the practice where the associate is already employed, is becoming more and more common as there are more and more multi-DVM practices. This is a lower risk strategy than a start-up because there is a current track record and following the buy-in, usually little, if anything, changes. It allows the buyer to obtain management experience, using the senior owner as a mentor. The financing is often done by the senior owner and at favorable terms, so that can be an additional benefit. The disadvantages are that the buyer usually has little power or ability to institute changes or to personalize the practice as long as he or she is a minority owner. It can take many years to become the controlling owner, depending upon the purchase structure.
It is important to seek professional assistance with a buy-in because of the many issues that need to be resolved. There are significant tax issues that can mean many thousands of dollars, depending upon the purchase structure. In one case, a buyer was able to realize a tax savings in excess of $200,000 by purchasing the practice assets rather than stocks in the corporation! There are a myriad of legal issues that need resolution as well. How will the non-compete agreements be worded? What happens if either owner wants out? How will the partners be compensated fairly? What if one of the partners develops a drug addiction problem, or worse, dies? In short, a comprehensive and thorough buy-sell agreement must be crafted by an attorney who is knowledgeable with contract law.
Finally, employing a veterinary consultant or broker as a buyer‘s agent or as a neutral facilitator is invaluable to help negotiate a purchase that is fair, to assist in obtaining financing, and to keep everyone focused on the final goal. The veterinarians‘ time is best spent doing what they do best, practicing veterinary medicine. In a busy practice (usually the case in practice seeking a partner to buy in), there is little extra time left to deal with the many issues and decisions related to a buy-in. Without someone to push, prod, and shepherd the whole process to a successful completion, it is all too common to see it drag on and on for many months or even years and eventually completely stall.
Buy-in – Pros
- Small risk
- Investment should pay for itself
- Gain management experience
- Better support
Buy-in – Cons
- Slow process
- Still not in charge (minority owner)
- Tied to practice (Golden handcuffs)
This is still a common entrance strategy and offers some distinct advantages. It has many of the benefits seen in start ups such as ability to quickly personalize the practice and be in complete control of management. It also has some of the advantages of a buy-in because there is an existing cash flow and client base which reduces risk (lenders LOVE reduced risk!) and provides immediate income to the buyer. Because there is no other owner, the lender can be in “first lien position, which makes financing for this type of purchase the easiest to obtain (as opposed to a partial buy-in or a start-up). The disadvantages of buying out an existing practice involve, mainly, the psychology of “going it alone”. Although sometimes the previous owner will continue to work in the practice and help, it is more common to see a relatively short transition period. Therefore, it is important that the new practice owner have the skills and confidence to step into the role of the sole owner. Not only does that require medical skill, but it also requires a desire to learn the management and a willingness to take risk. This is what we call an “owner mentality”.
Buy-out – Pros
- Many financing options (money available)
- Practice history
- Investment pay for itself
- Instant income
Buy-out – Cons
- Large investment
- Full responsibility
In some rare circumstances, leasing a practice is a possibility. Generally, it is poor strategy since there is no possibility of building equity (remember, the Holy Grail?), and it is almost impossible to arrive at a reasonable lease amount.
Not every veterinarian should be a practice owner. It takes a certain mindset for risk but the holy grail of practice equity is a great reward. It is also true that not everyone wishing to own a practice should take the same path. Each pathway has its own benefits and rewards as well as its own drawbacks. However, every person wishing to become an owner should educate himself or herself on all aspects of practice ownership and then choose what is the best fit for them.
For a PDF of this article, click here – Ownership Options_What Are My Choices
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