David B. Gerber, DVM
Larry McCormick, DVM, MBA, CBA
Simmons Mid Atlantic
Not long ago, a 70-year old owner of a $1.5 M grossing practice said to me that he was thinking of selling his veterinary practice to an associate, hopefully within the next six months. Further, he believed his practice was worth about $1.4M. He was not pleased when his 3% profitability practice did not value much more than tangible assets.
The seller had excellent monthly financial statements prepared by his accountant to whom he paid $12,000 annually. He said he doesn’t pay much attention to the monthly financial statements-“Just don’t understand that stuff.” Further, he didn’t understand why his practice received such a low value.
Cursory review of his financial statements showed his drug and supply costs were in the neighborhood of 34% of revenue (10+% points higher than average).
BOTTOM LINE: Because of my client’s resistance to learning the basics of financial accounting, he had no clue as to how well his practice was performing.
Step 1: Be Proactive! Have a basic understanding of your practice financials.
It used to be that an owner could run a practice by the seat of his pants and the practice would likely be profitable. Those days are rapidly disappearing.
Step 2: Read the AVPMCA’s The No-Lo Practice-Avoiding a Practice Worth Less
It is important that an owner have a basic understanding of how practices are valued and appreciate those factors that drive value
Step 3: Allow adequate time for corrective measures to take place.
It takes time to put in place and realize results from any corrective procedures designed to create change in practice operations.
It is not adequate just to initiate change in the short run. Sufficient time must be allowed to determine whether the change is sustainable.
In most cases, three or more years should be allowed for.
Step 4: Know what your practice’s value is today.
Guidance from Alice in Wonderland
Alice meets the Cheshire Cat at a fork in the Yellow Brick Road:
Alice asks the CC: “Which way should I go?”
CC asks Alice: “Where are you at?”
Alice responds: “I do not know where I am.”
CC queries Alice: “Well then, where do you want to go?”
Alice responds: “I do not know where I want to go.”
CC philosophizes: “Then, it doesn’t matter which way you go.”
The wisdom of the Cheshire Cat can be applied to our practice life. To create effective change, we need to where we are starting from and where we want to go.
In most cases it is essential to know where your practice is today.
Perform an appraisal.
Timing of appraisal
What is your age
How soon do you wish to retire?
Age – does age really matter?
– debilitating disease and death occur at all ages
– prepare your life/practice as if you were going to die tonight
Have your practice appraised
Preference: to have a full appraisal performed.
This certainly is the case if it is 3-5 years from sell date
Type of appraisal – written appraisal
Very Important: Not a time to cut corners to save dollars
– rely on outdated rules of thumb
– homemade attempts to use valuation formulas
(Stories-misuse of the old VETEC formula),
western DVM who wanted to plug and chug
At minimum: complete the AVPMCA profitability worksheet (www.avpmca.org)
Step 5: Analyze your practice to better understand the reasons behind low value
Perform the grunt work OR hire a consultant.
Too much is at stake for owners not to do one or the other.
Goal: to identify the areas within your practice where changes might be made.
Analyze your income statement.
Look at the major expense groups first.
Most practices can manage their expenses better.
Quick and very dirty assessment of three key expenses:
Express as a percent of revenue
Think 20%, 20%, 20% (actually 20% plus or minus 3%)
OR 60 plus or minus 2% for all three
a. Costs of Goods Sold (Costs of Professional Services)
-includes drugs and supplies, lab cost, imaging costs, diets, etc.
-make sure you buy right;
-high turnover (minimal vs maximal drug on shelf)
-consider joining cooperatives
b. Costs of Support Staffing
-avoid squeaky hinge method of staffing
c. Cost of Professional Staffing
-charge a fair market value for owner’s work as vet
Interpretation: consider a % as a fraction, i.e., an upper and lower #
– If only one or two of the three expenses have high percentages,
look for cause and solution on the upper number of the fraction
– If all three percentages show high values, the major problem is in the lower number of the percent fraction, i.e., the most likely cause is too little revenue; fees are too low
Step 6: Determine where do you need to go? Your Goals? Your Objectives?
If value is good,
– Then keep up the good management.
– Understand the drivers of value.
-Perform profitability worksheet at regular intervals; at least quarterly
If value is less than desired:
– Must decide if you want to pursue trying to increase value
– VIN experience – I don’t care if I am a No-Lo
may be an easy out
impact on colleagues
impact on staff- Satisficing
Step 7: Develop a Plan to get you where you want to go.
Develop a list of possible corrective measures you might possibly institute.
– Keep in mind the Goals of Step 5 and the available time frame you have to work.
– Where do I want to go?
– Where do I believe I can go?
– How much time will I have to make changes?
Prioritize the corrective measures list with the most beneficial and most achievable at the top.
For each possible corrective measure, define the following:
– How the success or failure of each corrective procedure will be determined.
– How the success or failure of each corrective procedure will be measured.
– When the success or failure will be measured.
Step 8: Institute Plan; perform scheduled measurements; make adjustments; repeat process
Step 9: Perform a follow-up appraisal to re-assess the results of Recovery Plan
The timing of the follow-up appraisal varies depending on the exit timing of the owner, but usually at the first or second anniversary of the original appraisal.
Step 10: Use of Budgets. The budget process, when well thought out and properly implemented, can be a very effective process to recover lost value.
For a PDF of this article, click here: Ten Critical Steps
This article was originally posted on www.simmonsinc.com. Any reproduction on any other site is prohibited and a violation of copyright laws.