David King, DVM CVA – Simmons Southcentral
Dave Gerber, DVM CVA – Simmons Northwest
Ownership‘s “Big Stick
One of my heroes of history, Theodore Roosevelt, once said “Speak softly but carry a big stick” and I liken that somewhat to practice ownership. There is just no substitute for carrying that ‘Big Stick.’
There are many reasons NOT to own a practice, and they are all based upon the individual. We all know that practice owners pay a high price for autonomy. You may not want to sacrifice any family time (however if this is the case you probably should have chosen another profession), or you may think you may not have the business savvy to succeed. Whatever the reason not everyone is cut out to own a veterinary business, but for those of us who are, the rewards can be great.
Being a practice owner and having that ‘Big Stick’ means you will succeed or fail on your own merit. No one can tell you what to do; he or she can only advise. This usually fits perfectly in the fiercely independent nature of the average veterinarian. There is no better personal satisfaction than to have a successful business and to know that you where solely responsible for its success.
Autonomy aside, probably the most important reason to own a practice is that the financial rewards can be great. Associates are commanding a high salary these days, but an associate has no equity in the future. As an associate, you could make $80,000 per year and save 10% annually, and at the end of 10 years you will have a nice little nest egg. However, let’s say you purchase a practice worth $500,000 and you take home the same $80,000 per year (though it would probably be more), save the same 10%, then at the end of 10 years you have the same little nest egg, but you have an asset in the form of a successful business worth probably in the neighbor of $750,000! It’s something to think about.
If one weighs all the pro and cons about the ‘Big Stick’ of practice ownership, then for most the rewards of autonomy and practice equity will far outweigh any risk or sacrifice. Knowing the risks and the rewards, I’m sure if Teddy had been a veterinarian he would still have carried that Big Stick.
Practice Purchase Financing
A decade ago, most owners selling their veterinary practices had no choice but to finance part, if not all, of the practice sale. Today, many commercial lenders are eager to be involved.
Small Business Administration (SBA) loan performance data indicates that veterinary practice loans are in the “lowest risk” category. Commercial lenders, who represent agencies or individuals with money to invest, see veterinary practice buyers as ideal candidates for their clients. Unencumbered by strict banking rules and policies, commercial lenders can tailor loan packages to meet the needs of buyers and sellers alike.
Buyers are well served by loan terms of variable length and rates of interest. Some loans are “blended” interest and “blended” term. (Often 17-20 years if both practice and real estate are “blended into one single loan.) The traditional alternative is a combination of two separate loans. One is for the business (5-10 years) and the other for the real estate (10-25 years). The “blended” loan offers lower monthly payments, but total interest costs can be higher.
SBA loans can often be obtained with more lenient terms than conventional loans. Conventional loans, however, cost less to originate and require less paperwork.
Loan approvals are based upon the credit-worthiness (not the net worth) of the buyer. They also consider the present and historic practice profitability (cash flow) and, if the real estate is included, a real estate appraisal. Buyer indebtedness, for example educational debt, does not detract from credit-worthiness unless payments are past due.
Financing the sale of a veterinary practice has rarely been easier than it is now. Great opportunities are available to veterinarians with clean credit histories, who are interested in purchasing financially rewarding practices.
Pitfalls to Avoid when Buying a Practice
Pitfall #1 – Practice sale price does not account for all of the following:
Normal practice expenses
Loan payments for the practice purchase
Loan (or rent) payments for the real estate
Income needs of the buyer
If a practice is properly priced, it should “buy itself. In other words, the profits of the practice must be sufficient to pay for all of the normal operating expenses, any rent or real estate mortgage payments, the loan payments for the practice, and still provide a reasonable salary to the buyer. If it can‘t, the price is too high. In owner-occupied practices, the owner often does not pay himself/herself a “rent for the building, and, thus, incorrectly calculates the practice‘s profits. The buyer will need to pay an actual rent or mortgage for the building, but, either way there is a cost to the practice for the facility, which leaves less for the buyer and to pay for the practice. So, when figuring how much will be left for a buyer in a particular practice, one must look at the gross revenue, and then subtract the normal operating costs, a rent or mortgage cost for the facility, and finally the payments to purchase the practice. What is left is the amount available for the buyer‘s personal needs. Is it enough? If so, the price works. If not, it is priced too high.
Pitfall #2 – Inadequate preparation
Credit is king. Do whatever it takes to keep your personal credit as good as possible. A huge pitfall is entering into a transaction with marginal credit, high charge card debt, a couple car loans, and a few late payments. It‘s also wise to know, as you begin your search to figure WHERE you want to practice and what TYPE of practice fits well (high volume and low cost, boutique, exotics, mixed, etc.) Then when the right practice comes along, you are ready to move on it.
Pitfall #3 – Thinking that you can buy only a small practice for lack of financial resources
Actually, a small practice is higher risk than a large one. Even if the cash flow PERCENTAGE is smaller in a large practice, the actual dollars available to the buyer will generally be more. Therefore, if the practice has a hiccup or a temporary drop in revenue, there is usually a lot bigger cushion and margin of error with these larger practices.
Remember, if priced properly, the practice should pay for itself out of its own profits. So, a $200K practice will buy itself, but a $1M practice will also buy itself.
#4 – Unreasonable Demands
You can‘t have it all your way. Remember, if you BOTH leave the closing table feeling a little bit “taken advantage of and that if you had held out just a little bit longer you could have gotten a better deal, it probably was fair to both parties.
A common unreasonable demand from a buyer is that they may ask the seller to stay on for an extended period for a transition with little or no compensation. They may even want the seller to guarantee the practice‘s income. Really, this has happened!
Bottom line is that the purchase and sale must work and be fair to BOTH parties or it really isn‘t a good transaction. Neither party should end up with “all the marbles.
Pitfall #5 ” Inaccurate Equipment Lists
Although it is not critical the every single hemostat be listed, the asset list should be pretty complete to include all the medical equipment (don‘t forget the stuff on walls and ceiling such as surgery lights), office furniture, and office equipment. Again, listing each stapler isn‘t necessary.
Even more important than what IS listed, is the exclusion list of IS NOT included. The best approach is to remove any items from the building before the practice is shown. If that is not practical, then the buyer should be told, as he/she tours the clinic what is NOT included. Then these items need to be written on the equipment list as exclusions. Be sure to be specific about any leased equipment. Our recommendation is to pay off any remaining balances at or prior to closing so this is not an issue.
We actually saw a dispute over $50 lawn ornaments that involved both attorneys due to a simple misunderstanding.
Pitfall #6 – Relying too heavily on your attorney or accountant for business advice
While the opinions and advice of these advisors is important and necessary, you are the one that must make the business decisions. The participation of the seller‘s and buyer‘s attorneys should be limited to their areas of expertise. Otherwise, their fees can become costly and the process can quickly become “bogged down, a frustration for both buyer and seller.
Planning and knowledge is the key to finding and buying a veterinary practice. If one prepares, seeks competent advice and knows what to expect, the whole practice purchasing process can be relatively stress fee and very rewarding.
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