If autonomy, directing a small team, and having prospects for affluence are important to you, then owning your own veterinary practice may be a good choice. Buying your first practice doesn’t have to be a shot in the dark. This article highlights some of the common misconceptions and misunderstandings we’ve come across over the last 40+ years.
The Megastudy, in the late 90‘s, determined that stagnant income is our profession‘s number one problem. It was also determined that practice ownership is still an indicator of success in our profession. The Brakke Study identified factors that are consistent with financial success in veterinary practice. It also identified factors consistent with poor performance.
If we are to learn from these studies, we are sensitized to the fact that financial performance is very important. Owning a veterinary practice is not merely the traditional model for doing what we are trained to do, but it can be a small business capable of generating a valuable service, jobs for the community, and personal wealth for the owner.
We have also learned that pricing is inelastic in companion animal practice. That is, clients pay for what is valued. If the price for a service goes up 10%, 10% of the clients do not leave the practice. Rather, if prices go up 10%, 1-2% of clients may leave the practice. There is an inelastic relationship between fees charged and client use. This gives the veterinary practice owner opportunity in optimizing pricing strategies.
We learned that higher incomes accrue to practice owners, to those with more years in practice, for those that work longer hours, and for those who have and exercise financial acumen. Those who own or work in financially successful practices are more highly compensated than others. Being business savvy pays off for both the owner and for his/her staff.
In looking at practices available on the market at any given time, opportunities for earning a six-figure income in the first year of ownership are represented in about 50% of all listings. The others do not provide similar rewards. Selecting the “right” practice is important to the buyer‘s financial success.
So, should I retire debt so I can buy a practice or should I buy a practice so I can retire debt?
The attraction of ownership
Owning a veterinary practice is attractive for a variety of reasons. Autonomy in decision making and leadership is attractive to many as one can then choose the practice quality and style, the practice’s “culture.” If you are the owner, you can choose and develop your own team. You can establish your own work schedule. You can make financial decisions such as fees, equipment purchases, compensation, and perks. Buying the right practice results in equity growth, as the practice pays for itself.
Practice owners are typically paid in four ways. Associate veterinarians are typically paid in one way. Which is more attractive to you?
- Practice owners are paid for being veterinarians, as they treat patients and serve clients. Often this is a rate of pay that is linked to personal production, either directly or indirectly. A common range in percentage-based compensation is in the 20-25% range. Associate veterinarians are also paid in this manner but do not typically participate in the remaining three checks.
- The second way in which owners are paid is for their leadership, administrative and management involvement. At least 1% of practice gross may be allocated to the owner for their leadership role.
- The third paycheck represents a return on the veterinary practice investment. This should be a reward commensurate with the risk taken as a practice owner. Since this investment has more inherent risk than an index fund in the stock market, the rate of return should be greater as well. Something in excess of 10% should be the expectation. One should plan for, and budget, for at least this level of profitability.
- The fourth and final paycheck is for the practice owner that also happens to own the real estate occupied by the practice. The fair market return for this investment should be 10-12% of the fair market value of the real estate and assumes triple net lease terms. A triple net lease means that the tenant (practice) pays for property taxes, insurance, and repairs/maintenance costs.
Looking for opportunities
Substantial compensation potential is often accompanied by a substantial practice price. Do not be distracted by “sticker shock.” Often a high practice price is appropriate due to the proven ability of the practice to generate profits and continuous growth. An inexpensive practice may appear to be more affordable, but on further review, it may have a cash flow that is so anemic that the buyer cannot support himself/herself nor will a lender be interested in financing. Typically, the pricing of a veterinary practice is justified to a great extent by its profitability. Profitable practices generate sufficient cash to pay the new owner appropriately and, at the same time, service the debt incurred with the practice purchase.
Start-up or buy an existing practice?
Starting your own practice is not for the faint-hearted. Assuming one can obtain financing, the break-even period is often 3-5 years. Obtaining financing for this route is more difficult than buying an existing practice. The primary difference is there is immediate cash flow to service debt with the practice acquisition. With a start-up, there is not.
Attractive attributes of a start-up include the excitement of something new, of doing it “your way from the beginning”: your floor plan, your equipment selections, your recruited staff, your decorating and landscaping, etc. The downside is often a slow and arduous task of building a clientele and caseload. This route is emotionally less traumatic if the start-up is a satellite of an existing practice ( or an additional full-service location) with primary support coming from the established practice until break-even is achieved.
Buying an established practice is like buying someone else’s ideas and tastes… for awhile. Frankly, you can redecorate and re-landscape right away. The average client lifetime in a practice is 3-5 years. In a short time, those clients will be yours. In a similar fashion, your staff will be committed to you or will be gone within a year or two. The net result is that the practice takes on your personality, values, vision, and culture within a very short time. And the financial anxiety is greatly reduced in comparison to a start-up.
I have no money. Now what?
As a recent graduate, you need two years of work experience and clean credit to obtain a loan. Having a positive net worth or cash in the bank is helpful, but rarely required. With some work experience and clean credit (FICO score in excess of 650 or 675), you can obtain 90-100% financing from commercial lenders active in the veterinary market. If you obtain only 90% financing and you have only 1-2% of the purchase price in your own money, sellers will often be willing to finance the remaining 8-9% of the transaction.
A key reason for this readily available financing is the track record of our profession. Small Business Administration (SBA) statistics reveal that veterinary practice loans are among those with the lowest default rate of all loans measured. Veterinary practice loans rarely go bad! This is not lost on commercial lenders who offer “cash flow financing.” That is, they make a loan based on the ability of the practice entity to service the loan form cash flow. The alternative perspective, often held by local banks, is asset-based financing. That is, their security is in the tangible value of the asset being financed rather than the cash flow that it generates.
What are common loan terms?
Loans are created for practice-only, for real estate-only, and for a combination of real estate and practice (blended loan). Loans may be conventional or may be guaranteed by the SBA. Practice-only loans are for a relatively short term such as 5 years, 7 years, and never more than 10 years (unless seller financing is in place). Real estate loans are made for a longer period of time with a range of 15 years up to 25 years being common.
Finally, the popular SBA blended product provides a single loan for both entities with an averaged term. For example, if a practice sells for $500K and the real estate it occupies is valued at $500K, the term of the loan would be the average of 10 years (typical practice loan term) and 25 years (typical real estate loan term) or 17.5 years. Similarly, the interest rate may be blended. The current practice loan might be 7.25% and the current real estate loan 5.25%. The blended loan result would be 6.25%. Most loan rates are variable rates and may have a cap of 5%, meaning that the rate cannot exceed the initial rate by more than 5%.
So, how’s my credit?
Most lenders make some judgment about the quality of your debt. Educational debt is often seen as “good debt”, like a home mortgage. “Good debt” typically is incurred for an asset that appreciates in value. “Bad debt” often refers to credit card debt or consumer debt. It is debt incurred for items that are immediately consumed or depreciate in value (e.g., cars and boats). Educational debt is rarely, if ever, a deterrent to buying a practice from the lender‘s perspective.
As a rule of thumb, one should not be paying more than 20% of after-tax income for consumer debt. A reasonable range for a home mortgage, including principle, interest, insurance, and taxes, is 25-29% of gross income.
Websites that you may find useful include:
www.debtadvice.com Safeguarding your credit
www.creditcard.com Low rate &/or no annual fee cards
www.salliemae.com Debt consolidation, forbearance, etc.
www.kiplinger.com Financial advice and budgeting tools
www.salaryexpert.com DVM salaries in any community
www.avma.org JAVMA articles online: salary, etc.
www.aahanet.org Best practice business resources
www.ncvei.org Fee reference and financial tips
I hear it gets lonely at the top.
You shouldn’t be alone and isolated, even in a solo practice. Recruit and use advisors and mentors who can help you be successful by providing specialized services and objective advice. Your current employer may be an excellent business mentor. Accountants and attorneys offer valuable tax, accounting, and legal advice. Establish a relationship with your local banker. Obtain a line of credit and equipment acquisition installment loans in exchange and reciprocate by doing all your banking at one location. Personal financial advisors, such as fee-only Certified Financial Planners (CFP), can be useful. Your competent insurance advisor will be invaluable in providing a business owner package, workers compensation, professional liability, and more. To help you find the “right practice”, you may want to enlist the help of a veterinary practice broker who offers buyer agency. Finally, to keep your business skills sharp, you may want to join a veterinary management study group (http://www.veterinarystudygroups.com or http://www.oemcpa.com/vsg.html ).
If you desire to assert your ideas and assume a leadership role in your own practice team, and if you want to make decisions and give direction with autonomy, consider buying an existing practice with healthy cash flow and a culture that you can adapt to your own. With two years of work experience and clean credit, it is likely you can successfully acquire a very nice and profitable practice.
If you are ready to begin the search for the perfect established practice, contact your regional Simmons advisor. We are here to help you fulfill your dreams of buying a veterinary practice.
Dick Goebel, DVM, Simmons Great Lakes
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