Buying a Veterinary Practice – What You Need to Know

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If autonomy, directing a small team, and having prospects for affluence is essential to you, then owning your own veterinary practice may be the right choice. But, buying a veterinary practice doesn’t have to be a shot in the dark. This article highlights the most common misconceptions and misunderstandings we’ve heard over the last 40+ years.

Background

The Megastudy, published in the late ‘90s, determined that stagnant income is our profession‘s number one problem. The study also determined that practice ownership is still an indicator of success in our profession. Meanwhile, The Brakke Study identified factors consistent with financial success in veterinary practice while also identifying those consistent with poor performance.

We can gain from these studies the fact that financial performance is significant. Veterinary practice ownership is not only the traditional model for doing what we love. 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 they perceive as valuable. If a service price goes up 10%, 10% of the clients do not leave the practice. Instead, 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 to optimize pricing strategies.

We learned that higher incomes accrue to practice owners, those with more years in practice, those that work long hours, and those who have and exercise financial acumen. Those who own or work in financially successful practices are compensated more than others. Being business savvy pays off for both the owner and for their 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.

Should I retire debt to 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 appealing to many as one can then choose the practice quality and style, the practice’s “culture.” If you are the owner, you can select and develop your team. You can establish your work schedule. You can make financial decisions, such as fees, equipment purchases, compensation, and perks. When you buy the right vet practice results in equity growth, as the practice pays for itself.

Four Paychecks

Practice owners are typically paid in four ways. Associate veterinarians generally are paid in one way. Which is more attractive to you?

  1. Practice owners are paid for being veterinarians when they treat patients and serve clients. Often this is a rate of pay that is linked to personal production, either directly or indirectly. A standard range in percentage-based compensation is in the 20-25% range. Associate veterinarians are also paid this way but do not typically participate in the remaining three points.
  2. The second way 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.
  3. 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 return rate should be greater. Something above 10% should be the expectation. One should plan for and budget for at least this level of profitability.
  4. The fourth and final paycheck is for the practice owner, who also owns the practice’s real estate. This investment’s fair market return should be 10-12% of the real estate’s fair market value 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

A substantial practice price often accompanies substantial compensation potential. Do not be distracted by “sticker shock.” Usually, a high practice price is appropriate due to the practice’s proven ability to generate profits and continuous growth. An inexpensive practice may appear to be more affordable. Still, on further review, it may have a cash flow that is so anemic that the buyer cannot support themselves, 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.

Should I Start a New Practice or Buy An Existing One?

Starting your own practice is not for the faint-hearted. Assuming you can obtain financing, the break-even period is often 3-5 years. Securing funding for this route is more difficult than buying an existing veterinary practice. The primary difference is there is immediate cash flow to service debt with the practice acquisition, while with a start-up, there is not.

Attractive attributes of a start-up include the excitement of something new, doing it “your way” from the beginning with your floor plan, your equipment selections, your recruited staff, and your decorating and landscaping. The downside is often the 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 direct support from the established practice until break-even is achieved.

Buying an established practice is like buying someone else’s ideas and tastes – but just for a short time. You can redecorate and re-landscape right away. And, the average client lifetime in a practice is 3-5 years. In a short time, those clients will be yours. Similarly, your staff will be committed to you or will be gone within a year or two. The net result is that the practice quickly takes on your personality, values, vision, and culture. And the financial anxiety is greatly reduced in comparison to a start-up.

What if I Have No Money?

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 – a FICO score over 650 or 675 – you can obtain 90-100% financing from commercial lenders active in the veterinary market. If you receive 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 revealed that veterinary practice loans have some of the lowest default rates of all loans measured, meaning veterinary practice loans rarely go bad! This is not lost on commercial lenders who offer “cash flow financing.” They make a loan based on the practice entity’s ability to service the loan from cash flow. The alternative perspective, which local banks often have, is asset-based financing. 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 given for practice-only, real estate-only, or a combination of real estate and practice, known as a 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 there is seller financing in place. Real estate loans are made for a more extended period, 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 loan’s duration would be the average of 10 years (the typical practice loan term) and 25 years (the standard 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 existing real estate loan is 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” in the same way as 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 depreciated (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, you should not pay more than 20% of after-tax income for consumer debt. A reasonable range for a home mortgage, including principal, interest, insurance, and taxes, is 25-29% of gross income.

Websites that you may find useful include the following.

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 even 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).

Simmons Can Help You Achieve Your Goals

If you desire to assert your ideas and assume a leadership role in your practice team, and if you want to make decisions and give direction with autonomy, consider buying an existing vet practice with a healthy cash flow and a culture that you can adapt to your own. With two years of work experience and clean credit, you can likely successfully acquire a very gratifying and profitable practice.

If you are ready to begin searching 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

This article was originally posted on www.simmonsinc.com. Any reproduction on any other site is prohibited and a violation of copyright laws.

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