By David King, DVM, CVA
Wow, 2020 was rough but like most challenges veterinarians persevered. Now it’s 2021 and there are new issues facing practice owners deciding on an exit strategy. There seems to be a shortage of veterinarians which may good if you are looking for a job but bad if you are a practice owner with a positions to fill. Owners are figuring when and how to “return to practice as usual” as we come out of the pandemic. Also, the political climate may create some uncertainty in the market with a major tax increase looming. So without a crystal ball when should you sell?
If it is about money then DON’T SELL (with one exception to be discussed later). Because the veterinary profession is as close to recession proof as you can get, if nothing else Covid has proven that point. There is just no better place to have a major investment. However, if it is about something else (retirement, health, sanity or maybe relocation) then let that reason help you decide the right time to sell.
Regardless of your reason or timing you should always be planning your exit.
Crafting an Exit Strategy
Simply hoping that a corporation will bail you out of a low profit practice by making you a generous offer to purchase is not an exit strategy. In fact this most likely will not happen. So there is just no getting out of managing your practice for profit and preparing for an exit to achieve maximum value for your practice. Remember you can plan a time to exit but time may not go along with that plan. None of us know how much time we have so we all should be prepared to exit in case the timing decision is not up to us.
Schedule a Practice Appraisal
The very first step (after deciding to take the first step of course) is to get a practice appraisal – you cannot figure out where you need to go if you don’t know where you are. An appraisal will set a baseline of your practice value and help you set a future goal. It may also illuminate certain areas of your practice that need attention. The appraisal will give you a current fair market value of the practice and decisions can be made based upon this information. If the market is good, or if your practice could be a corporate target, it might be best to test the market now rather than in 3-5 years when it may be significantly different. However, most of the time you will find areas of improvement that will increase the practice value before the planned exit.
Am I a Corporate Target?
Again, if it is about money don’t sell unless you may be a corporate target (the one reason to sell if it is about money). If you have someone do your valuation that is familiar with the “veterinary corporate market” then you may get a general idea of what your practice might bring in this market. A practice appraisal will give you a fair market value, the value that another DVM could afford and could get reasonable financing from a lender. If your practice is a corporate target then the corporates will offer you investment value, what it is worth to them to acquire the practice. There is no magic formula to determine this number so the only way to know if you are getting the best number from corporates is to hire an adviser that is familiar with the current corporate market. Never deal with the corporates alone! If you think you will save money negotiating by yourself the odds are pretty high that you will not.
If you decide not to test the corporate market then it is critical to follow through after the valuation. If you fail to act on the information your appraisal provided by not planning an exit strategy then you have essentially wasted your time and money. There are essentially three decisions that can be made 1) Plan and try to improve with set goals in mind, 2) Maintain the course if all is going according to plan or 3) Do nothing. Sadly, the last option is the most common and can lead to just shutting the doors and leaving.
Improving Your Practice
Planning to improve the practice is about not only improving the value but also its desirability/marketability. Value and marketability are different. In the strict sense, value relates mostly to numbers, formulas, and objective data to arrive at what a practice is really “worth”. Marketability also takes into account the intangible, subjective qualities of a practice to help establish a proper selling price.
For instance, a highly profitable, well-run practice in Austin would have a very different “value” from that same practice is a small west Texas town. Marketability has a huge impact on what a practice can actually sell for and needs to be considered during the valuation process. This is why is it is so important to hire a practice appraiser who specializes in veterinary practices and one who also is familiar with the geographic area. So, what contributes to high or low value/marketability? Certainly, high net income is of paramount importance. Practice and community growth (or decline), geographical location, competition, and the value of the equipment and inventory also play important roles in arriving at a final value. A multi-DVM small animal practice would show less impact from the owner leaving than would a single DVM mobile equine practice. Thus the transferability of the goodwill contributes to value. Remember that the goodwill has value ONLY in that it can be transferred to a new owner. Is this a “boutique”, high-touch practice, or a high-volume, low cost practice? There is more loyalty to the former, and thus, it would typically carry a higher goodwill value.
What Affects Value & Marketability?
The most important aspect in value as well as desirability is profit. For every dollar that makes it to the bottom line, the practice value increases by 3-6 dollars or more! So, profitability becomes paramount when arriving at practice value. Certainly increasing fees on a regular basis is important and should be part of any management plan. Controlling expenses works similarly. But something often overlooked is the owner’s tax reporting strategy. “Investing in taxes” can play a major role in increasing the selling price of a practice. From a strictly tax view, anything that will decrease income or increase expenses ultimately results in a lowered tax burden. However, it also will dramatically decrease practice value. “Creative accounting” such as under reporting revenues or over reporting expenses is sometimes hard to undo at the time of a sale, so it is wise indeed to keep the clinic books “squeaky clean” in preparation for a sale. The dividends will be great.
Implementing Your Exit Strategy
Proper planning, well in advance, will have a major impact on the success of the transition.
Even very small, inexpensive plans can have a huge impact to your retirement nest egg. It is important to stay passionate about veterinary medicine, keeping the practice and building in a condition to sell at all times by concentrating on profit, growth, and routine maintenance. This will pay large dividends when the time is right to sell your practice. Stay focused on the goal of selling your practice for maximum value and don’t wean yourself out early. After you sell, you will have plenty of time to look back on a very successful career and your wise investment in a successful exit strategy.