Simmons is the leader in corporate and private practice sales. 45 years of industry experience and knowledge ensure that our deals reach the closing table. We provide exceptional value with our time-tested expertise. Thus, ensuring you receive the maximum return on the sale of your biggest asset and that your legacy continues. You receive unmatched insight and expert advice in an open, honest, and transparent manner to help you realize your goals.
As brokers and advisors, we’re involved in discussions every day about practice sales and we hear many of the misconceptions that circulate within the veterinary industry about the process of buying or selling. Too often, these inaccuracies tend to discourage young veterinarians from acquiring their own practice or they make the process of selling a practice sound like an insurmountable hurdle for owners.
We’ve compiled a list of some of the most common questions and themes we hear from our clients. Maybe these sound familiar?
Zero to 5% down is an achievable arrangement, so not having a down payment isn’t the biggest hurdle to purchasing your own practice. While most conventional home loans typically need 20% down, practice loans most often do not.
Small practices have small profits. A practice grossing $200K per year likely produces $60-$75K. Allow a reasonable doctor salary around $60-$75K (most buyers need this much due to high student debt coming out of vet school, please general living expenses) and you have a practice with little or no earnings.
The price and the appraised value are based on what is there now, not what will be there someday, after changes. If the practice can produce $500K in income with the current computer system, then that’s what is being sold. Justifying your purchase of new equipment requires an increase in corresponding future revenue. If the proposed equipment purchase will not increase revenues or reduce costs, then it might be a luxury item and, therefore, unnecessary.
It’s very common for us today to see buyers who have little or no cash available for a down payment. This is, in large part, due to the high student loans facing today’s graduates. That does not mean they are excluded from practice ownership.
The three C’s of financing are Character, Credit, and Cash Flow. Lenders want to know who the borrower is: What is their experience level, is a move across the country necessary, is this practice a good fit, and what are the long-term goals of the borrower? Excellent credit is probably THE most important issue in obtaining a loan. It is more important than having a lot of money for down payment, so, whatever it takes, it is mandatory to maintain top-notch credit. Finally, there needs to be enough cash (profit) in the practice to pay all the expenses, to pay the buyer enough to meet personal needs, and to pay the debt on the practice.
Outside of the small down payment, it’s the practice, not the buyer, that pays for the loan payments in the form of redirecting earnings. Earnings that used to go to the seller as profits, now go to the lender in the form of loan payments.
Simple averaging of data isn’t usually an appropriate measurement. Most good appraisers use weighted averages, not straight averages. Meaning, the most recent year should receive more consideration than 3 years ago. And it’s easy to imagine that a buyer would pay more for a practice that was first grossing $500K, then $750K then $1.0M, rather than one that was doing $1.0M, which then dropped to $750K and dropped again to $500K. In both cases, the straight average is $750K, but an informed buyer would not pay the same amount for these two practices. The practice that clearly shows growth is worth more.
In the past, our profession routinely tried to tie practice value to gross income. That was before the time of high student debt, increased competition, and the current level of business savvy that we see in today’s veterinarians. There are many, many factors that create value most of which have little to do with the gross revenue of the practice. The profits are vital in establishing a value, but it would be a mistake to ignore the intrinsic and extrinsic factors that are intimately related to the total practice value. Therefore, it is important to work with professional appraisers who are most familiar with the veterinary industry and current market conditions. If you’d like to know more, visit our article library to learn how practice value is determined.
In general, “less is more”. Let’s look at a hypothetical example: If Dr. Allen can generate $300K in profit with $100K of equipment and it takes Dr. Baker $200K of equipment to do the same thing, Dr. Allen is actually doing more with less. Also, what if Dr. Baker’s payment on his equipment is higher than Dr. Allen’s? If one buys a $30,000 ultrasound that costs $800 per month in payments, but it sits in the corner, getting dusty, it is a financial liability and really does NOT add significant practice value.
Yes, a practice might have $150K vs $100K in equipment, but if the profit is no higher, or worse, even lower, that does not make the practice with more equipment worth $50,000 more. Also, consider the expertise needed to operate this expensive equipment. All buyers may not possess the skills to run the equipment in the practice, therefore, it will have little value to them.
A practice with good solid equipment that one would find in any progressive practice will get more return on that investment than the practice that has every new, state of the art piece of equipment, especially if some of this equipment is not generating sufficient income to the practice.
New equipment needs time to produce income for the practice. The first question before making an equipment purchase is, “Will this equipment pay for itself and produce a profit?” If the answer is not a strong yes, then the equipment is probably nothing more than a high-priced toy. Toys depreciate and do nothing to contribute to the value of the practice. Equipment will give you a tax deduction AND contribute to the bottom line and thus to the practice value. Most large equipment purchases are done with a five-year lease or note. In either case, but especially with a lease, be sure it is transferable to a new owner and/or there is no prepayment penalty. In a lease, a prepayment penalty is the norm (regardless of what the salesman tells you) so read the fine print – or bypass it all together and borrow the money from your bank.