By David King, DVM, CVA
Can you believe it’s 2020 and the start of a new decade? This year has always seemed so far in the future, but here it is! This new year holds new opportunities to capitalize on your hard work and sell your practice or plan a sound exit strategy.
2020 came in strong and promising, but now several events nationwide have presented some concerns and apprehension for the future. For the most part, the veterinary industry has weathered the storm well, as it usually does in tough times. There seems to be a shortage of veterinarians, which is good if you are looking for a job but bad if you are a practice owner with positions to fill. Additionally, 2020 is an election year, and this always leads to uncertainty in the market. So without a crystal ball, when should you sell?
Should I Sell My Practice?
If your reason to consider selling is financially motivated, don’t sell (with one exception to be discussed later). Because the veterinary profession is as close to recession-proof as you can get, there are fewer places better for significant investment. However, if your reasoning revolves around retirement, health, sanity, or maybe relocation, 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 purchase offer is not the same as an exit strategy. Sadly, this most likely will not happen, so there is just no getting out of managing your for-profit practice for-profit and preparing an exit to achieve maximum value through its sale. Remember, you can plan a time to exit, but time may not allow for that plan. None of us knows how much time we have, so we all should prepare to exit if the timing decision is not up to us.
Schedule a Practice Appraisal
The very first step 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 it may also illuminate certain areas of your practice that need attention. The appraisal will give you the current market value of the practice, and you can make decisions accordingly. 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 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 your decision is about money, don’t sell unless you may be a corporate target, which is the one reason to sell. If you have someone familiar with the veterinary corporate market who can do your valuation, you may get a general idea of what your practice might bring in the current market. A practice appraisal will give you fair market value, and the value that another DVM could afford. It could also give an example as to reasonable lender financing.
If your practice is a corporate target, then corporations will offer you the investment value, what it is worth to them to acquire the practice. There is no magic formula to determine this number – the only way to know the best number is to hire an adviser familiar with the current corporate market. Never deal with the corporations alone! If you think you will save money negotiating by yourself, the odds are pretty high that you won’t.
It is critical to follow through after the valuation if you decide not to test the corporate market. If you fail to act on the information your appraisal provided by planning an exit strategy, then you have essentially wasted your time and money. There are three decisions that should be made:
- Plan and try to improve with set goals in mind.
- Maintain the course if all is going according to plan.
- Do nothing.
Unfortunately, the last option is the most common and can lead to just shutting the doors and leaving.
Improving Your Practice
Planning to improve your practice is about improving the value and its desirability and marketability. Value and marketability are different. Value relates mostly to numbers, formulas, and objective data to calculate 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 in a small west Texas town. Marketability has a considerable effect on what a practice can sell for and should be considered during the valuation process. This is why it’s so important to hire a practice appraiser who specializes in veterinary practices and is familiar with your geographic area.
What Affects Value & Marketability?
So, what contributes to a high or low value and marketability? Certainly, high net income is of paramount importance. Practice and community growth (or decline), geographical location, competition, and the equipment and inventory value 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 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,” a 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.
The most important aspect of 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! Certainly, regularly increasing fees 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 the 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.
Implementing Your Exit Strategy
Proper planning will have a major impact on the success of your transition. Even very small, inexpensive plans can have a considerable impact on your retirement nest egg. It’s important to stay passionate about veterinary medicine, and keep the practice and building in a sellable condition 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.
If you need assistance in crafting an exit strategy and implementing the steps that result from it, your team at Simmons is here to guide you. Through practice appraisals and selling assistance, your next chapter is easier to achieve than you might think. Contact us to connect with your Simmons advisor today.