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goebel-richard3.jpgDick Goebel, DVM
Simmons Great Lakes
Southeast Veterinary Conference 2008 (speaking notes)

According to recent AVMA data (1), there are over 21,000 veterinary practices in the United States. It is estimated that roughly 5% (or 1,050) are in some phase of ownership transition each year, either sale on the open market, internal sale, acquisition or merger, or liquidation.

When considering all business listed for sale, only 20% actually sell. The remainder are taken off the market or liquidated. In veterinary medicine, the picture is more encouraging as two thirds of the practices that are advertised on the open market do, in fact, sell. The remaining one-third does not (2).

Practices sell for a variety of reasons, the principle one being retirement of the seller. However, this number comprises only half of the total with other reasons being cited such as career shift, gaining liquidity, geographic change, health issues, spouse career issues, personal and family reasons, and partnership dissolution (business or marriage).

When practice owners consider selling their practice, many questions come to mind:

Are buyers available, who are they and what are they looking for?
Should I try to hire an associate and sell to her?
Should I try to sell to my current associate? In one transaction or an incremental sale?
Should I consider merging with another practice or being acquired as an exit strategy?
When should I sell?
Should I do it myself or get some help? If so, who do I call?
Will a sale fund my retirement? When should I know the answer to this question?
Can this process occur confidentially or will it become a “public forum?
Can I give up control?
What will I do after the sale? Am I ready to retire?
What are the tax implications?
How important is a restrictive covenant with my associate?

Let‘s address some of these questions before going further.

The typical (and traditional) buyer is a veterinarian who has 3-8 years of practice experience as an associate. Less typical is the veterinarian who is looking for an additional practice (2nd, 3rd or more) to buy, two veterinarians seeking to buy their first practice together, and the regional or national corporate buyer.

The recent graduate buyer is looking for independence but with safety and security, that is some assurance of professional and financial success. Lifestyle preferences are a major factor in making a purchase decision. With most new veterinarians coming from a large metro environment, small animal practices located in large metro areas are in highest demand. In addition to location, the availability of after-hour emergency services is animportant criterion. Access to specialty referral and the lifestyle comforts provided by a multi-doctor practice are also appealing.

Once the species and geographic parameters are satisfied, the buyer looks at the financial success of the practice (including the anticipated ability to service a new practice acquisition loan) and the ability to “get a raise from the associate salary level of compensation. Roughly 50% of practices listed for sale have the ability to provide a 6-figure income (after debt service) to a new owner in their first year of ownership. These
are obviously more attractive than other 50% of practices that will produce less.

Practice qualities that are important include modern equipment, an up to date drug and supply inventory, computerized client and patient records, a compliant clientele that is accustomed to accepting practice recommendations, and a well-trained service oriented staff.

It is extremely important in states where restrictive covenants are enforceable that they be used in conjunction with associate veterinarian employment agreements. Without them being in place, the transferable good will of your practice may be at risk. The only time that a practice owner has any leverage in obtaining a restrictive covenant agreement is PRIOR to hiring the associate. In some situations, a covenant signed after employment is not enforceable. Buyers often ask for a contingency that provides for the employment and new restrictive covenant be negotiated between the associate and the buyer in order for the sale to be completed. If this does not occur, the purchase agreement may become null and void.

Buyers have their own set of questions:

What about price? How high is too high? Is cheap a good deal?
What about financing?
What about cash flow, debt service, my income, my educational debt re-payment?
What about employing existing associates and staff? Will they stay or not?
What about restrictive covenants? With seller, with associates?
Should I buy or lease the real estate? Any zoning issues?
What are seller‘s future plans?

Price is important to both buyer and seller. Both expect fair treatment but their expectations and perspectives are different. The differences must be reconciled if a sale is to be completed.

Profitability and practice value are closely related, as value is based on earnings (profitability). Earnings are defined as the net income available to the practice owner after fair compensation has been paid to all staff and doctors (including the owner), after fair market rent is paid, and after a reasonable rate of depreciation (of equipment) is considered. Earnings are the return on investment (ROI) that accrues to the owner in
return for his/her assumption of ownership risk (the buck stops here).

Practice value is calculated separately from real estate value (the real estate occupied by the practice). Practice value includes: drugs, medical and office supplies, medical and office equipment and transferable practice goodwill. Items excluded from practice value include accounts receivable, cash, cash equivalents and real estate. It is assumed that all accounts payable (and, perhaps, outstanding loans or leases) existing at the time of sale will be paid by seller out of proceeds of the sale.

When should start planning for a sale? The day you buy the practice or sooner.

One should always consider how one will exit a business opportunity before committing to ownership. In addition, one never knows for sure when the exit will occur. It may not be planned, as occurs with illness, disabilities or accidental death. The best advice is to ALWAYS have your practice prepared for sale.

Since good financial performance (profitability in the 12-20% range) during the last 3 years prior to the sale is a precursor to optimal practice value and pricing, an important question is raised. If the practice can perform at this level for the 3 years prior to sale, why not tailor the practice to perform at this level throughout your career as a practice owner and make a significant annual contribution to your retirement nest egg? Surely, building a retirement fund throughout your career would provide more peace of mind than waiting for a “roll of the dice at the end of your career when it comes time to sell the practice. It would seem much wiser to annually fund your retirement and look at the proceeds of the practice sale as an added bonus, rather than an essential dollar requirement.

Because your practice and the real estate it occupies are valuable assets in your investment portfolio, they should be valued periodically much like your periodic stock portfolio report or your bank statement. A professional appraisal of value should be conducted periodically (every 1-3 years?). For the purpose of financial and estate planning, for communication among partners, for potential internal sale, and for other reasons, an appraisal of business and real estate valuable is essential. Veterinary practice consultants who provide this service can be identified with the help of the American Animal Hospital Association (AAHA)(3) Consultants Directory and also by the American Veterinary Practice Management Consultants Association (AVPMCA) (4).

If the value of the real estate is so high that the fair market rent exceeds 6-7% of practice revenue, it may be wise to relocate the practice prior to the sale (5-7 years in advance). In this way, it becomes more likely that the seller can be paid full price for both entities. If left together, the pricey real estate actually reduces the value of the practice via high fair market rent payments that are too expensive for a veterinary business. (These sites are more appropriately occupied by a major drug store, fast food restaurant or other retail business.)

Emotional preparation for the sale is essential. Caution: do not retire emotionally before retiring physically. If you do the practice will suffer as will the purchase price. Before retiring, do find activities that you would rather do than veterinary practice. Some sellers do part time relief work after they sell and as they explore retirement diversions.

Financing of the practice sale can occur in a variety of ways. Historically, most practice sales were seller financed. During the last decade, however, a trend toward 3rd party financing has provided sellers with a more certain payout for the practice sale. Small Business Administration ratings of veterinary practice purchasers rank veterinary practice financing among the lowest risk of all loans. As a result, local banks and national commercial lenders are eager to finance many of the practice sales that now occur. If sellers desire to function in the lender role, it may be advisable to be cashed out of the practice sale but hold the mortgage on the real estate. Because of the fragile nature of the veterinary business and the reluctance of sellers to foreclose and salvage a failing practice, 3rd party financing places the risk on a lender that has a large portfolio of loans and is not dependent upon the ultimate success of this one veterinary practice loan. The seller, however, may have as his portfolio just one loan…and it must not go bad.

1. http://www.avma.org/membshp/marketstats/usvets.asp#prac
2. Simmons and Associates sales database
3. www.aahanet.org
4. www.avpmca.org

For a PDF of this article, click here: Ownership Transition Solo Practice_Planning the Exit Ahead_D.Goebel, DVM

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