Nikki Nitz, CPA, CMA
For a PDF of this aricle, click here Rich Owner Poor Owner – Nikki Nitz-Quenette, Simmons Northwest
By recommendation of a mentor I just read Rich Dad Poor Dad by Robert T. Kiyosaki. As I read through the book I could relate many of the concepts directly to veterinary practices. Just as the book was highly recommended to me, I highly recommend it to you. It will teach you how to become a Rich Owner instead of a Poor Owner.
Recently I valued two veterinary practices both grossing approximately $2,000,000. The Rich Owner has controlled his expenses well throughout many years of ownership and therefore has a high profit percentage. The Poor Owner has not controlled expenses and has no profit. The Rich Owner owns an investment that is worth nearly $2,000,000. The Poor Owner really owns a liability that is worth little more than what the equipment & inventory can be sold for on Ebay.
In college you were taught medicine but you weren’t taught business. Yet most veterinarians become business owners throughout their career. Now students are being taught that they need to be practice owners to payoff their student debt. I don’t disagree that business ownership can be and is a great investment but you need to be educated on how to make the business work for you.
I could bore and confuse you by writing about valuation theory and methodology but I prefer to keep things simple. The value of a practice is really driven by two things: profitability and desirability. It all reality it boils down to the practice being in a location buyers want to live and how much cash flow the practice is producing that a new buyer has available to them to make debt payments on the purchase.
Unfortunately we have too many Poor Owners in this profession and it is my mission to correct this problem. The Rich Owners have built themselves an investment that is worth something when they are ready to sell it. The practice is producing sufficient cash flow that a buyer can afford to buy at a fair price. Poor Owners have poured many years of blood, sweat and tears into their practices yet they haven’t controlled expenses and therefore there is little if any cash flow available for a buyer to make debt payments.
On a regular basis I regret having to tell practice owners that they are Poor Owners and the worst part is that it comes to them as a complete surprise. If the Poor Owner has time (work a few more years) and energy they can correct the problem but all too often they want to sell now. Poor Owners can become Rich Owners through awareness, education and taking action.
Asset versus Liability
As a practice owner you need to understand the difference between owning an asset that makes you money versus owning a liability that is draining your cash flow. Rich Owners buy assets. Poor Owners only have expenses. Middle Class Owners buy liabilities that they think are assets.
Pause for a moment and really think about this. Is your practice producing profit after all normal operating expenses are paid? Normal operating expenses include fair-market rent even if you as the owner own the real estate. In it’s simplest form you can think of fair-market rent as what you’d charge another veterinarian to rent your real estate from you.
Normal operating expenses also include paying all owners fair compensation for what services they provide to the practice. The simplest way to calculate this is by determining what you’d have to pay another person or multiple people to do what you do in the practice if you were sitting on the beach in the Bahamas. If you are a veterinarian producing revenue in your practice, what would you have to pay another veterinarian to produce your same revenues?
Also remember as an owner of the practice you have at least some management responsibilities. If you have a practice manager your management duties should be less. If you don’t, you’re likely responsible for full management of the practice. What would you have to pay another person to come in and do the hiring, firing, policy setting, staff scheduling, etc.?
If your practice is generating a profit after all normal operating expenses are deducted, congratulations! You are on the right path to being a Rich Owner. But not so fast. How much profit are you generating? To be a Rich Owner you should be striving for a profit percentage (profit divided by revenue) of 20%. If your profit percentage is in the single digits or worse, negative (yes some practices have a negative profit percentage or a loss) you are a Poor Owner. Middle Class Owners have profit percentages in the low teens.
Is your practice an asset that is producing profit? Or is it a liability that is constantly eating up cash?
Investment versus Expense
In the two practices I valued the Poor Owner built a new building in 1999 and another major addition in 2006. The Rich Owner did a major remodel in 2008. The difference between the Rich Owner and the Poor Owner is one added to their investment and the other created a larger expense.
The Poor Owner now has fair-market rent higher than the practice can support with the revenues it is generating. This eats up profits of the practice. I refer to this as an expense. Now I understand that the practice may have been bursting at the seams in 1999 and they needed a new facility. I also understand that eventually they may grow into the practice meaning gross revenues will increase to make fair-market rent percentage appropriate and increase profitability. I don’t think this should take over 13 years.
The Rich Owner’s fair-market rent as a percentage of gross revenues is well below the industry standards. The remodel added room to allow for more revenue to be produced. Not to mention the facility looks great! This remodel also allowed Rich Owner to merge in a nearby smaller practice to even further increase his profitability and the value of his investment.
Pay Yourself First
Rich Owners pay themselves first. This not only means fair compensation for what they do in the practice it also means a return on their investment. There is risk in being a business owner. Just as lenders require interest in return for the risk in lending money, a savvy business owner requires a return for taking the risk of purchasing the business.
Many veterinarians have this backwards. They pay themselves whatever is left over. These are Poor Owners. Do you not regularly pay yourself a return on your investment? Have you withheld your own paycheck from payroll processing because you didn’t have the funds to make payroll? These are things Poor Owners do.
In most cases veterinary practice owners can be Rich Owners. It is a matter of choice. If you are currently a Poor Owner you can make the choice to change. The first key is awareness. You need to understand the value of your practice so you know if you are a Poor, Middle Class or Rich Owner. If you find yourself a Rich Owner, congratulations! Keep up the good work! If your results are those of a Middle Class or Poor Owner you need the second key, which is education.
Poor Owners associate education with expense. Rich Owners consider life-long learning an investment. Education doesn’t have to be that expensive. You do need to learn how money works and how to run a business. These are things you weren’t taught in college. National and State veterinary conferences have practice management courses. If you’re attending, allocate a few hours for these courses instead of spending all your time in scientific courses.
There is endless free information on the Internet about money, investing, and running successful businesses. Go to your local library and read as many books as you can about these topics. The issue with education is not expense. It is about prioritizing your time and having the desire to become a Rich Owner.
The final and most important key to becoming a Rich Owner is by taking action. If you are not currently a Rich Owner you have to change. If you don’t change you’ll keep getting the same results. Through education (key #2) you’ll understand the changes that need to be made and it is up to you to take action.
Being a Rich Owner is your decision to make. Become aware of the value of your practice by getting it appraised. If your results are those of a Middle Class or Poor Owner you will be able to identify the opportunities for improvement and make the necessary changes so that you can enjoy the life of a Rich Owner.