Not long ago, a 70-year old owner of a $1.5 M grossing practice said to me that he was thinking of selling his veterinary practice to an associate, hopefully within the next six months. Further, he believed his practice was worth about $1.4M. He was not pleased when his 3% profitability practice did not value much more than tangible assets.
The seller had excellent monthly financial statements prepared by his accountant to whom he paid $12,000 annually. He said he doesn’t pay much attention to the monthly financial statements “Just don’t understand that stuff.” Further, he didn’t understand why his practice received such a low value.
A cursory review of his financial statements showed his drug and supply costs were in the neighborhood of 34% of revenue (10+% points higher than average).
BOTTOM LINE: Because of my client’s resistance to learning the basics of financial accounting, he had no clue as to how well his practice was performing.
Step 1: Be proactive.
Have a basic understanding of your practice financials. It used to be that an owner could run a practice by the seat of his pants and the practice would likely be profitable. Those days are rapidly disappearing.
Step 2: Be informed.
Read the VetPartner’s The No-Lo Practice: Avoiding a Practice Worth Less
It is important that an owner has a basic understanding of how practices are valued and appreciate those factors that drive value
Step 3: Be patient.
Allow adequate time for corrective measures to take place. It takes time to put in place and realize results from any corrective procedures designed to create change in practice operations. It is not adequate just to initiate change in the short run. Sufficient time must be allowed to determine whether the change is sustainable. In most cases, three or more years should be allowed for.
Step 4: Know what your practice’s value is today.
Guidance from Alice in Wonderland
Alice meets the Cheshire Cat at a fork in the Yellow Brick Road:
Alice asks the CC: “Which way should I go?”
CC asks Alice: “Where are you at?”
Alice responds: “I do not know where I am.”
CC queries Alice: “Well then, where do you want to go?”
Alice responds: “I do not know where I want to go.”
CC philosophizes: “Then, it doesn’t matter which way you go.”
The wisdom of the Cheshire Cat can be applied to our practice life. To create effective change, we need to where we are starting from and where we want to go.
In most cases, it is essential to know where your practice is today. These steps will help you establish where you are, so you can determine where you want to go:
- Decide how soon do you wish to retire.
- Complete the VetPartners profitability worksheet
- Perform an appraisal.
Type of appraisal
It can be very tempting to cut corners with a free appraisal or verbal estimate but to truly access your veterinary practice’s worth, a professional, written appraisal is necessary. When it comes to the biggest investment of your lifetime, a homemade or outdated appraisal system won’t cut it. Trust the experts at Simmons to provide an accurate, transparent appraisal.
Step 5: Analyze your practice.
Whether you perform the grunt work or hire a consultant, is it important to know the reason why your practice is or isn’t worth what you think it should be. Too much is at stake for owners not to do one or the other.
Goal: Identify the areas within your practice where changes might be made.
Analyze your income statement starting with the major expense groups:
- costs of goods sold (include pharmacy, supplies, lab fees, imaging, etc)
- cost of support staff
- cost of professional staff (include a fair market salary for the owner DVM)
Express each of these as a percent of revenue. To interpret this data, consider a % as a fraction, i.e., an upper and lower #
- If only one or two of the three expenses have high percentages, look for cause and solution on the upper number of the fraction
- If all three percentages show high values, the major problem is in the lower number of the percent fraction, i.e., the most likely cause is too little revenue; fees are too low
Step 6: Set goals.
Determine your objectives and where you want to go.
If the value is good
- Keep up the good management.
- Understand the drivers of value.
- Perform profitability worksheet at regular intervals; at least quarterly
If the value is less than desired
- Resolve to put in the work to improve the practice’s value.
- Accept the low value of your hospital as sell before you put in more work that does not return value.
Step 7: Make a plan.
Develop a list of possible corrective measures you might possibly institute. Keep in mind the goals of Step 5 and the available time frame you have to work.
- Where do I want to go?
- Where do I believe I can go?
- How much time will I have to make changes?
Prioritize the corrective measures list with the most beneficial and most achievable at the top. For each possible corrective measure, define the following:
- How the success or failure of each corrective procedure will be determined.
- How the success or failure of each corrective procedure will be measured.
- When success or failure will be measured.
Step 8: Institute your plan.
Perform scheduled measurements; make adjustments; repeat the process.
Step 9: Perform a follow-up appraisal.
Assess the results of your plan and determine if your practice’s value has improved. The timing of the follow-up appraisal varies depending on the exit timing of the owner, but usually at the first or second anniversary of the original appraisal.
Step 10: Use budgets.
The budget process, when well thought out and properly implemented, can be a very effective process to recover lost value.
David B. Gerber, DVM
Larry McCormick, DVM, MBA, CBA
Simmons Mid Atlantic
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