Nikki Nitz, CPA, CMA
At Simmons, we get asked regularly about veterinary practice ownership, “Are there buyers who can actually afford to buy?” The quick answer is yes! There are a few considerations to keep in mind, so read on as we outline them for you.
Who Can Afford to Buy?
When a practice is priced relatively, the practice profits cover the debt payments the buyer needs to make and provide them a reasonable return on their investment on the practice purchase.
Profit is money that is available after all regular operating expenses have been deducted from revenues, including the following:
- Fair compensation of the owner for being a revenue-generating veterinarian in the practice.
- Fair compensation of the owner for their management responsibilities in the practice.
- Fair market rent no matter who owns the real estate — the owner or a third-party landlord.
Student Loan Debt
Many sellers and buyers have concerns about student loan debt. Veterinary lenders understand the industry and know most buyers have student loan debt. Their four biggest concerns are the following.
- Does the buyer have a good credit history? Do they have a proven track record of repaying their debts timely?
- Have they proven they can generate reasonable revenues as a doctor?
- What is the monthly financial need of the buyer to cover their personal expenses, including student loan payments?
- Does the practice they are looking to purchase provide enough cash flow to cover these financial needs?
Insufficient Cash Flow
If the practice does not generate enough cash flow to cover the buyer’s needs, it does not necessarily mean the practice is priced incorrectly. This could be the case, but it could also mean that this is simply not the right practice for this particular buyer.
For example, I had a buyer that had 6 small children at home, and their spouse was a stay-at-home parent, meaning no secondary income. Therefore the personal needs of this buyer were higher than the typical buyer. Even though I priced the practice appropriately, it did not produce sufficient cash flow for this particular buyer.
Can a Buyer Afford the Real Estate and Practice?
We also get asked regularly, “Can a buyer afford the real estate and the practice?” The quick answer again is yes!
The buyer must pay for the facility use one way or another. Either they pay rent or make real estate mortgage payments. If the rent is at fair market prices, the rent and debt payment figures are close to the same amount. So if the buyer can afford to rent, they usually can afford to buy. An exception would be if the total debt load gets to be too high for the lender to accept the risk, but this outcome is rare.
Corporate purchasers can afford to buy as well, and one of the benefits of corporate purchasers is that they pay cash. This removes lenders from the process, and the result is usually a shorter period to close the transaction.
A few challenges of corporate purchasers are that many of them don’t purchase real estate, which means you become a landlord if you own the real estate. We are starting to see corporations recognize this hurdle. As a result, some have built relationships with outside investors willing to purchase the real estate and then rent it back to the corporate purchaser.
Corporate purchasers usually require the seller to become their employee for some time post-sale. The culture of the practice will change with corporate ownership, and this is sometimes a tough pill to swallow for the seller when they are now an employee and are not in a position of control. Nonetheless, corporate purchasers are becoming great options for many sellers.
Can You Afford to Wait to Sell?
Veterinary practice brokers have predicted market shifting for the past few years, and it is simple economics. It has been a seller’s market where we have experienced more buyers than sellers. Eventually, it will shift to a buyer’s market where there are more practices for sale than we have buyers, which is a trend already seen in the Pacific Northwest. This may be happening because there are many veterinary practices owned by baby boomers, and they are all retiring at the same time — now.
The Future of Practice Sales
How is this going to affect future practice sales? It will likely not affect the value of the practice itself, but what it will affect is how long your practice is on the market. If you need or want to sell your practice quickly, you may have to lower the price to entice buyers. Buyers will cherry-pick the best practices, meaning the most financially healthy, in their preferred geographical location, and with the most modern facility and equipment.
Interest rates are another significant factor in deciding if you can wait to sell. Right now, lenders typically offer 4-5% interest rates. This means that buyers can afford to buy more practice now than they could with a higher interest rate.
Remember, when a practice is priced fairly, it produces enough profit to cover the practice debt payments and provide a reasonable return on their investment. Higher debt payments because of higher interest mean the less practice they can afford to purchase.
We all know that interest rates have only one way to go, and this is up.
Simmons Is Your Trusted Guide in Veterinary Practice Sales and Purchases
Can you afford to wait to sell your veterinary practice? You may be better off putting your practice on the market sooner rather than later to beat the rush of retiring baby boomers and the increase of interest rates. So, who can afford to buy a veterinary practice? Independent veterinarians — even those with student loan debt — and corporations.
Simmons Veterinary Practice Sales and Appraisals has over 4 decades of helping veterinarian buyers and sellers make the most of their ownership journey. For more information or expert guidance from an experienced team, contact us today.