Call us crazy but a downturn in the market is the perfect time to take the leap of faith and buy a veterinary practice. Here’s why!
Stop here. Close your eyes. The year is 2007. Some of you might have been just starting your career in veterinary medicine, and others may have been too young at the time to watch the financial world recess. Without showing our age, we at Simmons can confirm that we were in fact old enough to watch the recession and use that vantage point to help you walk through why, contrary to popular belief, this kind of financial climate makes for an opportune time to purchase a veterinary practice.
Ok, time to open your eyes again. Let’s fast forward to the present day – things aren’t looking that different than they did back in 2007. The stock market is in a constant state of turmoil, trusted bank entities are crumbling, and interest rates are fluctuating daily. Major corporations are laying off thousands of employees—some of these being our own colleagues in the veterinary world. Those who are laid off are left with no choice but to start over and subsequently turn to another major corporation that might lay them off when things start to get rocky again. And they will get rocky again, that’s inevitable. But you don’t have to be at the mercy of corporations. You can have the ability to take control of your own destiny. You can experience what job security feels like for yourself and give that gift to your valued employees. That freedom is available to you through the ownership of a veterinary practice!
If not now, then when? For veterinarians nearing the end of a long career, now makes financial sense for them to make the move into the world of sunshine-y retirement. This means that their beautiful veterinary clinics are looking for someone to take charge and lead them into their next great chapter… employees looking to be led by a passionate new owner… pets (and pet parents) looking for a new favorite veterinarian to visit! A new owner just like you.
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Ending the false narrative. You’ve probably heard people around the industry gossip about large consolidators—from the chatter it seems like there are no ‘mom and pop’ practices left to purchase, true? False! In every market, there are still many one- and two-doctor practices out there looking for associates to buy. If anything, it actually makes the climate for these smaller private practices a buyer’s market.
Do we have you yet? Maybe talking financials will seal the deal. There are two popular ways to look at the value of the practice. The first is Owner’s Discretionary Cash Flow (ODCF), meaning the income that is left over after taxes. This is the amount of net income available to spend, save, or invest. The second method we take into consideration when determining the value of the practice is the profitability of the clinic. Each formula accounts for the predicted wages you would earn once you start working in the practice. In simpler terms, there is no pay cut necessary for you to buy a veterinary practice during a market downturn.
Let’s break this down more, shall we?
- Example: A practice that is sold for 5.5x its earnings (a/k/a profit)
- Practice Revenue: $1.2M
- Earnings: $182K after Owner Compensation
- Owner Compensation: $147K (21% of $700K production)
Note remaining $500K Revenues produced by a part-time associate and support staff were paid accordingly before the $182K Earnings were established.)
- Purchase Price: $1M ($182K Earnings x 5.5)
- Loan payment on $1M Purchase Price: $140K/year (for 10 years at 7% interest, note that current interest rates are approximately 5%)
- New Owner Compensation After Loan Payment: $189K (Earnings – Loan Payment + $147K compensation as a producing doctor)
Another way of looking at this using the ODCF method:
- $329K Owner’s pre-tax compensation after the loan is paid off, assuming no practice growth or other debt.
- $329K Calculated: $182K Earnings + $147K Compensation
The timing may never be perfect in the grand scheme of your life for you to buy a practice. There will always be reasons to wait for a “better time” to buy. But if you never take the leap, you will never have the chance to see the financial freedom that is waiting or you… even on the potential brink of a recession.
Authored by Sean Coyle, Veterinary Broker, Simmons Northeast