Buyer Hot Buttons
In this article, we will review the practice attributes that today’s buyers are paying close attention to – their “Hot Buttons”- as well as our recommendations on how to address those Hot Button issues in order to make the practice as valuable and marketable as possible.
Hot Button #1: Asking Price. Today’s buyers are sophisticated and very well informed about the market value of veterinary practices in their area. If the practice is initially priced well above its true market value, it will take much longer to sell. Even if you find a buyer who is willing to offer more than the market value, overpriced practices will ultimately end up selling near their true market value once the buyer’s advisors and practice lenders begin to weigh in on the practice purchase price.
Solution: Set an asking price for the practice within the normal range of market values in the area. This is accomplished by conducting a thorough analysis of comparable sales in the local market. Be sure to engage an experienced, local broker to accomplish this task.
Hot Button #2: Practice Location. We find that the majority of buyers are looking to purchase a practice primarily in urban/suburban areas. Therefore, it usually takes longer to sell a veterinary practice in a rural area. In addition, most buyers prefer a retail-type space with good visibility, although an attractive professional building location is also a viable option.
Solution: Utilize a long-term, strategic analysis of your current location. If the area is “going downhill” or the building in which the practice is located does not have the type and volume of tenants it once did, consider the costs vs. benefits of relocating your practice to a better area or a different type of building. If you are 7 to 10 years away from transitioning your practice, the benefits and potential gain in practice value can often justify the investment required to relocate.
NOTE: If your practice is in a rural area, the other “Hot Buttons” discussed in this article become even more important to buyers.
Hot Button #3: Equipment and Aesthetic Appearance/Cleanliness. Because most buyers have been practicing for less than 5 years, they would prefer to utilize newer equipment and digital technologies in their practices. The practices that have digital radiography and chair-side computers tend to sell quicker and at a higher price than their counterparts.
Also, first impressions are important, so practices that do not have a positive “curb appeal” when buyers walk in the door for the first time can lose value and take longer to sell.
Solution: Just as with your location analysis, it is imperative to have a long-term plan for keeping your equipment and facility up to date. The more time you have until the practice sale, the easier it will be to garner a sufficient return on investment from purchasing new equipment. We recommend that you upgrade your equipment 3 to 5 years prior to selling your practice.
In regard to aesthetics, we again recommend updating your office décor and finishes 3 to 5 years before the sale to initiate a positive response from potential buyers. Hiring an interior designer or remodeling the practice can enhance practice value and marketability.
Hot Button #4: Practice Cash Flow. Most buyers are looking for practices that generate sufficient net cash flow (after operating expenses) to cover their personal living expense needs, which can be substantial considering that many potential buyers have student loan debt in excess of $200,000. Additionally, the ability for a buyer to obtain financing for the practice purchase is heavily tied to the historical cash flow of the practice.
Solution: Cash flow is related to both expense control and revenue enhancement. Start by ensuring that your major expense categories (staff payroll, veterinary supplies, and lab fees) are within industry norms. Next, make sure that you are doing everything possible to enhance practice revenue, increase case acceptance, attract new patients, and retain your existing patience base.
Hot Button #5: Type of Patient Base. When we sell a veterinary practice, our experience has been that the majority of buyers are looking to acquire a practice with a fee for service and/or PPO patient base. DMO patient bases are definitely waning in popularity and, with the recent changes to Medicaid reimbursement, a patient base with a significant Medicaid component may be viewed negatively by some buyers.
Solution: With the help of a practice management or insurance consultant, conduct an analysis of the insurance plans that you currently accept along with those that are prevalent in your market area to determine if it is worthwhile to drop some plans and possibly add others. If handled properly, these changes may help increase new patient flow, decrease practice overhead, and make your practice more valuable and marketable to potential buyers.
If Medicaid accounts for the majority of your patient base, you have likely already experienced a significant decrease in revenue and should consider developing a long-term strategic plan to build a fee for service and/or PPO patient base. A location/demographic analysis will be essential to identifying potential opportunities in your area.
Hot Button #6: Active Patients & New Patient Flow. Active patient count and new patient flow are extremely important to buyers in evaluating the health and goodwill of a practice. We have often heard that, on average, patients switch Veterinarians every seven years. Therefore, an easy way to determine if your patient base is growing or declining is to divide your number of active patients (seen in the past 24 months) by seven and compare the result to the number of new patients you have seen in the past year. If the number of active patients leaving your practice each year is larger than the number of annual new patients, then your patient base is shrinking and may be cause for concern.
Solution: Conduct a periodic analysis of your active and new patient counts to evaluate the health of your practice and identify trends that may need to be corrected. Enhancing the patient experience and maintaining an effective recall system can ensure maximize patient retention, while implementing an internal marketing strategy (asking for referrals from existing patients) and an effective external marketing strategy (such as a website or direct mail) can improve new patient flow. Hiring a practice management consultant on a periodic basis can help you and your team to stay on track in these areas.
Hot Button #7: Upside Potential. When an acquisition opportunity provides the buyer with the potential to increase revenue through making minor changes in the practice, the buyer will typically be more inclined to offer full market value for the office. Retaining services that are being referred to specialists, increasing operating days or hours, and implementing relatively simple internal or external marketing strategies are all attractive ways for a buyer to increase revenues and patient flow.
Solution: While you should take advantage of the revenue potential of your practice prior to the sale, be sure to identify and quantify any opportunities that you have not pursued to your practice broker and potential buyers.
By understanding the factors that influence a potential buyer’s perception of value, making the changes necessary to maximize practice value and marketability, and planning ahead, practice owners can ensure that they will be in a great position when the time comes to sell their most valuable asset.
-Rod Johnston, MBA. CMA
TOP 5 VETERINARY PRACTICE TRANSITIONS STRATEGIES
Until, one day, your back blows out, your spouse tells you to retire, or you just plain get tired of managing staff, cutting expneses, and health departments or state taxing authorities coming by for a “little visit”. You decide, it’s time to sell my veterinary practice! Maybe you want to continue doing veterinary work at some level, either part time, or full time. How about forming a partnership? Maybe you want to be completely done. Here are the top five strategies you can think about before that time happens and where we have expertise in making it happen. We offer a courtesy planning session to start the process.
1. SELL AND DON’T LOOK BACK – This is the option for those who are completely done and ready to either find another career, a good fishing hole, or favorite golf course. You can either attempt to do it yourself, or hire a veterinary practice broker to help you out. The pros of this are you are done, you get your equity out of the practice and you do not have to worry about staff, insurance companies or other problems again. The cons are that you do not know how your clients and staff will be cared for by the buying doctor. This is a favorite strategy for the retiring veterinarian or doctors with health issues, those moving far away or who just wants to be done.
2. SELL AND TRANSITION – This approach allows you to sell your veterinary practice and stay on for a short or long term transition. The “staying on” part can be a two hour drop in once per week for a couple of months, working back one or two days per week, or a more extensive two to four days per week for a year. It’s all negotiable and depends on the amount of production in your practice. This strategy is great for those who are closely tied to their clients and staff and want to see them well cared for after the sale. It also ensures the clients will stay with the buying doctor if the seller is there for a bit after the sale of your veterinary practice. The pros are that it allows for a very smooth transition. The cons can be that the staff is still allegiant to you and the clients still want to see you. You need to be an impartial observer more than anything at this point and let the buyer be the owner and do his/her work.
3. SELL AND WORK BACK – If you decide that you still enjoy veterinary work, but just do not want to manage the practice anymore, then this is the strategy for you. In certain cases, you can sell your veterinary practice and work back. This can be done at an early age and does not mean you are retiring. I have several case studies where a 50-year-old veterinarian was tired of managing his staff and getting hit with unexpected taxes or other expenses. We sold his practice to someone that wanted a satellite practice. He is working back full time making more money than he ever made. The buyer implemented marketing and other services to increase production. Pros are that you no longer manage your practice and you may make more money. Cons are that you may be selling to a small group or a large group that may require you to implement systems and procedures that are not what you may like. Be selective in who you sell to. I have found that smaller groups allow you more freedom.
4. PARTIAL SALE – PARTNERSHIP – If your practice has enough production, you can sell a partnership in your veterinary practice and continue to work. Often these practices grow with an infusion of young enthusiasm. There are numerous ways of structuring these deals. And, anytime you enter a partnership, I advise strongly you put everything in writing and have an attorney do their magic to make it legal and fool proof. You sell a portion of your practice, say 1/3, to a buyer. You continue to work and grow the practice. You can then either sell another 1/3 to another buyer or continue to grow, or sell out completely. The pros of this is that you harvest some of your equity while continuing to grow your practice. You then grow the practice some more and then you sell another portion. The cons are that partnerships come with all the trials of a marriage. You will probably have disagreements with your partner. Be sure and structure it right up front to reduce disagreements and to remedy them if there are.
5. DEFERRED SALE – Also called an associate to own sale. This is where you bring on an associate who works in the practice. The associate may work one or two days to start. You can then sell the veterinary practice to the associate at an agreed upon time. The price can either be determine up front or at the time of the sale. The way we typically do a deferred sale is to perform a valuation in the beginning and agree upon the price. We then do a valuation in the end and the buyer and seller split the equity to determine the final price. This can be a good way to transition as the staff and clients get to know the new doctor. It can go very smoothly. Statistics show that these fail about 50% of the time. I typically see them fail when either parties change the deal in the middle of the process, one party gets jealous of the other, or personalities conflict. We structure these so there’s a “dating” period and then we lock in the associate with a deposit.
EVERYTHING IN BETWEEN – Now you know the top five strategies for transitioning out of your veterarinary practice. We often get asked about how creative a transition can be. You can really be as creative as you want to be. The only challenge is finding a buyer who will be creative with you.
So, think about where you are today and what your end goals are. We offer a complimentary consultation to help you determine which strategy is best for you. You can trust that we will come up with a plan that will work for both you and a prospective buyer to make your transition as smooth for everyone as possible.
-Rod Johnston, MBA. CMA