Top Pitfalls To Avoid When Buying a Veterianry Practice
There are a number of things to look out for when buying a veterinary practice. If you’re not careful, you could end up with a bag of tricks. Here are some of the top pitfalls to avoid when buying a practice:
1. Not understanding the numbers. Be sure and know what normal veterinary expenses are and what may be extraneous.
2. Assume the staff are all on board and will be staying with the practice. Know who the staff is and what their relationship is with the seller, and how good they are…
3. Embezzlement – hire an accountant to look for any irregularities. Statistics show there are a high number of practices that are embezzled by their employees each year. Are courtesy credits high? How about patient refunds?
4. Does the procedures the selling doctor perform match the procedures that you do? Make sure a large amount of the procedures you don’t do are not currently being performed by the seller. You don’t want to have an immediate drop in production right from the start.
5. Understand the lease. How many years are there left on the lease? Are there more options to extend? Is there a loan form the landlord build into the lease? Which expenses are covered in the lease? Is it triple new or a gross lease?
These are only a few of the pitfalls to make sure you don’t get tricked. Spend as much time in due diligence as you need and bring on experts to help you along the journey.
-Jim Vander Mey, CPA. ABI
Be an Educated Veterinary Practice Buyer
I meet hundreds of veterinarians each year who are looking to buy an existing veterinary practice. Of those, I would estimate that 30% have done any research on what is involved in buying a practice. Of that 30%, none know the beginning to end process of buying a veterinary practice. While all the steps cannot be covered in this article, here is some guidance on where to start and what steps to take before buying a practice.
- Contact a bank that finances veterinary practice acquisitions and makes sure you can qualify for a good loan. Banks can require decent credit scores, cash in the bank, that you are two years out of school, and show production from your current employer. Every situation is a little bit different. Try to avoid SBA loans if you can, as they can be expensive with early payment penalties. However, if that is the only avenue to ownership, do not pass it up.
- The next step is to understand a little bit about veterinary practice valuations. You don’t want to go into a sale not knowing if the practice is worth the price listed or not. If you are looking at a practice that a corporate entity is also looking at, the rule of thumb is that valuations are out the window. Practices grossing 1 million or less could be worth between 65% and 75% of its’ last 12 months’ production. Remember, that’s a rule of thumb – I’ve seen practices go for as high as 160% of production and as low as 30% of production.
- Think about where you want to practice. You’re probably going to be there a while, so you might as well like the area. Research demographics – there are excellent demographic services that sell great Veterinary demographic information for about $500. It will tell you where the best locations to practice are located. Also, do not ignore the smaller, older, and not-state-of-the-art-equipped practices. These can be the best opportunities allowing a higher return on your investment.
- Put together a good team. Get referrals for a good veterinary broker, attorney, banker, and accountant. They’ll help you analyze the veterinary practice, do the legal work, and help you find a practice.
- Get an understanding of the true cash flow of the practice and if expenses are above industry averages. For example, is the staff expense greater than 25% of production? Is the reason because one employee is overpaid and will be retiring at the same time as the seller, or is there an over-staffing issue? Be an informed buyer.
- Be prepared for your due diligence. You need to know what to look for when you do get to the point of buying a veterinary practice. Does the practice have a website? As the practice should be valued on current performance, not future potential, there could be real opportunities for immediate growth. Know how to spot these things.
- Finally, spend some time with a veterinary broker before you go look at the practice. Understand what the practice you are looking at is all about. Does the broker think it’s honestly a good practice? Why? Does the explanation make sense? Once you’re comfortable with the numbers, then go take a look at the practice.
By being an informed buyer, you will avoid a lot of headaches and potential problems down the road. There are practices that are hidden gold mines and practices that you should not touch. Being educated and knowing the difference is critical in your veterinary practice acquisition success.
Current Trends For Veterinary Practice Buyers
Since Omni started in 2004, we have sold well over 300 practices. Prior to approximately seven years ago, the majority of the practices had been sold to individual veterinarians buying their own practices. The past seven years, most of our sales have been to corporations. They have been paying big bucks to acquire practices. They have been paying associates handsomely to work in those practices. But is the trend flipping again back to individual buyers?
Corporate buyers have always told us that they want to acquire large practices with two or more doctors working in the practice. They have been doing that successfully. So well, that it’s hard to find a multi-doctor practice that isn’t owned by a corporation. I know, there still are some, but a lot of them have been gobbled up by the big guys. And they’ve paid a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) ranging from a low of 6 to as high as 20 (or more) in certain cases. One of the requirements for the sellers is that they stay in the practice and commit to work for anywhere from 2 to 5 years in their practice after it’s sold depending on what’s been negotiated. Here’s where the corporates are now realizing what happens when the doctors are done with their commitment. The selling doctor may retire completely. The corporate then needs to get another associate. Associate veterinarians are not easy to find these days. Thus, the rush to open up a few more veterinary schools. So, that leaves them with a practice with one less doctor if they can’t find an associate.
Here’s another trend we are seeing. Some of the smart, entrepreneurial younger veterinarians, in their 40’s and 50’s for example, who sold their practices and have fulfilled their commitment to a corporation are now back on the market looking for a practice. They got tired of some of the corporates telling them which supplies and equipment to use and, in some cases, even which procedures to perform. (Yes, I know, they’re not supposed to dictate clinical work, but some do).
As I previously stated, corporations have been passing up on acquiring the majority of the solo doctor practices. We see lots of practices with only one veterinarian collecting a million dollars or more, booked out a month or two, working six days per week and they just can’t find, or afford an associate. Some of these practices, if they had two doctors, would quickly grow to collect $1.5 to $2.0 million. Those practices are prime acquisition targets for the solo doctor who sold to the corporate, has practice management skills, can retain the selling doctor, and quickly grow the practice. They can potentially then sell the practice in a year or two to a corporate as they now have a multi-doctor practice if the seller stays on. Or, they can hold onto the practice and reap the cash flow from the now two-doctor practice.
Note to the young buyers out there that have been out of veterinary school for 3 to 5 years, you can do this too! The seller has the experience of running a practice. Many that we speak with are willing and want to stay on to mentor the buyer and help run the practice, they’re just getting tired and want to cut back a few days. Most love being a veterinarian and want to continue the clinical aspect of veterinary work. They just want to pass on the management to the buyer and work less days. So, the opportunity is ripe for veterinarians who are tired of working for a corporation and want to own your own practice. You don’t even have to sell to a corporate. You can hold onto it and make it your own practice for years to come and be proud of what you’ve built, or the legacy you’ve carried on.
There are a lot of great solo-doctor practices out there waiting for a buyer to come along. The potential is both lucrative and gratifying to the buyer and the seller. You don’t need to work in a corporate environment the rest of your life. You can enjoy your freedom and work in your own practice. The choice is yours.
We’re always just a free phone call away and happy to help in any way we can.
Read MoreBuy an Existing Practice or Build a New One?
By We speak with hundreds of practice buyers each year. Many are looking for that gem of a practice in their desired area; a practice with new or newer equipment, digital technology, great location, recently remodeled, etc. Oftentimes, that practice either doesn’t exist; or if it does exist, it’s not for sale. So what’s a buyer to do?
Omni is a rare breed in the practice broker world. We not only provide practice transition and valuation services for veterinarians – both buyers and sellers – we are also experts in helping veterinarians with their real estate needs. We are often asked in seminars, at conferences, or over the phone, “Should I buy an existing practice, or do a startup?” I often suggest that veterinarians spend some time looking for a practice in their desired location. If they can’t find one, they should consider starting a practice, especially if the doctor is 100% certain of the area in which they want to practice.
I recommend that veterinarians do a bit of demographic analysis on the locale. See how many vets are currently practicing in the area. A good ratio is 3,000 daytime population for each doctor in an urban population. In a rural population, the ratio is 10,000 daytime population for each doctor within a 20-mile radius. There is a difference between the daytime population and the regular (nighttime) population. The daytime population includes the workforce. For example, if you look at the population of South Lake Union during the day vs. the nighttime population, you would see a big difference. Another demographic to pay attention to is the age of the population. For a companion practice, a middle-aged to an older population is generally better. Homeownership is another good indicator of practice success. You want to have more homeowners than apartment renters. You can obtain detailed demographics either through a company that will charge a fee and provides data such as the average annual dollar amount spent on veterinary services per person within a zip code and other more granular items. Or, Omni has information that we can provide.
If you perform the necessary research and find that opening a new practice in the area you like makes sense based on the numbers, we suggest that you go for it. We have helped many veterinarians over the years do demographic research, find a space, and negotiate a lease. Steve Kikikis is our go-to person for real estate leasing and sales. You can reach out to Steve anytime by sending him an email at steve@omnipg-vet.com.
Read MoreShould I Pay Down My Student Debt Before Purchasing a Practice?
Nothing resonates more with recent college graduates than the talk of possibly wiping away student debt. Even though this might be a talking point of our current administration, it does bring up a question that newly graduated veterinarians worry about if they want to own their own veterinary practice. Should I pay down my student debt first? Or should I purchase a practice and then have two debts?
Your own gut reflex will say, “Uh, no way…more debt is crazy when I’m already so far underwater.” However, it is usually advantageous in the long run. If the dream of owning your own business is on your vision board, then it makes financial sense to move ahead with securing a business loan early in your career, even with a large amount of student debt.
Each person’s financial position will be unique. However, here are some items to consider:
Will it be harder to get a bank loan with a lot of student debt? Although not necessarily harder, the amount you can borrow will be determined by the amount of your student debt and your history of making regular and timely payments. Consistent payments and not skipping any repayments on your student loan will show the bank that you are reliable in your financial commitments. Although it’s tempting to splurge on extravagant items, keep your finances in check during this time and keep making regular payments. Banks like to see that you have a stable financial history and are not high-risk.
Which has the higher interest rate, the student loan or business loan? Whichever loan has the higher interest rate, is the loan you will want to pay down first. This might seem obvious but check with your lender for your student loan because they often don’t have harsh penalties if you lower your payment. Go back and recalculate what the minimum student loan payment is and take the difference you had been paying and use that towards your new business loan, hence paying the more expensive loan sooner.
Buying a turn-key practice or one that needs some work. Look for a veterinary practice that is undervalued, has potential, and is located in a good area. Most buyers want a turn-key solution when purchasing a practice. But there are a few diamonds in the ruff. The advantage is you will secure a loan for less money on an underperforming practice and with some work, you can turn it into a polished gem which is a great investment.
Building equity. You will earn equity in your business if you purchase a practice, rather than remaining an associate. As an owner, your earning potential is far greater, often outpacing the associate salary from the day you purchase a veterinary practice. If you purchase a practice where you own the real estate, then you would also increase your bottom line when you are ready to retire and transition.
You haven’t missed the boat of owning your own veterinary practice when you have a large amount of student debt, but you will want to be business savvy on how you should proceed.
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