Buying a Practice

I know. Running a business seems daunting. You just want to be a doctor and not have to worry about the rest. I understand. That said, it is wise to consider what is left on the table by being a career employee, or by waiting for that perfect practice to show up.
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Let us consider a fictitious practice:

• Overhead: 60%
• Gross: $550,000
• Net: $220,000
• Acquisition price today, due to COVID environment: $300,000
• Interest rate: 4%
• Loan of $330,000 (acquisition price plus one month of working capital) over ten years: $3,341 monthly payment/$40,000 annually/$400,930 over life of loan

Let us assume 10% growth in the first two years and 5% growth in the next eight, all while maintaining overhead percentages.

• Total income over those ten years $2,600,000
• Estimate of practice value in ten years $700,000

Sum of income and asset value $3,300,000
As an associate, how does this compare your compensation package over the next decade?

A lot of “experts” have been giving their own predictions on the Covid-19 Pandemic.  The truth of the matter is, no one has a crystal ball and knows what tomorrow will bring.  So far, most experts have been off on their predictions.  What we do know is that there will be a “post-Covid” and life will get back to some form of normal in the relatively near future.

We as a society have historically been through pandemics such as the Spanish Flu, HIV/Aids, Hong Kong Flu, and others.  Pandemics are definitely game changers and force us to look at how we live, work, educate, etc., This pandemic will be no different.  Some states are beginning to open up as I write this article.  Some veterinary clinics and hospitals have already made some changes.  Dropping off animals outside the office, taking patients directly into exam rooms, using telemedicine, etc. are just a few examples of changes made in some practices.  Some of those changes will be short lived but some will be permanent.  But the truth is there will be changes.

One thing that I promise you will not change is that animals will continue to exist and people will still have pets.  I’m 100% certain of that.  As such, animals will continue to need care.  Unless plumbers start doing veterinary work, that means they will need to see a veterinarian in a veterinary hospital!  It will just be a matter of how the new game of veterinary practice will play out with new rules in place.  In sports, rules change all the time.  Players and coaches just adapt to those rules and adjust to playing under those new rules.

Another rule that may change is valuations on practices in the near term.  I have heard a gamut of theories from brokers, bankers, veterinarians and the grocery store clerk.  But they are just that… theories.  My advice would be to stop listening to your friends, relatives and others who don’t have any more knowledge than you do about the future of practice valuation.  Here’s what I know for sure, good practices with good margins pre-Covid will be good practices with good margins post-Covid.  They will sell for a normal value, even post-Covid.  I also know patients will come back to the veterinary hospitals.  This will be true for most all offices.  I’ve spoken to several veterinarians who have told me they have full schedules already in the immediate future.  For those practices that are below average to average practices, there may be some adjustments to values in the near term.  Banks have told us that they may adjust their valuations as well.  I don’t expect huge discounts, but perhaps a discount to account for some of the new expenses or reduction in production.

As a potential buyer of a veterinary practice, you should look at the practice as if it was pre-Covid.  In the long-run, that practice will get back to “normal”.  If you find a practice that has been what you’re looking for, you need to do your due diligence and be confident that normal will happen again.  Those who do will be ahead of the game. ​

What a crazy time we are in. At least to me, this is a sober reminder that major disruptors are almost impossible to predict. I am reassured that our nation seems to be taking the situation seriously and I do firmly believe we can weather this storm. Most of you reading this have had your professional world rocked. You’ve probably had your hours cut. Some of you may even have been laid off. Fortunately, there is a strong support system in this industry ready to help. Don’t hesitate to reach out. I think you will find all of us willing to go the extra mile right now to help you keep your ship afloat.

Most of you have thought about buying a practice at some point, some of you have been seriously pursuing ownership. There is going to be a lot of advice out there right now saying that it is far too risky to buy a practice and it is better to get/keep a nice safe, secure job. I am going to give you four reasons why you should do exactly the opposite.

One, financing. Interest rates are at an all-time low. Most banks are willing to defer principal payments or even the entire payment for months. Some have even said a year. I’m not going out on much of a limb to say these are the best lending conditions you will see in your career. Historically, there have been periods of higher interest rates. When I was a kid in the early eighties, they were fourteen percent. There have been many times when banks weren’t as generous on the amounts they would lend. One hundred percent financing is not a given.

Two, taxes. The government is going to spend a fortune to deal with this crisis, we have an aging population, new social safety nets will probably be put in place, etc… It is hard to imagine a scenario where taxes don’t go up, maybe way up. Nobody gets hit in a tax hike as hard as a non-business owning high wage earner. As a professional, this is you.

Three, working for a corporation in a down economy. Corporations aren’t inherently bad entities. Many are fabulous. That said, unless they are a non-profit, they aren’t set up to be a charity. The shareholders and private equity backers are going to demand performance once this crisis is over. If clients hold off on elective treatment, keeping revenue up will require a high volume. You could be expected to see many more patients, in less time, than you currently do. It happened to physicians, it happened to pharmacists, it could happen to you.

Four, time. Odds are you have more free time than normal. No one, especially the bank, is going to expect you to complete a practice purchase before this crisis is over. That said, doing the work now could put you in a position to complete the purchase when the restrictions are lifted and capitalize on the built-up demand, which inevitably will occur.

In the words of Rahm Emanuel, “Never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.”

Applying for a loan is probably not at the top of anyone’s list of favorite things to do. Sometimes applying for a loan can feel like a very opaque process, and often times it may seem endless. When you consider a Veterinary practice loan, you may wonder how to make the process easier, and what you can do to best position yourself for approval.

Different lenders have different parameters for approval. Some lenders place more importance on some factors and less on others. While not all lenders are alike, there are certain common factors most banks consider. Understanding these factors can help you position yourself in the best way possible to multiple lenders.

Increase cash flow, eliminate credit card debt
Cash flow is one of the most important things a lender considers. The monthly expenditures reflected on your credit report – such as personal mortgages, car loans, credit card bills, and others – affect your cash flow. High monthly bills can negatively affect your cash flow, while lower monthly bills can positively affect your cash flow. Consider how much credit card debt you carry from month to month. If you pay your credit card balances down to zero every month, this does not negatively affect you; however, if you do carry a balance, this can negatively impact your cash flow. To best position yourself to be approved for a Veterinary loan, you’ll want to carry less than $25,000 in credit card balances from month to month.

Student and existing business loans come into play
Student loans may also affect your ability to obtain a Veterinary business loan. Many Veterinary lenders don’t consider the total amount of student loan debt outstanding as the deciding factor but will look at your total monthly payment. This is where you may consider Income-Based Repayment as an option to lower your monthly payments and improve your cash flow. Be sure to ask your lender about whether this may be necessary.
If you already own a Veterinary practice, lenders will consider the monthly payments on any business loans you have. Most Veterinary lenders will look for a global debt service coverage of at least 1.20x. This means that for every $1.00 of debt you owe – both business and personal monthly bills annualized – you have at least $1.20 to pay it with, from all your annualized income (income from either your salary, practice profit, distributions, guarantor, etc.)  A great exercise before applying for a loan would be to calculate your current ratio beforehand so you can either pat yourself on the back, or make changes to increase your chances for an approval.

Liquidity is key
Another thing to consider is your current liquidity – the amount of cash reserves you have, outside of retirement savings. Conventional veterinary lenders typically like to see at least six to 12 months of reserves when they consider your loan request. This means you have enough cash set aside to cover your monthly bills for six months to a year. If you are a current practice owner considering a loan, a good rule of thumb is to have between 5% and 10% of the total loan amount in cash reserves. Again, every lender’s requirements are different, but having adequate cash reserves in place will put you in the best possible position with multiple lenders.

Consider collateral
Conventional Veterinary specialty financing looks at collateral a little differently than SBA lending or non-specialty financing. Goodwill in an existing practice should suffice as collateral for Veterinary-specific lenders. Typically, they can lend up to 80-90% of total collections on a Veterinary practice without the need for additional collateral or a seller carry-back note. This amount will vary depending on the lender and the situation; keep this in mind if you have an existing practice and are planning to apply for a loan. When you’re considering a startup loan, you do not need to put your house, your spouse, or first-born child as collateral. Specialty Veterinary lenders will allow you to use the future potential of goodwill, as well as the equipment you purchase, as collateral for your startup loan.

Know before you borrow
As mentioned before, criteria for approving a loan may differ from bank to bank. This process may be arduous for the borrower, but know the criteria beforehand and you can best position yourself for practice financing. You can potentially alleviate the frustration of a loan decline before it happens. The good news is that rates are still at historic lows, and access to Veterinary-specific financing has never been easier. With this knowledge, you can prepare yourself for future success, for both the loan process and Veterinary practice ownership.

​There are many advantages to owning a veterinary practice over being an associate veterinarian and not owning a practice.  For one, the average veterinary practice owner makes approximately 20% more in income than an associate veterinarian working for someone else.  A veterinary practice owner also gets to choose what procedures he wants to perform and what type of animals he or she wants to work on.  Heck, they even get to choose which animals they want to work on.  They can also choose their own hours, pick the days they want to work and how much vacation they want to take.  So, why aren’t veterinary associates owning practices?  What are they afraid of?  Here are a few fears we have encountered and how to overcome those fears:

1. Fear of the unknown – Associates feel they don’t have the experience in owning a practice.  They haven’t managed staff.  They haven’t kept financial records.  They don’t know what marketing to put in place.  They don’t know what benefits to give employees, how to hire or fire employees, or even how to balance a checkbook.

   Fear not, you don’t have to know everything at once.  You know how to do veterinary medicine.  That’s the first step in owning a practice.  You have a few years of experience working as an associate in a veterinary practice.  You’ve observed the owner working with and managing staff.  You may have experience leading a team in school, playing sports, etc.  These are all examples of good experience in handling staff.  You don’t have to know how to keep books right away.   We suggest getting a veterinary bookkeeper and then getting educated on reading financial statements.  This can happen over time.  Bottom line is if you are good at what you do and willing to learn the other parts of practice ownership, you’ll be just fine.

2. Fear of taking on more Debt – Read Robert Kiyosaki’s book, “Rich Dad, Poor Dad”.  Not all debt is created equal.  There is good debt such as student loans and practice debt that helps generate an income and there is bad debt such as credit card debt where you just borrowed money because you wanted something.  Practice debt used to buy a practice that will help you make more money and build equity in an asset (the practice) is a positive thing.  As long as it’s a good practice with good cash flow, you’ll be money ahead in the long run.
3. Fear of the Corporate Giants – Don’t fear the corporate giants.  They have their own niche targeting the bargain shoppers and lemmings who follow the crowd.   They also have a high turnover in their staff and doctors.  You will provide excellent service with the same staff and veterinarian that the clients will see every time they come to your office.  In a corporate environment, they’re not sure who they’re going to get.
4. Fear of not knowing what to look for – This is a valid concern.  You can educate yourself in a number of ways.  There are great resources via podcasts, YouTube, etc., that can help you know what to look for.  Quite simply, you start by looking at your desired location, then look at the cash flow of the practice and after that, you can get into the details.   There are consultants and brokers who can also help you with reviewing practices.  Identify your team that will help you overcome this fear.
5. Fear of a recession – Recessions happen, typically every 8 to 10 years and last 10 to 12 months.  You cannot avoid recessions or downturns in the economy, it’s part of life.  But, during recessions, employees typically get laid off of work.  If you own your own practice, you’re probably not going to fire yourself.  You’ll probably keep yourself employed and busy.  Owning a practice is a deterrent from getting laid off during a recession.

These are a few of the fears that we’ve seen over the years, and there are others as well.  But, the best thing you can do is educate yourself and talk to practice owners, brokers and bankers.  Seek advice and counsel from everyone you can.   This will help you make a wise decision in moving forward with practice ownership.

For a chance to get advice from a team of experts all in one place – broker, banker, attorney, etc., we have 4 Practice Ownership seminars coming up this fall, all are free!  Click the link below for more information.