My First Practice
Owning a practice should be on nearly every veterinarian’s list of things to accomplish. Pride of ownership, directing your own clinic or hospital, and treating those types of animals you want to treat are just a few reasons why you should want to be an owner. In addition, veterinary practice owners typically make 22% more in annual salaries than an average associate veterinarian. On top of that, the equity you build in your practice will contribute towards your retirement nest egg.
The process of owning a veterinary practice can be simple if done right. Simple, but it does require work. Having a good team on your side keeps the workload down and alleviates road bumps. One of the first decisions is should you buy an existing or build a new practice? That decision comes down to whether you want to buy an existing practice with potentially good cash flow, but also potential problems? Is there a practice available to your liking and in the area you want to practice? Do you want something that truly has your stamp on it that you have built from the ground up? A self-evaluation and talking about it with a few experts will enlighten you into knowing which route is best for you.
The other question is whether or not you have what it takes to be a practice owner? The simple answer is “yes, you do”. Even if you don’t want to manage staff, do bookkeeping, or handle other management tasks, you can still outsource all of that and enjoy being a practice owner. Proper guidance and education are key if you have not ever done any of those things before. A consultant, accountant, broker, and others can help guide you in practice ownership.
Corporate practice owners are here to stay. I would not be afraid of a corporate practice as a competitor. You can open a clinic across the street and out personalize their services. Some corporates are just in it for the money. Not all of them mind you, but quite a few of them. They don’t provide the personal touch and sense of community that you can in your practice. Many also have an associate turnstile where they change associate veterinarians every six to twelve months. I don’t know about you, but if I’m taking my beloved dog Fi-Fi, who is a part of my family, I’m going to get to know my vet and make sure Fi-Fi sees that same vet every time. I don’t want someone whom I’ve never met and don’t know anything about them. I think the majority of the pet-owning public feels the same way.
Fears are a product of the unknown. You fear there’s a monster under your bed because you cannot see under the bed in the dark and you don’t know what’s under there. You fear broccoli as a kid because you don’t know what it’s going to taste like. Fear of practice ownership is similar. If you educate yourself, you can squash those fears.
To help facilitate this, we are offering a seminar called “Build or Buy – Your Pathway to Practice Ownership”. This seminar will help you begin the process of educating you on what you need to do to be a practice owner. There will be experts from various fields of buying or building a practice. You’ll learn everything from finding the right practice or location to analyzing the value of a practice. You will receive continuing education credits while you learn about the process of owning a practice. It will be an evening full of information with dinner provided as well. For dates, locations, and registration information, visit our calendar.
From the Horse’s Mouth
Each year one of the largest corporate veterinary practice owners holds a one-day conference exclusively for veterinary practice brokers. At the conference, they discuss, amongst many other things, how their company is different than other corporates, how they value veterinary practices, and trends in corporate buying. It’s an interesting meeting to get the “state of the union” from a corporate buyers’ perspective. I wanted to share with you some of the notes I took and give you my thoughts on a few of their points.
- Corporates are continuing to expand. Not only in the U.S. and Canada, but this corporate buyer has begun acquiring practices in Australia and New Zealand.
- Some corporates have begun to do de novo practices. They are filling the gaps where they don’t have ownership of a practice with a startup practice. If you can’t buy it, build it!
- The DVM retention rate for the industry is 62%. A particular corporate claimed to retain DVMs at a rate of 82.5%. They said it’s due to how they treat the DVM and staff leaving everything as close to the same as possible. They also give the owners a piece of the pie.
- There currently is a shortage of DVM associates. They are putting a heavy effort towards recruiting DVMs at Veterinary Schools as well as the general public.
- This corporate has three commitments – Wellness Plans, Dentistry, and Fear-Free Clinics.
- They expect the current acquisition trend to continue for the next three to five years.
- Valuations are different among the various corporate buyers. Their add-back for DVM salaries is 20%. Another corporate buyer uses 22%. That can make a big difference in the purchase price on a large practice. Another example is adding back an office manager salary. That can vary significantly amongst corporate buyers. These are just two of ten examples of the differences they provided.
- Valuations have gone up over the past 5 years. Five years ago, they were buying practices at 4x to 5x EBITDA. They are now acquiring practices at a broader range of 6x to 9x EBITDA.
- They believe valuations are currently at their high peak with the expectation that they will start tapering back down to the 4x to 5x EBITDA range they saw five years ago.
- General Veterinary Practices that are in the sights of corporate acquisition teams represent 50% of all General Veterinary Practices. Corporates currently own 30% of all of these practices. The expectation is that once total corporate ownership hits 50%, the acquisitions will taper off dramatically. Corporates then may turn to specialty clinics. Note, we’re already seeing this in the marketplace. They also may focus on de novo practices.
In summary, the presentation confirmed what our thoughts have been:
- Corporates are here to stay.
- Corporate ownership will continue to grow.
- There are some good corporate buyers who treat their staff and DVMs well and there are others that do not.
- Corporates will go the de novo route when they can’t find a practice in an area they want to have a concentration.
- Valuations will begin to trend down in the not too distant future.
The number of corporate buyers in the market and the supply of practices corporates want all play into this. Whether good or bad, the corporate veterinary practice is here for the long haul.
This is just meant as an educational document and we are not promoting this or any other corporate buyer.
Analyzing a Lease in a Practice Aquisition
When you get a copy of the lease, you or your advisor should contact the landlord or property manager. Be sure the seller has informed the landlord that they are selling the practice first. If there is a short time left on the lease, the landlord may be willing to do an extension on the lease. You can put conditions on the extension that can include getting a tenant improvement credit to cover new paint, carpet, etc., free rent for a few months, lower rent, etc., I’ve even had a situation where the landlord loaned money to the tenant to completely remodel the practice.
Remember that everything is negotiable. Don’t automatically assume the lease is set and you cannot change anything. At the same time, know how to negotiate. If you go for a home run right off the bat, you may turn off the landlord and they won’t be willing to negotiate. If you’re working with a broker, it’s best to let them handle the negotiating. They’re the experts and can save you thousands if done right.
Get in the Game
Well, GET IN THE GAME! I’m not talking about football, I’m talking about reaching your potential and owning your own veterinary practice. Too many doctors sit on the sidelines waiting for the perfect opportunity to go in. You need to create your own opportunity. An opportunity to show and improve your skills by purchasing or starting your own practice. I know several doctors who I’ve been “thinking about” a practice or a startup location for 7+ years! If they would have purchased the first practice they considered, their practice would be almost paid off and worth over $500,000. That’s an opportunity cost of a half million dollars. Let me say that again in another way, you threw away $500,000!
I know everyone’s situation is different, but we have shown a lot of practices and start-up locations to doctors where those practices and locations were picked up by another doctor. That doctor got in the game and grew those practices in some cases to over $1 million. On average practice owners make 20% more than employee veterinarians, retiring with $400,000 more in their pocket.
If you’re still undecided after this pep talk, give us a call and we’ll be happy to coach you through the process. (877) 866-6053
How to Buy a Veterinary Practice
Buying a Veterinary practice is like getting a colonoscopy. You know you should probably do it, but it can sometimes be a pain in the nether region. But just like getting a colonoscopy, it can go very smooth if you follow the right steps and use the right professional. Here are a few steps to consider which can make for happy times in the end. No pun intended.
- Have good clinical skills. Be sure you have the clinical skills to produce the same or more production than the average veterinarian. In other words, don’t buy a practice right out of veterinary school when it takes you four hours to do spay or neuter a dog. It can take up to 5 years to learn the clinical and management skills to run a practice.
- Buy existing or Startup new. Decide if you want to start up a new practice, or buy an existing practice. We recommend start by looking for an existing practice in the area you’d like to practice. If after a period of time you cannot find a practice and the numbers make sense in your location of choice, analyze doing a startup. Cash flow is king in veterinary practice financing and in paying your student loans, so look for an existing practice first and then look at doing a startup.
- Veterinary Professional Team. Get professional help from professionals that specialize in the veterinary field. This includes your attorney, CPA, Banker and Broker. Just like you don’t want your plumber doing your colonoscopy, you don’t want a bankruptcy attorney helping you with your veterinary practice purchase and sale agreement.
- Educate yourself on buying a practice. Know how to read a financial statement, practice management reports, lease terms, etc., There is a lot of information online, in the Veterinary Forums and other areas where you can get this for free. Your professionals that you will be working with can also help educate you.
- Find your practice. Use the brokers in the area as well as state and local association contacts to find a practice of your choice.
- Stop looking for the Unicorn! Neither a unicorn nor a perfect practice exists. Don’t cross a practice off a list because the carpet is green and you wanted brown. Or, everything else in the practice looks good, but the staff is overpaid. You can’t glue a pointy horn on a horse and call it a unicorn. But, you can change the carpet, paint the walls, reduce staff pay, add endo to the practice, etc. You will be in the practice for a long time, so don’t poo-poo the practice because of a change that the practice can handle.
- Gather practice documents. At a minimum, you want the following:
- 3 years tax returns
- 3 years profit and loss statement
- 3 years production by procedures and production by provider report
- Copy of the current lease and any amendments
- Practice statistics report showing patient demographics and other information
- Aging balance
- List of Staff salaries and benefits
- Any associate agreements
- List of any vendor contracts
- List of equipment
- Fee Schedule
- Consider your offer. So you like most everything about the practice and you want to make an offer. You can work with your professional veterinary broker, or consultant and put together an offer. You’ll want to analyze the purchase price. If you’ve educated yourself, you can do this on your own. If not, you can use a veterinary professional broker, CPA or consultant to help you put the offer together. The offer is in the form of a Letter of Intent.
- Get a Loan. Banks love veterinarians. The failure rate is less than .0125%. Being a successful veterinarian is like finding a coffee shop in Seattle. It’s pretty hard to miss. Ask your broker, attorney, consultant, etc., for a referral to a lender. Use someone reputable who does veterinary practice financing. Do not use Suzie Q or Jonny Public the local commercial banker. She will treat it like any other commercial transaction and try to run it through the SBA ending poorly with high fees.
- Completing Due Diligence. After you have agreed to a purchase price and both parties have signed a letter of intent, you will want to schedule due diligence in the office. Prepare ahead of time for due diligence. Know which reports you want to run and what the plan is for the due diligence. You’ll want to truly see what the active patient count is. You will want to review charts. You will want to take a closer look at the equipment. I would also suggest seeing if the seller is available for lunch, or to at least come into the office after due diligence. This will help you get all of your questions answered by the doctor himself/herself.
- Preparing to Transition. The real work begins here as far as the transition goes. There are somewhere between 50 to 70 items to get done prior to the closing of the sale. We have a checklist if you’d like to see it. This includes everything from setting up a legal entity to getting insurance credentials to ordering a credit card terminal.
- Staff. All through the process, the staff is hopefully unaware there is a sale going on. The meetings and due diligence have happened in the dark of night, or on weekends all while wearing camouflage. Kidding about the camouflage. The reason the staff is not informed of the sale is there is a potential they may leave. Part of the goodwill of the practice is staff. If they all leave, there may be a potential loss of goodwill. We recommend the seller tell the staff when there is a 99% certainty the transaction will go through to closing. Sometimes that may mean a month before closing and other times it may mean the day of closing. Every transaction, every staff, and every veterinarian is different. It’s a gut feeling we get from experience. Consult with your professional.
- Closing the Sale. Awe, the day is finally here. It’s similar to any major purchase such as a house. Some transactions require an escrow company or attorney to handle the closing. Others can be done by a broker. You will sign the purchase and sale agreement, bill of sale, closing certificate, loan documents and other agreements. It’s a pretty painless process.
- Notifying Patients. As with staff, patients are not notified until the contracts are signed and the money is in the bank. We don’t notify patients as they may leave the practice just as staff may leave. There is a patient letter that is worked and agreed on between the seller and buyer. The cost is typically split 50/50 between the buyer and seller.
- Post Sale. If the practice is running well, do not make any major changes for 6 to 12 months. The more changes make the staff and patients uncomfortable. Go in keeping things business as usual. Of course, if there is an ugly orange shag carpet with teal painted walls, by all means, bring the décor up to date. Also, if the practice is on a downward trend, you may need to make major changes including letting a staff member or two go, adding procedures, etc. You need to make sure it will be successful and again, your veterinary professional advisors can help you.
Following these steps will make your acquisition of a practice a smooth process and not be a pain in the end (get it?). Because you want to step into your new practice with a smile on your face on your first day and not looking like you just had a colonoscopy.