Questions Frequently Asked by Veterinarians Who Are Thinking About Selling Their Practice
By Rod Johnston & Jim Vander Mey
- When should I start thinking about and preparing to sell my practice?
The earlier the better, but no later than 3 years prior to selling your practice in order to optimize your sales price and find a good buyer match. Practice values are typically based on 3 to 5 years of financial information with the numbers weighted heavier towards the most recent years. If you focus your last 3 years in your practice on maximizing collections, overhead and updating your practice, you will come out money and time ahead. - Will I get a higher price if I ramp up production for another year?
Typically, no. Since values are based on up to 5 years of production and net income, simply ramping up numbers for one year will not increase the value a whole lot. In fact, if it goes up too much in one year, a potential buyer and banks may even question why the production all of a sudden went up in one year. - Should I buy new equipment or remodel before I sell my practice?
If you are 5 to 10 years away from selling your practice and your practice is looking dated, then you should update the practice. That can range from simply painting the practice and installing new carpet, up to replacing tables, adding new x-rays and other technology. If you spend a lot of money too close to the sale, you will not get the depreciation write-off that you would get if you had done it much earlier. The exception to this rule (there’s always an exception, isn’t there?) would be digital x-rays and computers. If you are not digital, don’t have computers, or your computers are 10 years old, you should consider adding those before selling. - What are buyers looking for in a practice?
Individual buyers like to see a well-run practice with a decent amount of production, typically over $500,000 per year, average to low overhead (below 75% is good), somewhat up to date look and feel to the practice and a good location.Corporate buyers like to see similar things, but also want the seller to stay on and work in the practice for another 1 to 3 years (depends on which corporate buyer). They also want the seller to carry-back approximately 20% or more of the purchase price of the practice. This means you get 80% of the purchase price upfront and then you receive the rest of it – 20% after you’ve completed your 1 to 3-years work requirement and have met established production, and other targets in the practice. If you don’t reach those targets, you may not receive the final 20%. - I have an offer from several corporate buyers, why do I need a broker?
It’s been said that “the man who represents himself has a fool for a client”. A broker wears many hats in a transition. Finding a buyer is only one small role they play. The broker also takes a look at the offer and looks out for the clients’ best interest. Corporate offers are all not alike, so brokers also play the role of analyst by looking at each offer. They have to understand accounting, finance, the law, contracts, and even human resources. If you try to do this all yourself, you will end up costing yourself, your family, your staff and patients more time, money and grief than if you just hired a broker in the beginning. We have case studies where we have caught things in the offer that would have cost clients hundreds of thousands of dollars. We have helped negotiate and solicit more offers that have put hundreds of thousands and even one million dollars more than what the clients first offer was. - The person representing a corporate buyer told us they prefer us (seller) to not work with a broker. Why is that?
They don’t want you to use a broker because it weighs the negotiations in their favor and gives them an upper hand. They have powerful attorneys, CPAs, and professional negotiators to pit against you. They may first knock on your door with a friendly neighborhood veterinarian as their representative, but behind that friendly veterinarian lurks the professionals hoping you don’t have anyone helping you out. They’re able to get lower prices, better terms and corporate favored contracts if the seller doesn’t have a broker. - I own my building, should I keep it as a rental for future retirement income?
In the current real estate market, the short answer is “no”, especially if you’re considering a corporate buyer. We have pictures and case studies of sellers who kept their building only to have the veterinary corporate buyer move out of the building two years later to a new building they built down the street. The seller is left with an empty building that was a veterinary practice and will be difficult to find a tenant. The exception could be if you have an extraordinary building in a fantastic location on a busy street with great visibility and the building is in pristine condition – these practices make up less than 10% of all veterinary buildings. - I want to do an associate to own transition. Can you help me with that?
Absolutely. We can help with pretty much any type of sale. Whether you want to do an associate to own transition, a straight sale to an individual, a corporate sale, or anything in between, we can help. We will show you all the options and scenarios to help you make the right decision. Often times, doctors think they want an associate to own transition and not sell to a corporate. But, when we show them that they can make $500,000, $1,000,000, or more by selling to a corporate, they change their mind. We’ll help walk you through each scenario to do what’s best for you and your family. - I want to continue working in the practice after I sell, is that possible?
It depends. If you sell to an individual and your practice isn’t large enough to support multiple doctors, then the answer is probably not. But we can help identify the right buyer for you who will allow you to do what you want to do. In fact, one of the questions we ask is “What is your dream transition scenario?” We then go from there and do our best to make your dreams come true. - I want to make sure my staff and clients are taken care of. How do we make sure that happens?
We like to call ourselves matchmakers. We spend time getting to know you as a veterinarian, practice owner, family person, etc. We ask a lot of questions to find out what your needs, wants, and dreams are in a transition. We then go out and find a perfect match — whether it’s an associate, individual buyer, or a corporate. Even corporate buyers have their own unique personality, culture, philosophy, and terms. We make sure that the buyers who will want to buy your practice are a good match for both you and your practice.
Do you have more questions? Attend one of our upcoming Practice Transition Seminars this fall, where we will go into all of the above in more detail, and you’ll get a chance to discuss your situation with a panel of experts – broker, banker, attorney, CPA, etc. – all in one place.
What Owning a Veterinary Practice is Really Like
Owning a veterinary practice can be like drinking water from a fire hose. It completely consumes you physically, emotionally, and intellectually. You not only wear the hat of a veterinarian, but you have to also play the role of human resources, accountant, marketing, public relations, lease negotiator, salesman, supply management, janitor, referee, etc. Whoever believes there is a 40 hour work week as a practice owner has not owned a veterinary practice. Yet, all the public ever sees of you are running in and out of the door telling them there furry friend needs treatment. They don’t see or appreciate your countless hours refereeing staff disputes, negotiating a new lease, fixing broken equipment, or installing a new light. They think you are gone fishing or at your lake house every weekend.
Many of you have recognized the power and need to delegate. You have people you can trust – your knowledgeable service rep now fixes your equipment, a skilled plumber who fixes the leaky sink, and an expert commercial broker who takes care of your lease. By delegating you have freed up your time, reduced your stress, and let the experts use their skills to do what they do best.
When it comes time for your veterinary transition, you can try doing it yourself, but that’s like giving the patient a sharp veterinary instrument to spay their own pet. They don’t have the knowledge, experience, or skills to do it right and may end up bleeding in the end. Or, you can entrust your veterinary transition to the people at OMNI Veterinary Practice Group who have the experience, knowledge, and track record to help you achieve your goal giving you peace of mind, freedom, and more happiness. Contact us today for a free consultation – 877-866-6053 or email info@omnipg-vet.com.
Read MoreMany of you have recognized the power and need to delegate. You have people you can trust – your knowledgeable service rep now fixes your equipment, a skilled plumber who fixes the leaky sink, and an expert commercial broker who takes care of your lease. By delegating you have freed up your time, reduced your stress, and let the experts use their skills to do what they do best.
When it comes time for your veterinary transition, you can try doing it yourself, but that’s like giving the patient a sharp veterinary instrument to spay their own pet. They don’t have the knowledge, experience, or skills to do it right and may end up bleeding in the end. Or, you can entrust your veterinary transition to the people at OMNI Veterinary Practice Group who have the experience, knowledge, and track record to help you achieve your goal giving you peace of mind, freedom, and more happiness. Contact us today for a free consultation – 877-866-6053 or email info@omnipg-vet.com.
Selling Your Practice Does Not Mean You Have To Stop Practicing
Whether you have owned your practice for 40 years, or owned it for 5 years, selling your practice does not mean you are done practicing. We often meet with veterinarians who are sick and tired of managing their staff, doing the bookkeeping, dealing with the ups and downs of the economy, and on and on. The veterinarians are about to crack, but think they cannot yet sell their practice because, according to their CPA or financial advisor, they are not yet financially ready to retire,
We counter this by asking them, “Who said you need to retire?” You can harvest your equity and either work back in the practice or go work for another veterinary hospital. What the CPAs and financial advisors may not see is that your practice collections numbers are going down, or that your blood pressure is skyrocketing due to the above-mentioned challenges of managing your practice to the point of a heart attack coming right around the corner.
If you have a good amount of equity in your practice, we can sell your practice and you can put the cash in the bank and work as an employee until you are ready to retire in 5, 10, 20 years, or as long as your heart desires. Transitioning out of your practice may be the way to enjoy your profession again.
If you think you might want to sell, we are happy to talk you through the process. Just give us a call at 877-866-6053 or email info@omnipg-vet.com to set up a free consultation.
10 Pitfalls To Avoid In Your Transition
Making just one of these mistakes may cost you hundreds of thousands of dollars.
Ensuring you have a successful transition involves preparation and knowledge. There are numerous things you should do to make sure your practice is ready to sell. There are also several things you need to avoid in order to make your transition successful. Here are a few pitfalls to make sure to avoid:
- Letting your production go down prior to selling. We have seen many practices that were producing $300,000 to $500,000 a few years prior to contacting us. They thought they would cut down their days working and possibly hire an associate veterinarian. The associate ends up not producing as much, and then collections go down. The seller doesn’t take corrective action and production tanks. This can result in a loss of hundreds of thousands of lost practice value, if not more. So, keep your production numbers up.
- Counting on selling your practice to your associate. This always sounds like a great plan. You bring on an associate, train and mentor them and then you can slow down and eventually transition at your leisure. But you didn’t account for your associate getting married and moving out of state. Or, your associate decided they want to practice in another town. Or, your associate finding another opportunity in another practice. Or, you discuss the money issues and the relationship changes. We make plans and then… life happens. Statistics show that over 70% of associate-to-own opportunities do not make it to a sale. Be sure and get everything in writing and, if possible, use an intermediary. Additionally, consider having your associate put away money in an escrow account that is non-refundable.
- Not knowing your lease. …Or, at least, not understanding the impact some of the terms in the lease have on the sale of your practice. A tear-down clause can be a deal breaker. This is a clause which states the landlord can give you a 12-month notice to terminate the lease, so they can tear the building down and build a new one. It can be a longer notice and it can be a shorter lease. It’s very difficult to sell, if not impossible if you do not have a lease in place. Banks need to see that the term of the lease be as long as the term of the loan they are giving to your buyer, at least.
- Not selling your real estate with the sale of your practice. We have seen practices sold to corporates and to others where the tenant purchased the practice and, two years later, they move the practice to another building down the street with a larger space and better visibility. You’re now stuck with a vacant veterinary building. There are 3 vacant veterinary buildings within 5 miles of our office that were the result of this scenario. A careful analysis is required to determine what is best for your scenario.
- Not keeping tabs on your profitability (EBITDA). Valuations are based on the profitability of your practice. Letting your profitability slip by not actively managing your practice, letting payroll get too high, inventory out of control, etc., will result in the value of your practice going down considerably. In the case of a corporate buyer, it could be as much as a $10,000 in value for every $1,000 in EBITDA lost.
- Not evaluating all options. There are various buyers in the market. We sell to individual buyers, small group practice buyers as well as corporate buyers. When we ask sellers if they are okay with selling to a corporate buyer, we often get a reaction of, “No way. We won’t sell to that corporation(s).” We can introduce buyers where, after the sale, nobody would even know that you sold to a corporation because there were NO changes to the way the practice is being run. It isn’t always the case, but while an individual buyer may be limited to paying 2 to 4 times EBITDA, some corporates are willing to pay 5 to 10 times EBITDA (depending on the type of practice, etc. and in rare circumstances pay over 10 times EBITDA. We have come in after an individual owner was negotiating with a corporate buyer and we got them $1 million more than what they were originally going to accept. That’s a million dollars to help pay grandchildren’s education, bonus your hardworking staff, and enjoy retirement from working weekends and long hours for decades. If your practice proceeds are going to be used to fund your retirement, it can make a big difference in your retirement lifestyle.
- Not understanding the deal. Your transition may be a simple transaction where you are selling to an individual buyer, walk away, and retire. Even so, you still need to ensure that any long-term contracts, such as leases, are being taken over by the buyer, or a lease is in place, etc., Or, you may have a more complex transaction selling to a corporate. Corporate buyers often have clauses where you receive a portion of the sales price upfront and then additional dollars a couple of years later, but the practice numbers may need to remain the same or grow. Or, you may receive the 20% as payroll compensation instead of a purchase price. This might have tax implications. You may also be required to work back in the practice or other terms that need to be understood. Just be sure to have an expert who has experience in these transactions explain the terms of the deal to you.
- Having the wrong players on your team. The wrong attorney, accountant, broker, or banker can cost you potentially hundreds of thousands of dollars and an entire deal. Sellers often think they can use their friend or relative who is some type of attorney, bankruptcy, divorce, or real estate attorney whom they think will take care of them. The problem is, they don’t know the complexity involved in the deal and are not familiar with the terms. We have seen many transactions where this has occurred where an attorney who specializes in veterinary transitions may charge $5,000 but were charged $40,000 by their “friend” because they did not know what they were doing. The same can happen for an accountant, broker, or banker. We have stories for each where the wrong person costs the seller a lot of money and even the loss of a potential buyer.
- Telling your staff too early. A common question we get asked is, “When should I tell my staff about the sale of the practice?” We suggest the seller wait until the agreements are signed. Telling the staff too early may result in them leaving for another opportunity elsewhere. It also creates a fear of the unknown. Who’s the new buyer? Will my job stay intact? Will my pay be the same? What about my benefits and hours? Maybe I should find another job before I get laid off? Are they going to dictate how I practice? Will I have to change outside the lab? It may not seem like it is the right thing to do to wait until you’re near the end to tell the staff, but believe me, it is.
- Going it alone. Corporate buyers are throwing out offers to potential practice sellers left and right. Some are hiring DVMs to tell you that you do not need representation and that they will handle everything. But, is it the best offer you can get? Not only from a price perspective but best for your staff and clients, best fit, etc.? If you don’t know what the others have to offer, how would you know? A good broker knows all the other buyers and what kind of terms and pricing they typically offer. If you try to do it on your own, you could sell it to the wrong buyer for the wrong price. This also relates to individual buyers.
The pitfalls to avoid in a transition are many. I’ve just listed 10, but there are many more. Making any one of these mistakes could cost you thousands, hundreds of thousands, and even a million dollars. There’s too much to risk in not having experts on your side to ensure you don’t make these mistakes.
Take our advice and call us at 877-866-6053 ext. 2 for a free consultation on how to make your transition go as smoothly as possible.
Read MoreThe Short List Before Selling Your Veterinary Practice
There are many steps to selling your veterinary practice and your trusted advisors are here to help. Right now, we want to address just a few items that many veterinarians don’t think about and that can lead to surprises.
Contact your CPA and/or Financial Planner regarding the following items:
- Are you financially prepared to retire? Your transition specialist (broker) can assist you in determining the potential price of your practice and your real estate (if any).
- Depending on your entity structure and past depreciation, what taxes will you owe?
- Depending on your state, what taxes will you owe?
- If you have any debt against your practice or real estate the debt will be paid at closing from your sales proceeds.
- What will you do with the final funds? Do you have a retirement plan to maximize or does a 1031 exchange on the real estate make sense for you?
Again, there are many steps to selling your practice, but please address the above items to help reduce surprises.
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