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.
Read MoreVeterinary Partnerships
Veterinary partnerships can be great or not-so-great. They can include different scenarios: buying a partnership, adding a partner to your existing practice, or a start-up partnership. To ensure you have the best outcome, financially and emotionally, you’ll need to consider some important questions.
- Are you friends, relatives, or colleagues with the people whom you are considering entering into a partnership with? Are you convinced you can get along in a work environment?
- How will you resolve disagreements and make decisions regarding advertising, patient care, team management, and acquiring new equipment and technology?
- How will you divide up responsibilities within the practice?
- Is there enough physical space for more than one veterinarian? Are there enough patients?
- How will you divide up new patients and exams?
- How are you going to determine compensation, such as 30% of individual collections, then 50% split on all additional income and costs? If one of you performs procedures with much higher lab bills, you may need to consider a lab payment These items will need to be written up by your attorney as part of your partnership documents.
- Do your legal documents include specifics on terminating the partnership? You will need to address details regarding non-compete agreements, disability or death, and how to sell a practice when one or both partners are ready.
- Do you know a good CPA who specializes in veterinary practices and can assist you with setting up the entity or entities that make the most sense?
There are many items to consider to ensure that you make the right decision, but we can help make the process go smoothly with the best outcome for all parties. We have guided many veterinarians through purchasing and selling practices, partnerships, multiple locations, and every size and type of practice. We have the experience and the expertise to help you achieve your goals.
Read MoreSettling Credits Before Listing Your Practice
You’ve made the decision to sell your practice, and with that comes the to-do list of tasks that can often feel daunting. One important task that is often overlooked is settling patient credit balances.
What are credit balances and where do they come from?
In many cases, a patient will have a credit on their account when their insurance pays more toward their treatment than anticipated or you estimated a patient portion to be higher than was necessary and collected accordingly. In these instances, patients paid more out of pocket than necessary; therefore, the difference will show as a credit on their account and on your accounts receivable report or unassigned credit report. Credit balances can also result from patients mailing in a payment or making an online payment on a balance that they have already paid. These are duplicate payments typically made in error. When this happens, we recommend contacting the patients and advising them of the duplicate payment before posting it to their accounts. Many patients will request that you return their duplicate payment to them and some will elect to leave the credit on their account if they have upcoming treatment planned. If they have upcoming treatment planned, this can be an effective way to get them on the schedule. It can be difficult to reverse an online payment and, in those instances, you may have to post it to the patient’s account. In other cases, patients may pay upfront for larger treatment plans and due to unanticipated circumstances, they were not able to complete their full treatment, or perhaps less treatment became necessary. If you have a practice where patients with insurance are required to pay their patient portion due at the time of scheduling their appointment for treatment, then credit balances will appear on the patient account until the procedures are posted and until insurance has paid their portion, this is just the normal course of collecting patient portions upfront. The same applies to patients without insurance if you collect the patient portion upfront.
How should I be handling credit balances?
To keep your credit balances at a minimum I would suggest you come up with an efficient protocol with whoever is in charge of your accounts receivable, whether it be your office manager, bookkeeper, or yourself. Credit balances are typically handled by an office manager. It is our recommendation that your accounts receivable report or unassigned credit report be reviewed monthly. If there are outstanding claims on an account, no refund is due yet. If there is a credit balance and there are no outstanding claims, we recommend contacting each patient and advising them of the credit balance. And again, if they have been treatment planned for procedures ask each patient if they would like to keep the credit balance on their account and get them on the schedule for treatment. If they have no upcoming treatment, it is typically best practice to refund the patient as soon as possible to keep your accounts clean. Make sure to document these conversations about credit balances in patient notes. This will serve you well in the long run when reviewing your reports each month for credit balances. Some practices choose to monitor patient credit balances quarterly; however, if you are preparing to sell your practice, we recommend that you do this monthly. You’d be surprised how quickly credit balances add up and how often they are overlooked.
One important note of caution! When reviewing the credit balances on patient accounts, do not assume that the refund always goes to the patient! You want to look back to the last zero balance on each account and look at patient payments made and insurance payments made. Insurance companies make mistakes and sometimes they overpay and sometimes they make a duplicate payment on a claim. In these instances, the refund is due to the insurance company and not to the patient. Some insurance companies catch these errors quickly and request a refund in writing. Others do not catch them so quickly and they have up to a year to claim their refund (this may vary from state to state). Pay attention to this detail when reviewing accounts. Remember to make notes in patient account notes so you don’t have to repeat your efforts every month.
I have not been settling patient credits on a regular basis, I have thousands of dollars in credits now what?
Follow the detailed recommendations above and get your accounts with credit balances cleaned up. It is essential to do this leg work prior to the sale of your practice. Make every effort to contact your patients to refund any monies due to them. If the refunds are due to insurance company overpayments, contact them and ask that they send a request for refund letter. If you are unable to reach patients with credit balances due to them, these credit balances in many states must be reported to the state in which your practice is located. For example, in the state of Washington, credit balances over a certain dollar amount must be documented on an “Unclaimed Property Report” and filed with the state before November 1st each year. Do some research and find out what your state’s unclaimed property reporting requirements are.
*Disclaimer: The information above is not legal advice. Each state has its own rules and regulations. Be sure to review all rules and regulations as circumstances may vary.
Read MoreEntrepreneurial Energy
By Corey Young, MBA, Practice Transition Specialist
What defines entrepreneurial energy? According to David Lyons PhD,
“Entrepreneurial energy is the force that sustains the momentum and velocity of progression in the venture. Energy can rise through excitation/agitation and fall through decay of the energy as a result of predicaments or failures.
Entrepreneurial energy is an endogenous force that fuels motivation and sustains entrepreneurial action and momentum. Encapsulating hope, optimism and obsessiveness, the nature and experience of the entrepreneurial energy provides meaning to the entrepreneurial pursuit and venture. Entrepreneurial energy is a motivational construct characterized by positive intense feeling, emotional arousal and internal drive and engagement in the pursuit that is salient to the self-identify of the entrepreneur. The positive affective state also generates positivity in the cognitive state fostering creativity and recognition of new patterns of information critical to opportunity recognition and exploitation in the external environment.
Entrepreneurship, after all, is a science of turbulence and change, not continuity. Turbulence is caused by certain force. Such is the force in entrepreneurship, like the wind is felt but not seen; or seen through the ruffle of the leaves but not the wind itself.”
Most of you reading this article can relate to those attributes, especially early in your career. Remember talking to your friends in veterinary school and making plans for your practice? Remember the excitement of updating your new practice? Remember the hours put in behind the scenes to get the practice where you wanted it?
Do you still have that energy in you? If you do, this is a great time to be a veterinarian entrepreneur. Consolidation is happening and it will favor the big and the bold.
What if you don’t? That is okay also, but the time to consider harvesting your practice asset is now.
In my exit-planning training, coaching our clients to either grow or sell their businesses was absolutely paramount. Stasis really is an illusion. Equipment gets older. Technology becomes dated. Marketing plans become obsolete. Business values decline.
So ask yourself, grow or sell?
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