Frequently Asked Questions for Veterinarian Sellers
Do I have to pay out my staff vacation and sick time at closing?
Yes, after the sale has closed, you will write a check for accrued vacation time to your staff members. The staff will then start accruing vacation and sick time under the new clinic owner.
Paying out sick time depends on your individual state laws. Some states have recently implemented mandatory sick time. Some of the new state laws may require the employer to pay out accrued sick time to terminated employees. Selling doctors may feel generous and go ahead and pay their staff accrued sick time at closing even though the law doesn’t require it. That is the personal preference of the seller.
Be sure to check your employee handbook and if it states that an employee is paid out for accrued vacation or sick time, then you must pay it out no matter what the law says. Employees can file a court action against you to get their accrued and earned time paid.
When should I tell my staff and patients about selling my clinic?
In general, you do not want to tell your staff about selling your clinic until the documents are signed. People are averse to change and if you have staff members that are already thinking about another job opportunity, then you may lose them if you tell them that you are selling your clinic.
However, that being said, if you’ve had the same staff for 30 years and they are like family to you and would be upset if you didn’t tell them, then it is really up to you if you’d like to tell them or not. If you trust they will be loyal and stay on, then it may make sense to tell them.
When to tell also applies to your patients. About the same time as you tell your team, a letter approved by the buyer should be ready to go out to your patients. We have examples of these letters for your use. Patients want to know a little bit about the new veterinarian and that you and your team all trust and respect the new veterinarian. Depending on what you desire, you may want to host an open house at the clinic, invite your staff and patients, and as additional marketing, invite local residents or businesses.
If my family member also works in the clinic and wants to retire at the same time, will that be a problem?
It’s not a major problem but expect the potential buyer to ask your family member to at least stay on for a transition to a new employee. For example, if your wife is the front desk person, the buyer may want your wife to help train a front desk person for three to six months to ensure the success of the new person.
Will I be required to stay on and work on patients as part of the transition process?
Every transition and every buyer are different. Larger transitioning clinics with higher volume production may ask you to stay on and work in the clinic. Especially if there is enough production for another part or full-time doctor. For smaller transitions under $800,000 or so, the buyer may ask you to stay on for a couple of months, or at least to be available via phone or e-mail to answer questions about patients, staff, etc. We have found that after a couple of weeks, buyers typically realize they have things under control and will then let sellers know that they are free to fully leave and enjoy whatever their next chapter brings.
Do I shut down my corporation at closing?
There will be some bills to pay after closing and some other “clean up” of the books, so we recommend you leave your corporation open for six months to make sure everything is taken care of. If you have an accountant, let them take care of closing out your corporation.
What are the taxes owed at closing?
It depends on the state, but there will be a final personal property tax bill that you will need to pay. If you are using escrow, they will take care of that. If not, you can contact your tax authority or accountant and they can help you calculate what is owed. There may also be a proration where you pay part of the personal property tax and the buyer pays the balance.
For income tax, there is a final income tax bill to pay. It’s due on April 15 and paid as normal. Your accountant will fill out a “Final” tax return and inform the IRS that you are dissolving your corporation. The state you live in will also need to be notified that you have sold your assets and dissolved your corporation.
Can I slow down the production the last few months before the sale?
Argh No! Keep your production up and going — business as usual. One of the worst things you can do is to have production go way down the last few months and have the lender come back and ask for current reports. They’ll see the drop in production and question if the clinic is now worth what they valued it at. They may ask you to lower the price. You can relax after the sale closes.
What is included in the sale – Equipment, Goodwill, Accounts Receivable, Cash in the bank, all my personal possessions in the clinic?
What you are selling is the goodwill of the clinic and the equipment used to produce the services you have provided over the years. Standard protocol is 75% to 80% of the purchase price is allocated to goodwill, $5,000 to $10,000 towards the non-compete, and the remaining to equipment. Accounts Receivable are typically sold in addition to the clinic assets as a separate sale. Personal possessions are excluded from the sale, as long as they are listed in the exhibit in the Purchase Agreement.
Should I sell my Accounts Receivable to the Purchaser, or keep it? At what discount is the Accounts Receivable sold?
The majority of the time, we recommend that you sell the accounts receivable. The sales price for the accounts receivable, which is in addition to the clinic sales price, is 85% of the accounts receivable balance less insurance and other discounts and less any credit balances on accounts. Another method is 90% of the accounts less than 30 days old, 75% in the 30 to 60-day-old bucket, 50% for the amount that is 60 to 90 days old, and 5% for anything over 90 days old. If there are patients on payment plans, then those may be excluded from the sale or may be included depending on what is negotiated.
If for some reason you decide to keep the accounts receivable and collect the balances yourself, you will pay a collection fee to the purchaser of 5% to 10% depending on what you have negotiated.
Note: Attorneys state that accounts receivable disputes when the A/R is not sold is the number one cause for potential litigation. It’s simply cleaner and easier if the seller sells their A/R.
How long does the sale of my clinic take?
The amount of time it takes to sell your clinic is dependent on a number of factors. The first factor is how much you are producing. Higher producing clinics tend to sell faster than lower producing clinics. The second factor is whether you are in a small rural location or an urban setting. Clinics located in small, remote towns tend to take a while to sell. They can take anywhere from one to two years to sell. If production is low, they may not sell at all. The more urban the clinic, the higher the likelihood of the clinic selling quickly. Lately, we have seen that clinics within 30 minutes of a metropolitan area are selling better than clinics directly in a metropolitan area. The final factor is how many rooms you have. A three-room clinic will take longer to sell than a four-room clinic. For some reason, young buyers seem to think they need six to eight rooms to run a clinic. We try to educate them that four is plenty, but they listen to people on VetQuest, consultants, or other forums that make blanket statements that you need six to eight rooms. They don’t realize that the more rooms you have, the more rent you will be paying. Three and four rooms are just fine.
With those factors in mind, here are some general “rules of thumb” time frames. A clinic in a metropolitan area, or within 30 minutes of a metropolitan area will sell in approximately six to nine months. Some sell faster, some sell slower. Again, the size of the clinic matters. A rural clinic will take between twelve months to twenty-four months to sell.
Should I sell my building?
Do you want to be a landlord? Can you get a better return on the proceeds somewhere else? Is the current real estate market hot? Can the buyer afford to buy the building now? These are the questions to ask yourself. In the current market, we have been getting higher than market prices on real estate because a building is worth more to an owner-user than to an investor. Owner-users would rather pay themselves rent than pay rent to someone else. Thus, they would pay a premium to purchase the building they will be occupying. The final thought is do you want to take the risk of tenants leaving the building to go buy their own building and rendering your building vacant?
Selling empty veterinary buildings can be nearly impossible and it is worth more to the buying veterinarian. Perhaps if your space is right on the coast or downtown you may have options, but potentially still difficult and you may be offered less because any other business will need to do considerable remodeling. It can take up to twelve months or longer to lease a commercial building. If you have a specialized building like a veterinary clinic, you more than likely need to find a veterinarian to fill the space again. That might be a challenge. In a nutshell, if it’s a good market, I would suggest selling the building.
What if I want to stay on and work a day or two a week?
This may be possible if there is enough production/collection for both of you. The buyer and the lender will need the buyer to get the production in order to pay the loan and everyday life expenses. You may be able to stay on if you perform procedures that the buyer does not perform. You can talk about and make a plan for ways to increase collections. If you work back you will need to have a compensation and employment agreement negotiated and in place.
How is the sale price determined to market my clinic (and real estate)?
We work with you to gather the last three years’ clinic financial information and then have our certified CVA’s put together a valuation of the clinic using three different methods, which are weighted and averaged to determine the market value of your clinic. The valuation is then reviewed with you to gain a final agreement on a listing price.
The real estate price is determined somewhat like a home or any commercial real estate by reviewing comparable real estate in your area. Once we determine the potential listing prices for your clinic and real estate, we consult with you and set a final price.
What if I run personal expenses through my clinic and pay my kids who don’t hold a position?
The cleaner your books are the easier they are to understand and if they are too convoluted, some banks won’t trust the numbers and won’t lend the money. We expect some “adjustments” to expenses and income, you just need to let us know what these are.
Should I remodel or get new equipment before selling?
If your clinic looks like 1975, consider updated paint, flooring, and décor, but nothing over the top that is expensive or makes it unsettling to the average person. If your equipment is really old, talk with us and we can help you determine if anything needs to be updated or replaced.
What do I do with all of the proceeds from the sale of my clinic and building?
Please remember that anything you owe on either the clinic or the building will have to be paid at closing. Talk with your CPA and financial planner to help you determine the best investment options. You may have a retirement plan in place that allows you to sock away a lot of money and is tax-free. If you have another business or like being a landlord, you can discuss a 1031 exchange with your CPA. You will have to pay taxes, but perhaps you can reduce them by strategizing with your advisors.
How can I increase the value of my clinic?
If you are thinking about selling your clinic in the next three to five years, you can review and make strategic decisions to increase the bottom line to increase the value. Some basic improvements would be to increase the number of new clients/patients and production, and hold off on any major purchases unless necessary to maintain the current day-to-day operations. Enhance the appearance of the clinic and clean out any old clutter. If you are ready to sell within the next twelve months, it is hard to increase the value of the clinic because the value is based on the last three years of clinic financials. The most important thing if you’re ready to sell now or in the next twelve months is to maintain or increase the clinic’s production. New buyers and banks will be reviewing the clinic reports to verify if the clinic is holding steady or if the numbers are declining.
Are non-compete clauses in a purchase and sale agreement enforceable?
Yes, when written correctly they are. Always consult with your legal professional on any enforceable non-compete questions.
Should the Seller and Buyer have an attorney or an accountant/CPA involved?
We strongly recommend that seller and buyer each have their own professional attorney and accountant/CPA for advice on legal, financial, and taxation matters. Typically, the broker involved can make a recommendation of a veterinary professional if you don’t have one.
Should I use a Veterinary Broker?
After many years of hard work and investment into building a veterinary clinic, you’re now thinking about selling the clinic. It is easy to assume that the clinic will sell quickly and for a great price when you are ready to sell. Selling a veterinary clinic is not like selling a home, it is a complicated process. Determining the market value of the clinic, showing the clinic, finding the right buyer, negotiating the purchase price, drafting the asset purchase agreement, formulating the transition plan, negotiating the lease assignment, and obtaining clinic financing are just a few of the key areas where a potential clinic sale could become derailed. The expertise, experience, and guidance of the Omni Practice Group brokers can prove to be invaluable. Using a broker will typically save you a lot of time and money in selling your clinic.
Read MoreWho Should be on Your Exit-Planning Team?
By Corey Young, MBA, CVA
Let’s discuss the best approach:
- Financial Planner. A financial planner helps clients meet their current money needs and long-term financial goals. They use a structured process to guide clients toward prudent financial decisions to maximize their potential for attaining life goals. Using their knowledge of personal finance, taxes, budgeting, and investments—combined with analytical tools and data that can illustrate potential outcomes—financial planners make recommendations, which help clients make informed decisions.
- CPA. Almost everyone reading this article has a CPA. While they are an invaluable resource, over-relying on them on a consultant basis can put them in a conflicting role when it comes time to exit your business. Per Investopedia, “Although some CPA firms serve as business consultants, the consulting role has been under scrutiny following the Enron scandal where Arthur Andersen simultaneously provided audit and consulting services which affected its ability to maintain independence in its audit duties If the CPA firm is auditing the same company that the firm also does consulting work for, then there is a conflict of interest. This conflict voids the CPA firm’s independence for multiple reasons, including: (1) the CPA firm would be auditing its own work or the work the firm suggested, and (2) the CPA firm may be pressured into unduly giving a positive (unmodified) audit opinion so as not to jeopardize the consulting revenue the firm receives from the client.”
- Transition Consultant. A business transition consultant helps a business owner assess the current asset value of the business and establish its attractiveness to various buyers. A transition consultant also helps owners assess where they’re at motivationally, as professionals and business owners in their readiness to sell. The consultant then works together with practice owners to develop exit strategies that could begin in the immediate future or develop over a couple of decades. Frequently, transition consultants also serve as the broker of practice sales. This is a real plus because their work in the open market makes their recommendations much more meaningful. A widely accepted recommendation is to engage a transition consultant long before you are ready to sell. Analogous to this recommendation is diagnosis and prevention. Waiting to contact a broker when you are ready to sell is considered emergency care.
- Attorney(s). Two different types of attorneys need to be engaged at some point during a well-developed exit strategy. First, an estate planning attorney to help set up wills and trusts. Second, an experienced transition attorney when the time comes to exit the business.
- Banker. Developing a solid relationship with a banker can open doors of possibility both currently and into the future. Because of banks’ (mostly outdated IMO) hiring and retention policies, bankers tend to move around quite a bit. My recommendation is to focus on the banker more than the bank.
Who do you currently have on your team?
Read MoreBuyer Trends in the Veterinary Industry
By Happy Holidays and congratulations on making it through another year! And what a year it’s been. Covid is still rearing its ugly self in new forms. Wearing masks went away, then came back again. Some veterinary conventions were canceled, some held virtually and others allowed in-person attendance. Corporate veterinary practice buyers are still around. Individual buyers are also acquiring practices albeit hesitantly. Banks started financing practices again. So what’s going to happen in 2022?
We hope that we can get back to some form of normalcy. Wouldn’t it be great to go out to dinner and not have to get carded as if we’re a 21-year-old buying our first beer? Having to show your vaccine card and wear masks is getting to be a pain. Covid is probably going to be around in some form or another for a very long time and will be similar to the flu as time wears on.
Corporate buyers will also be around for a long time. I’ve heard that corporates currently hold between 12% and 22% of all veterinary practices. Depending on who you ask and how you calculate what constitutes a corporate buyer. I would guess the real number is probably around 17%. There has been some consolidation of corporate buyers that is occurring. Getting acquired by a larger corporate buyer is the goal of the smaller corporate buyers. As they get gobbled up, there will be fewer and fewer buyers to drive up the value of practices.
Individuals are still buying practices and will continue to do so forever. It’s our job as practice brokers as well as the job of others in the veterinary industry to educate and assure veterinarians that they can be successful owning a veterinary practice and do very well. Many buyers worry about competing against the corporate owners thinking that they cannot get the same pricing on supplies and services that the big guys receive. Most supply companies have told me that they will in fact give the same pricing on supplies that the corporate owners get.
We wanted to keep you informed and know what’s going on in the veterinary practice buyer world. We wish you a happy and healthy 2022!
Read MoreTop 5 Fears Veterinarians Have About Practice Ownership (And How to Overcome Them)
By Rod Johnston MBA, CMA, and Jim Vander Mey, CPA, ABI
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:
- 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. - 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.
- Fear of the Corporate Giants – Don’t fear the corporate giants. They have their own niche targeting 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.
- 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.
- 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 from 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.
Read MoreSeller Carrybacks and Veterinary Practice Transitions Today
You’ve heard the term “Seller Carryback,” but what does it mean?
Seller carryback financing is when the seller of a given property, or in this case, a seller of a veterinary practice and assets, acts as a lender for the buyer if a conventional bank will not offer the full amount that the buyer needs to close the sale.
Years ago, it was commonplace for a retiring veterinarian to act as the lender for someone to purchase a veterinary practice. Seller financing was driven largely by the fact that banks and financial institutions had yet to embrace the industry like they do today. Therefore, there was a wide variety of structures, interest rates, terms, etc. that were built into those transitions and the exchange of funds between the buyer and seller.
Much like the rest of the veterinary world, the industry and the financing supporting transitions have evolved. In most transactions, it is quite common for the seller to receive all the cash at the time of closing, which is ideal. However, certain circumstances still exist where seller participation in financing is a requirement. In these cases, the buyer’s lender will require the seller to carry a certain portion of the purchase price. Usually, that amount is 10-25% of the total purchase price. Why would a bank need that, you might ask? Some common scenarios include: a declining revenue trend, uncertainty around the buyer’s production capability, and tight cash flow, to name a few.
Every lender has different standards around seller participation, but here are some common features of that path in the current environment:
- Term: Most carrybacks are amortized similar to the buyer’s bank loan. Payments based on a 10-year repayment are common.
- Rate: Since these loans are typically junior to the bank loan it is not unusual to see a seller note 0-2% higher than the banknote. Right now, around 5% is reasonable.
- Prepayment Penalty: Sellers typically want to receive the funds over a shorter timeline of 10 years. Most carrybacks do not have prepayment penalties so that the loan can be paid off or refinanced within 24 months of the transition.
With talks of increasing capital gains taxes in the near future only time will tell how prevalent carrybacks will become.
For more information, please contact us today.
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