How Much Will I Get for the Sale of My Practice?
By Rod Johnston, MBA, CMA
Whether you’re selling a car, a house, or your veterinary practice the ultimate question
that everyone wants to know is…. How much do I get? After all the years of blood,
sweat, and tears you have put into your practice and you come to the point of
retirement, or just selling to take a break from ownership, you want to know, after all the
fees and expenses, how much money will you be putting in your pocket. Or, hopefully,
bank account. Of course, the answer varies from sale to sale, but there are some
general expenses and fees that you can be sure will be part of your transaction.
Valuation Fee – To calculate what your practice is worth; you will need a valuation. If
you are using a broker, they will charge anywhere from $1,500 to $20,000. Many will
waive the fee if you are going to list your practice for sale with them. Others will back
the fee out of the commission when your practice is sold. If you do not use a broker,
you will still want a valuation. I suggest using a broker that has some type of
certification in valuing a business. Rule-of-thumb-valuations are back of the envelope
estimates at best and could cost you hundreds of thousands of dollars.
Attorney Fee – You will need an attorney to draft up the purchase and sale and other
agreements necessary to close the sale of your practice. Be sure and use an attorney
that specializes in or has completed a lot of veterinary practice sales. Attorney fees can
range from $4,000 up to $15,000 with the average being around $6,500. Of course, this
depends on the complexity of the transaction, who is representing the buyer and how
many changes are requested during the review phase. It also depends on if its’ a
corporate sale, or selling your practice to an individual. Corporate sales are more
complex.
Broker Fee – If you are using a broker, you will pay between 6% and 12% of the sale of
your practice. The range is due to a number of factors such as how much service you
will get from the broker, what documents and expertise the broker has and other factors
around service. Discount brokers charge a lower fee because they don’t come out and
see your practice, they don’t show your practice and all they do is advertise it and send
the buyer to you. Full service brokers will meet with you in person, value your practice,
show your practice numerous times and do all of the marketing for you. A discount
broker will put in about 20 hours worth of work. A full service broker will spend between
200 and 400 hours, or whatever it takes to complete the sale of your practice.
Other factors on the fee may include the size and complexity of your practice. Smaller
practices that produce less than $400,000 per year are harder to sell, require a lot of
money spent on marketing and require many more hours to get to the closing finish line;
therefore, those are typically in the 10% to 12% range. Larger practices typically are in
the 8% to 10% range depending on a number of other factors. You can decide not to
use a broker if you choose. Bankers and attorneys estimate that 50% of the practices
sold without a broker fall apart before the sale is closed. Buyers lose interest in the
practice, another opportunity pops up, or a disagreement occurs – and without an
intermediary, sellers and buyers clash, and the sale falls apart. A typical transition from
beginning to end can take 200 to 400 hours to complete. Be sure you have that extra
time in your life if you decide to sell without a broker.
Taxes – Here’s the biggie. When you sell a practice, the purchase price is allocated
between goodwill and tangible assets, such as equipment. Goodwill typically makes up
80% to 90% of the purchase price. It is taxed at the capital gains rate of from 18% to
24% by the IRS. The tangible assets make up 10% to 15% of the purchase price.
These are taxed at your ordinary income tax rate by the IRS. Most veterinarians fall
between 28% and 35% ordinary income tax rates. The average is 33%. So, you can
see, you want as much allocated to goodwill as your accountant and the IRS will allow.
Depending on the state you are selling your practice, there may also be a state capital
gains tax. California for example also has a state capital gains tax. Consult your
accountant to find out what the tax will be for your practice sale.
Equipment Valuation – This is typically not required, but occasionally requested by a
buyer. This is commonly around $400 for the equipment valuation.
Escrow – We like to complete a transition by using an escrow service. Escrow will
make sure all liens are paid off, everyone involved is license, state payroll taxes and
other taxes have been paid, and will prorate any items the seller has paid in advance
such as personal property taxes or an annual software maintenance contract. Escrow
fees range are typically split evenly between the seller and buyer and range from
$1,000 per side, up to $2,500 per side depending on complexity and whether real estate
is also involved.
When the dust has settled and the ink has dried on the agreements, you should walk
away with approximately 70% of the proceeds in your bank account after all fees have
been paid. Keep in mind these are just estimates to give you a ballpark figure of the
cost of selling a practice. As with most things in life, the fees will vary depending on the
variables mentioned above. Be sure and consult your team of experts to help you
better understand what the cost will be for your transition. Contact Omni Practice Group
at info@omni-pg.com and we can help you get started.
Practice Transition Market Trends
By: Rod Johnston, MBA, CMA, Owner and Founder
Over the years, the market for practice transitions has changed. Sellers sell for different reasons than they did ten years ago. Buyers make their buying decisions much differently than they did ten years ago. And, the veterinary industry has changed in a number of ways over the years as well.
When we first started selling practices approximately 20 years ago, the primary reason veterinarians told us they were selling was because they were ready to retire. The average age of retirement back then for a veterinarian was 64 years old. The most recent survey by the American Veterinary Medical Association has the average retirement age for a veterinarian of 70. Veterinarians are selling for reasons besides the fact that it’s time to retire. More and more, we see veterinarians retiring for three primary reasons:
- Staffing challenges – Sellers are having to deal with a revolving door of staff. With the staffing shortage because of the covid shutdowns, staff members are being recruited by other offices. Staff members leave for a little more money to go to work at an office nearby.
- Stress – Veterinary practice owners are complaining that they are working longer hours and more days than they were five or ten years ago. This is due to shortage of not only staff, but also a shortage of veterinarians. Some practices have closed. Corporates are paying associates bonuses and higher salaries. This is causing associates to leave the mom and pop veterinary clinics to go work for more money at a corporate office. Owners are having to work six days per week to keep up with the demand for veterinary care. Pet ownership and consumer spending on pet care is also increasing.
- Compassion Fatigue – This is the psychological, physical and emotional impact of constantly caring for others, often through stress and trauma. Veterinarians are constantly caring for animals and their owners. Veterinarians often work long hours and 5 or 6 days per week. This gives them little to no time to take care of themselves. The result is the stress with no release takes its’ toll and causes compassion fatigue.
Practice Buyers have also evolved. Fifteen years ago, a potential buyer would sign a non-disclosure agreement, take a look at the practice numbers, and then visit the practice. They would typically then decide to move forward or not. It was pretty quick and simple. The buyers would be an associate who had been out of school for from 2 to 5 years. They would focus on the numbers and the location and might bring in an accountant to review the tax returns.
Buyers nowadays are not only those who have been out of school for a few years, there are also corporate’s looking at larger practices. There are more veterinarians moving from other states to buy practices as well. A potential buyer quite often has someone representing them. It may be a buyer’s representative or an accountant who does more than just look at the profit and loss of the practice. Buyers scrutinize not only the numbers, but the technology in the practice as well. Corporate’s do a complete physical on the practice.
Good practices in good locations still sell reasonably fast. Good practices are those that collect $700,000 or more with overhead below 70% and the practice technology and décor is up to date. Good locations are in populated areas that are desirable to the public in general. Metropolitan cities and practices within 30 minutes of these areas are good locations. Locations in other urban areas will also sell quicker than rural areas. Practices in rural locations do sell. They just take a little longer than normal.
Whether you’re thinking about selling, or thinking about buying a practice, we’re here to help. Contact one of Omni’s Transition Consultants to steer you in the right direction.
Read MoreSelling to an Individual Buyer or a Corporate Buyer is Going to Take Time! Start Planning NOW!
By: Steve Kikikis, Vice President, Broker
Retirement…. Ah, that sounds nice! Right? But the process requires careful planning, especially when it comes to selling your veterinary practice. While the idea of selling may seem straightforward, the reality often proves to be far more complex. Selling a veterinary office isn’t putting up a “For Sale” sign and waiting for buyers to come knocking. Whether it’s finding the “right” individual buyer or selling to a corporation with a complex work agreement, veterinarians should start planning to sell their practice at least three years before they’re ready to retire. Omni Practice Group can help you determine your timing now.
Lack of Buyers for Individual Sales and Extensive Due Diligence.
Selling a veterinary practice to an individual buyer is a lengthy process. Depending on your location and type of practice, it can take anywhere from twelve months and up to thirty-six months for remote locations or “unique” practices. The greatest time factor in this scenario is the shortage of buyers across the nation. Potential purchasers are scarce, particularly those who meet the criteria and financial requirements necessary to acquire a veterinary practice. Fewer and fewer individuals are signing up to become practice owners and are willing to work the five days a week that may be required for a successful practice; instead many are opting to remain associates. That being said, good practices in good locations that are well managed do sell reasonably quick.
Omni Practice Group and I work hard to market your practice to potential individuals in as many ways as possible. We place classified ads with state and local veterinary associations, national publications, and veterinary school alumni websites and newsletters. We put on buyers’ seminars, attend conferences, speak at schools, and we work diligently to maintain an extensive database of potential buyers; ensuring if there is a doctor considering buying, they will see your practice (confidentially of course). We leave no stone unturned. Once we have found a buyer, they will need time to thoroughly evaluate the practice’s financials, client base, operational procedures, secure financing, negotiate terms, and other critical aspects. This thorough due diligence helps ensure that the buyer understands the investment they’re making and helps them assess the practice’s viability and potential for future success. But it takes time!
Whether you’re five years away or five months away from selling your practice, there’s no time like the present to not only start thinking but also to start planning for your transition. We are happy to help in any way we can and offer a free transition plan consultation. We’re only a phone call (or e-mail away) Call Steve Kikikis at 425-905-6920 or email at steve@omni-pg.com
Read MoreAm I Ready to Purchase a Veterinary Practice?
Am I Ready to Purchase a Veterinary Practice?
Now is the time to invest in yourself and increase your income! Yes, COVID changed our lives and yes, loan rates are a little higher, but if you surround yourself with trusted advisors, you can do it. Start making more money and driving your own ship today.
Transition specialists/brokers are here to help you understand everything about the practice, such as areas of opportunity to grow and to increase collections. If many services are referred out that you may do, what does that increase look like? For example, if the selling veterinarian does no specialty services and you do, we can potentially research the number of referrals and put an average patient fee to it and determine an immediate possible increase in collections.
Loan rates are a little higher, but that little amount is nothing in the life of your career. You may also be able to refinance at some point and your CPA can assist you to take advantage of current tax deductions and accelerated depreciation if it makes sense in your specific situation. Reducing taxes is money in your pocket. As an example, ask your CPA about sections 168, 179, Special Depreciation, and DPAD. Perhaps it is time to incorporate a retirement plan into your office, again, if it makes sense in your situation.
Start talking with us and we can provide contacts for veterinary specific lending, CPAs, and attorneys to help you move forward with your career plans.
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