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.
