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DVM360.com had a good article in the December 2015 issue entitled “3 Practice Sale Slowdowns”: 3 veterinary practice sale slowdowns A few things are certain: Death, taxes—and the countless ways a practice sale can be brought to a screeching halt. Dec 01, 2015 By Christopher J. Allen, DVM, JD DVM360 MAGAZINE Recently I was contacted by a group of veterinarians who had successfully negotiated an excellent deal to sell a group of practices to one of the large corporate veterinary companies. Based on what they told me then, I explained that it sounded as if everything was well on track and that if price, terms, financing and leasing had all been agreed upon, the closing should be simple and soon. But alas, I heard from them again about a month later. Apparently, the group’s attorney and CPA were being so slow in preparing schedules and documents that the corporate buyer was threatening to pull out of the deal entirely. This response is understandable; corporate practice purchases tie up the acquirer’s transition staff. These buyers need to schedule their people’s time, so time and timing are of the essence. They have little patience for unjustified delays. Clearly, negotiating and consummating a practice sale can be difficult for anyone who’s never been through it. And it can sometimes be tough to even identify who or what is holding things up when the transaction begins to stall. Let’s proceed logically through the process involved in a quick and proper clinic sale closing. Time is money First and foremost, never forget the reasons why it’s critical to move forward with the least possible delay. There are key time-sensitive realities facing both parties. Taxes. The clinic building may be part of a capital gain “like-kind” exchange and as such carries with it a severe Internal Revenue Service (IRS)-imposed time limitation for the buyer. The seller may have capital losses he needs to offset in the year the sale occurs. Missing deadlines can simply kill the sale for tax reasons. Financing rate. Banks and other lending institutions don’t commit to loans indefinitely. If some CPA or lawyer slows down the closing such that a loan commitment expires, it can result in more than an inconvenience. A rate hike can make it economically impossible for the buyer to go forward with the purchase. End of employee contracts. Many practice sales are contingent on the selling clinic having a full veterinary staff at closing. When ownership is about to change hands, employees of all categories begin to get nervous—that edginess can result in staff seeking employment elsewhere and DVMs hesitating to fulfill or renew their employment contracts. The usual suspects Second, once we understand the need for speed in finalizing a practice sale, we need to identify what’s most likely to slow things down. Here are my usual suspects: Lending institution paperwork. Often closings are delayed because banks and banks’ attorneys don’t concern themselves adequately with the importance of thoroughness. Financial institutions loan money day-in-day-out, and one deal looks a lot like the … Continue reading
Hospital owners who manage a veterinary practice for a decade or more demonstrate unquestionable dedication to their calling. Still, at some point, many feel a subtle yearning to do meaningful work in a different vocation. The result is a tension between that thought and the resolve to remain true to a life of serving people and animals. Career changes for veterinarians are a growing trend In fact, Dr. Valerie E. Ragan, Director of the Center for Public and Corporate Veterinary Medicine at the Virginia- Maryland College of Veterinary Medicine, provides workshops and other resources for veterinarians who are thinking of a career change. In a recent AVMA article*, she states, “We get a lot of contact from veterinarians who are looking into doing something different, but they still want to be veterinarians, and they don’t have any idea what’s out there or where to start.” She goes on to say, “Another group is veterinarians who have been in practice 25 years or longer and want to do something different for fun, to give back, or to travel.” Practice owners face two significant obstacles Time Constraints Veterinarians in practices today wear many hats as clinicians. Clients expect general practitioners to have extensive knowledge about numerous species and breeds along with expertise in every clinical discipline from radiology to nutrition. Practice owners carry the additional demands of managing a veterinary business in a changing economic climate. One survey conducted by the National Commission of Veterinary Economic Issues reported, “… owner vets spent an average of 18 hours per week on practice management tasks” Freedom to Explore Unrestricted time and money are two essential ingredients for a lifestyle of freedom. Many practice owners maintain large non-liquid equity, but don’t know their options for tapping into that wealth. So, what are some options? Spending a lot of time and cash finding a good practice manager could solve the time factor, but not the non-liquid equity. Sell your practice and take the leap to another endeavor that may or may not work out well. Delay a change until you’re older and, hopefully, in a better financial position. What if you could free up time and cash while practicing your way in your hospital? • Would you spend more time with family? • Would you volunteer for a cause you care about? • Would you explore ways to work part-time at home and build something to carry on after retirement? • Would you like to fill in the blank? Good news: many of your colleagues have found a way to gain that kind of freedom with the help of a corporate buyer. Diversify your assets by investing your equity in whatever way suits your situation. Create time in your life. Leave inventory management, staff training, payroll, accounting, marketing and all that business stuff to business professionals. Fulfill your number one calling. Focus more than ever on practicing quality medicine. Reduce staff turnover. Less stress means a happier office culture, and reduced potential for burnout. Discover new … Continue reading
Selling your veterinary practice may be the most important financial decision you make in your professional life. While many factors are involved in a decision to sell, one frequently gets overlooked: timing. Is there a “best time” to sell? Maximizing sale value is usually near the top of every owner’s list. So how do you pinpoint the “best time” to sell to command the best price for your business? The first step is to understand the components that influence valuation – as well as the extent to which you may be able to leverage them to your advantage. These variables include: The current economic environment and dynamics of the veterinary industry; The current conditions of capital markets; and The performance of the practice. Keep in mind that factors outside your control, like current economic and capital market conditions, may have as large a bearing as more controllable factors, such as revenues or profits, on how the sale turns out. We are currently in a “seller’s market” Today’s economic environment of historically low interest rates and readily available capital makes it relatively easy and affordable for buyers to purchase clinics. Add to this mix another favorable dynamic: increased demand for clinics by corporate buyers. The result? Healthy valuations for some veterinary clinics. However, like any trend, market cycles can and will change. If history is any guide, changes, when they occur, often happen without warning. An increase in interest rates, tightening of the money supply, or downturn in the economy could have a strong negative impact on a clinic’s valuation. These variables all are outside a business owner’s control. How to seize the “window” of opportunity There are ways to help protect a business from value-influencing factors outside your control. Planning ahead to provide a window of opportunity to time the sale is one such management tool. For instance, if you know you would like to retire or need liquidity in five years, now is the time to start positioning your clinic for sale and making any necessary improvements to the practice. At the two- to three-year mark, if things are going well, and you are able to obtain a good price for your business, you can sell a little early. Conversely, if the economy or business has hit a rough patch, you still have several more years until your original target date to ride out the down cycle and/or make additional improvements to the clinic. But if you wait until close to the five-year mark to start the sales process, you lose the flexibility to adapt to business cycle swings or unexpected events. Recognizing common delay reasons for delaying Owners may delay the sale of their practice for any number of reasons. Common ones we hear include: I’m too busy running my practice. I don’t have time to think about selling! I’ve made substantial investments in my practice. I want to wait to sell until after I realize the full value of those investments. My practice is going gangbusters! Let’s … Continue reading
Charles Darwin once wrote, “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” In the rapidly evolving business of veterinary medicine, as practice owners struggle to juggle work-life balance, training and career development, clinical practice, and business management, it does seem that the law of survival of the fittest applies. Enlisting the support of a corporate buyer to meet the demands is an attractive option, but how do you know which buyer to work with? While there is the typical list of demands (fair valuation, option to purchase or lease real estate, cash at closing, strong team support and financial backing), we’ve curated an additional checklist for savvy practice owners to use when filtering their choices: Personalized Approach Determining the value of what you do is not a simple equation: every veterinary practice is different. Look for a corporate buyer that offers a customized approach to not only acquisition, but also improving practice operations. You want a personal consultation and a comprehensive evaluation of your operations, as well as a customized plan and guidance for the implementation of strategies that are specifically designed to improve performance at your hospital. Local Medical Standards What works well for a 5 doctor practice in Bloomington, Illinois might not work well for a single doctor practice in Malibu, California. Veterinary medicine is best practiced when local veterinarians craft their own hospital and community specific strategies for high quality patient care. Avoid corporate buyers that utilize a single standardized national plan or formulary. Focus on Revenue Growth and Increased Efficiency, not Cutting Costs When your practice is operating at its best, clients and employees are happier, patients receive better care and your bottom line thrives. Choose a corporate buyer that can demonstrate a broad range of proven operational consulting services to the veterinary industry that are proven to grow revenue, including: General and specialty practice management training and mentorship Inventory management assistance Fee schedule review Marketing program development Doctor production analysis Staff training and development Human resources management and recruiting services IT support consultation Commitment to Uphold the Values and Culture of the Clinic You did not spend your career building a practice that is going to be radically changed once you sell it. Your hospital means the world to you. It’s been your life’s work and a labor of love. Choose a corporate buyer who will honor the values and culture of your clinic that are beneficially to the pets, the clients, and the staff. Look for a corporate buyer, like Innovetive Petcare, that works with veterinarian owners who want to continue running the medical side of their practices, but want help with the day-to-day administrative and team management tasks. Enlist a corporate buyer that will help you create a long-term strategy and a sustainable way for your practice to continue thriving — well into the future. The relationship should feel natural and should uphold the values that you built into your … Continue reading
In the past several decades the United States has experienced an upward-trend of corporate acquisition of private veterinary practices, and there is good reason for this trajectory. The advantages of a corporate buyer include capital, business know-how and strong support teams, and bring great value to the practice of veterinary medicine. Here are 7 other advantages of working with a corporate buyer that you may not have considered. Improved Marketing Corporate buyers assess a clinic’s current marketing programs and implement improvements, if necessary. Corporate buyers can introduce new programs to grow patient visits, profitability per visit, and overall revenue per visit. One such way corporate buyers do this is by improving patient compliance with wellness services, such as annual exams, parasite prevention, dentistry, and other wellness procedures. Corporate buyers have marketing teams in place to help you turn your ideas into reality. Accounting Support More likely than not, the reason you went into veterinary medicine was to practice medicine, not become a bookkeeper. Corporate buyers have an accounting team to manage these tasks for you and start important record-keeping processes. In addition, corporate buyers handle accounts payable, revenue reporting, check writing, cash reconciliation tasks, and financial statement preparation, all critical to keep any practice running smoothly. Human Resources Corporate buyers further free veterinarians up to practice by managing human resources. Corporate buyers offer a comprehensive benefits package and excellent salaries. They have a team of HR professionals to assist with recruiting, hiring and retaining staff. Corporate buyers handle payroll and benefits so you don’t have to. Assistance with Day-to-Day Operations Corporate buyers support local practices by assisting the staff with inventory management, examining new ways to improve ordering to make sure inventory is adequate but not expiring, and providing cost-of-goods reporting to make sure that product is moving. Many practices have had the headache of running out of flea and tick preventive, or the opposite, carrying too much inventory on the shelves. Corporate buyers can help practices get a better handle on the inventory and also assist with vendor contracting to ensure that the practice gets the best price possible on inventory. Financial Resources and Easy Transactions When you want to sell, a corporate buyer is able to offer cash for the practice. In addition, corporate buyers can also acquire clinic real estate when the owner wants to sell it as part of a transaction. Furthermore, corporate buyers have the financial resources to invest in the long term growth, success and health of the clinic long after the acquisition is done. Flexibility and Experience Corporate buyers are in the business of purchasing veterinary hospitals quickly and efficiently, and this includes successfully integrating the staff, including the selling veterinarian, who is welcomes to stay on. In contrast, veterinarians (other than current associates) who purchase a practice are generally replacing the selling veterinarian. Changes to staff, if any, are discussed prior to closing, and corporate buyers make every attempt to maintain continuity throughout the client experience. 7. Access to a Wider Team … Continue reading
Veterinary clinics are usually sold on a “debt-free” basis, meaning that when a clinic is sold, at a minimum any interest-bearing debt (such as bank loans, credit cards and capital leases) is deducted from the selling price. Example: A clinic is valued at $1,500,000 and has $300,000 of debt. The net proceeds to the seller would be $1,500,000 – $300,000 = $1,200,000. Does this mean that taking on debt is a bad idea for practice owners? Not necessarily. Taking on debt to finance growth can be a very good investment. For instance, a lease for new equipment that generates increased revenue and profits might result in a higher sales price and net the seller more money even after deducting the remaining debt. Remember that clinics are generally valued at a multiple of earnings, so investing in equipment that produces $20,000 of additional profit per year will yield several times that much in increased value to the clinic. It is important to continually re-invest in updated medical and office equipment. However, prioritize revenue-producing equipment over non-revenue-producing assets. For example, a new surgical laser that will generate new procedures (and additional revenue) is a better investment than, say, new TV’s in the waiting room.
Until the mid-1990’s, it was common for veterinary practices to be valued according to their revenue. One often-cited approach was to value a clinic using a multiple of revenue, such as 75% or 100% of revenue. For example, a clinic with $1,200,000 of revenue valued at 100% of revenue would have sold for $1,200,000. However, this valuation method has fallen out of favor and has not been used in some time. Why is that? Imagine three clinics with identical revenues but different profitability: • Clinic A has $1,000,000 of revenue and is generating a $50,000 loss • Clinic B has $1,000,000 of revenue and is generating a $100,000 profit • Clinic C has $1,000,000 of revenue and is generating a $250,000 profit Would you pay the same amount for all three clinics? Probably not. A buyer –whether another veterinarian or a corporate group – ultimately needs to pay back his original investment. The clinic’s profits, not its revenue, enable that to happen.
Even with the benefit of hindsight it might not be possible to known exactly when the best time to sell would have been – and certainly none of us has a crystal ball to know the perfect future time to sell. However, we can offer some general suggestions about timing that may help practice owners. In general, the best time to sell is when: The business is doing well. Potential buyers want to purchase a clinic that is profitable, that is growing, and that has the potential for continued future growth. The economy is healthy. A healthy economy makes buyers more confident about the future and makes it easier for them to obtain financing. Practice owners may own a clinic 20, 30, 40 years or longer. Businesses rarely have consistent growth and profitability over these long periods of time – they experience ups and downs just like the economy overall. Since you want to sell your practice when it is doing well, and since the health of your business may fluctuate over time due to many factors, plan ahead to allow flexibility on when to sell. If you have a firm date when you want to retire or will need money, waiting to sell your practice until you reach that point does not leave flexibility to adapt to business cycles or unexpected events. A better approach is to plan ahead and give yourself a window of opportunity to time a sale. For instance, if you would like to retire in five years, now is the time to start positioning your clinic for sale and start making any necessary changes and improvements. At the two- to three-year mark, if things are going well and you are able to obtain a good price for your business, you can sell a little early; however, if the business or economy has turned unfavorable, you still have several more years until your original target date to ride out the business cycle or make additional changes to the clinic. Some owners want to sell their practice but continue working; others want to sell and retire. Openly discuss your goals and be flexible to provide potential buyers with an adequate period for a smooth transition.
It is common for practice owners to also own the clinic’s real estate (the land and the building). In these cases, the buyer will typically purchase this real estate as part of the overall practice purchase, or enter into a lease with the seller, allowing the practice owner to continue owning the real estate and benefiting from rental income for years into the future. Sometimes a seller wants to sell both the practice and the real estate together, but the buyer does not want to purchase the real estate. In those cases, an experienced buyer can help arrange a third party to purchase the real estate and help meet the seller’s goals. The Impact of Real Estate on Valuation The practice’s real estate is an asset that can either be sold with or separately from the practice. Over time, the real estate can become a significant part of a practice owner’s investment portfolio. Therefore, it is generally preferable to own the real estate in a separate limited liability company (LLC), which allows the owner to easily keep both the real estate and the clinic at arm’s length. If you own both the practice and the real estate, it is important to ensure that the clinic is paying appropriate fair market rent. It is best to think of them as separate businesses. Ask yourself these questions: As the owner of the real estate, what rent would you charge third party? How does that rate compare to the rent you are charging your own practice? Charging below-market rent can hurt you when it is time to sell your practice. Here’s how. Real estate impact: Let’s say that the owner of both a practice and real estate is charging the clinic $10,000 per month in rent when the fair market rent is $15,000 per month. The owner obtains an appraisal on the building and is happy with the appraised value. However, the appraisal is based on the fair market rent, but the clinic is paying one third less ($10,000 rent vs. $15,000 fair market rent). It is unlikely that the owner will be able to sell the property for the appraised value unless he or she can raise the rent the clinic is paying. Clinic impact: A potential buyer will value the practice based on its current profitability. Since that profitability is based on below-market rent, any attempt to raise the rent will lower the clinic’s profitability and, consequently, its value. Let’s say that the owner of a practice and its real estate is charging the clinic $10,000 per month when fair market rent is $15,000 per month. The clinic is showing a $100,000 per year profit. When it is time to sell the practice, the owner tries to raise the rent to the fair market rate. However, the difference between the current rent and the fair market rent is $5,000 per month, or $60,000 per year. Suddenly the clinic’s income drops from $100,000 to $40,000 and its value drops dramatically. The Take-Away … Continue reading