Top Pitfalls To Avoid When Buying a Veterinary Practice
There are a number of things to look out for when buying a veterinary practice. If you’re not careful, you could end up with a bag of tricks. Here are some of the top pitfalls to avoid when buying a practice:
1. Not understanding the numbers. Be sure and know what normal veterinary expenses are and what may be extraneous.
2. Assume the staff are all on board and will be staying with the practice. Know who the staff is and what their relationship is with the seller, and how good they are…
3. Embezzlement – hire an accountant to look for any irregularities. Statistics show there are a high number of practices that are embezzled by their employees each year. Are courtesy credits high? How about patient refunds?
4. Does the procedures the selling doctor perform match the procedures that you do? Make sure a large amount of the procedures you don’t do are not currently being performed by the seller. You don’t want to have an immediate drop in production right from the start.
5. Understand the lease. How many years are there left on the lease? Are there more options to extend? Is there a loan form the landlord build into the lease? Which expenses are covered in the lease? Is it triple new or a gross lease?
These are only a few of the pitfalls to make sure you don’t get tricked. Spend as much time in due diligence as you need and bring on experts to help you along the journey.
-Jim Vander Mey, CPA. ABI
When Do You Know You’re Ready for Your First Dental Practice?
You have been out of dental school for over a year now, working as an associate, or a GPR assignment. You’re getting antsy as the owner keeps giving you the new patient exams, fillings, and the mean, nasty patients they don’t want to see. You’ve got the itch for a change, either to do a startup or buy your first dental practice. But, how do you know you’re ready? Here are a couple of questions to ask yourself:
1. Are you confident in your clinical skills?
2. Do you have savings to live on for 6 months, just in case of emergencies?
3. You have a part-time associate position that will keep the bills paid.
4. You have good chair-side skills and can get patients to accept treatment.
5. You know, at least the elementary aspects of running a practice.
If you answer yes to these questions, you’re ready to buy your first practice. You should start taking courses on practice management. The county associations often have courses on various aspects of running a practice. There are also Dentaltown podcasts, courses at your community college, etc., which will help you get ready.
So, if you’re on the sidelines, not sure if you’re ready to own your practice and can answer yes to these questions, jump on in, you’re ready. Give us a call if you’re still not sure.
-Rod Johnston, MBA. CMA
Selling Your Dental Practice Does NOT Mean You Have to Stop Practicing
Whether you have owned your practice for 40 years, or owned it for 5 years, selling your dental practice does not mean you are done practicing. We often meet with doctors who are sick and tired of managing their staff, doing the bookkeeping, playing games with the government agencies, dealing with the ups and downs of the economy, the changing environment of the profession, and on and on. The doctors are about to crack but think they cannot yet sell their practice as, according to their CPA or financial advisor, are not yet financially ready to retire. We counter this by asking them “who said you need to retire?” You can “harvest your equity” and either work back in the practice or go work for another practice. What the CPAs and financial advisors may not see is that your practice collections numbers are going down. Or, your blood pressure is skyrocketing due to the above-mentioned challenges of managing your practice to the point of a heart attack coming right around the corner. If you have a good amount of equity in your dental practice, we can sell your practice and you can put the cash in the bank and work as an employee until you are ready to retire in 5, 10, 20 years, or as long as your heart desires. Transitioning out of your practice may be the way to enjoy your profession again.
Selling Your Practice Does Not Mean You Have To Stop Practicing
Whether you have owned your practice for 40 years, or owned it for 5 years, selling your practice does not mean you are done practicing. We often meet with veterinarians who are sick and tired of managing their staff, doing the bookkeeping, dealing with the ups and downs of the economy, and on and on. The veterinarians are about to crack, but think they cannot yet sell their practice because, according to their CPA or financial advisor, they are not yet financially ready to retire,
We counter this by asking them, “Who said you need to retire?” You can harvest your equity and either work back in the practice or go work for another veterinary hospital. What the CPAs and financial advisors may not see is that your practice collections numbers are going down, or that your blood pressure is skyrocketing due to the above-mentioned challenges of managing your practice to the point of a heart attack coming right around the corner.
If you have a good amount of equity in your practice, we can sell your practice and you can put the cash in the bank and work as an employee until you are ready to retire in 5, 10, 20 years, or as long as your heart desires. Transitioning out of your practice may be the way to enjoy your profession again.
If you think you might want to sell, we are happy to talk you through the process. Just give us a call at 877-866-6053 or email info@omnipg-vet.com to set up a free consultation.
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.
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