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@omni-pg.com to set up a free consultation.
Be an Educated Veterinary Practice Buyer
I meet hundreds of veterinarians each year who are looking to buy an existing veterinary practice. Of those, I would estimate that 30% have done any research on what is involved in buying a practice. Of that 30%, none know the beginning to end process of buying a veterinary practice. While all the steps cannot be covered in this article, here is some guidance on where to start and what steps to take before buying a practice.
- Contact a bank that finances veterinary practice acquisitions and makes sure you can qualify for a good loan. Banks can require decent credit scores, cash in the bank, that you are two years out of school, and show production from your current employer. Every situation is a little bit different. Try to avoid SBA loans if you can, as they can be expensive with early payment penalties. However, if that is the only avenue to ownership, do not pass it up.
- The next step is to understand a little bit about veterinary practice valuations. You don’t want to go into a sale not knowing if the practice is worth the price listed or not. If you are looking at a practice that a corporate entity is also looking at, the rule of thumb is that valuations are out the window. Practices grossing 1 million or less could be worth between 65% and 75% of its’ last 12 months’ production. Remember, that’s a rule of thumb – I’ve seen practices go for as high as 160% of production and as low as 30% of production.
- Think about where you want to practice. You’re probably going to be there a while, so you might as well like the area. Research demographics – there are excellent demographic services that sell great Veterinary demographic information for about $500. It will tell you where the best locations to practice are located. Also, do not ignore the smaller, older, and not-state-of-the-art-equipped practices. These can be the best opportunities allowing a higher return on your investment.
- Put together a good team. Get referrals for a good veterinary broker, attorney, banker, and accountant. They’ll help you analyze the veterinary practice, do the legal work, and help you find a practice.
- Get an understanding of the true cash flow of the practice and if expenses are above industry averages. For example, is the staff expense greater than 25% of production? Is the reason because one employee is overpaid and will be retiring at the same time as the seller, or is there an over-staffing issue? Be an informed buyer.
- Be prepared for your due diligence. You need to know what to look for when you do get to the point of buying a veterinary practice. Does the practice have a website? As the practice should be valued on current performance, not future potential, there could be real opportunities for immediate growth. Know how to spot these things.
- Finally, spend some time with a veterinary broker before you go look at the practice. Understand what the practice you are looking at is all about. Does the broker think it’s honestly a good practice? Why? Does the explanation make sense? Once you’re comfortable with the numbers, then go take a look at the practice.
By being an informed buyer, you will avoid a lot of headaches and potential problems down the road. There are practices that are hidden gold mines and practices that you should not touch. Being educated and knowing the difference is critical in your veterinary practice acquisition success.
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.
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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