Considering a Veterinary Practice Loan? Know What Lenders Look For – Before You Apply
Applying for a loan is probably not at the top of anyone’s list of favorite things to do. Sometimes applying for a loan can feel like a very opaque process, and often times it may seem endless. When you consider a Veterinary practice loan, you may wonder how to make the process easier, and what you can do to best position yourself for approval.
Different lenders have different parameters for approval. Some lenders place more importance on some factors and less on others. While not all lenders are alike, there are certain common factors most banks consider. Understanding these factors can help you position yourself in the best way possible to multiple lenders.
Increase cash flow, eliminate credit card debt
Cash flow is one of the most important things a lender considers. The monthly expenditures reflected on your credit report – such as personal mortgages, car loans, credit card bills, and others – affect your cash flow. High monthly bills can negatively affect your cash flow, while lower monthly bills can positively affect your cash flow. Consider how much credit card debt you carry from month to month. If you pay your credit card balances down to zero every month, this does not negatively affect you; however, if you do carry a balance, this can negatively impact your cash flow. To best position yourself to be approved for a Veterinary loan, you’ll want to carry less than $25,000 in credit card balances from month to month.
Student and existing business loans come into play
Student loans may also affect your ability to obtain a Veterinary business loan. Many Veterinary lenders don’t consider the total amount of student loan debt outstanding as the deciding factor but will look at your total monthly payment. This is where you may consider Income-Based Repayment as an option to lower your monthly payments and improve your cash flow. Be sure to ask your lender about whether this may be necessary.
If you already own a Veterinary practice, lenders will consider the monthly payments on any business loans you have. Most Veterinary lenders will look for a global debt service coverage of at least 1.20x. This means that for every $1.00 of debt you owe – both business and personal monthly bills annualized – you have at least $1.20 to pay it with, from all your annualized income (income from either your salary, practice profit, distributions, guarantor, etc.) A great exercise before applying for a loan would be to calculate your current ratio beforehand so you can either pat yourself on the back, or make changes to increase your chances for an approval.
Liquidity is key
Another thing to consider is your current liquidity – the amount of cash reserves you have, outside of retirement savings. Conventional veterinary lenders typically like to see at least six to 12 months of reserves when they consider your loan request. This means you have enough cash set aside to cover your monthly bills for six months to a year. If you are a current practice owner considering a loan, a good rule of thumb is to have between 5% and 10% of the total loan amount in cash reserves. Again, every lender’s requirements are different, but having adequate cash reserves in place will put you in the best possible position with multiple lenders.
Consider collateral
Conventional Veterinary specialty financing looks at collateral a little differently than SBA lending or non-specialty financing. Goodwill in an existing practice should suffice as collateral for Veterinary-specific lenders. Typically, they can lend up to 80-90% of total collections on a Veterinary practice without the need for additional collateral or a seller carry-back note. This amount will vary depending on the lender and the situation; keep this in mind if you have an existing practice and are planning to apply for a loan. When you’re considering a startup loan, you do not need to put your house, your spouse, or first-born child as collateral. Specialty Veterinary lenders will allow you to use the future potential of goodwill, as well as the equipment you purchase, as collateral for your startup loan.
Know before you borrow
As mentioned before, criteria for approving a loan may differ from bank to bank. This process may be arduous for the borrower, but know the criteria beforehand and you can best position yourself for practice financing. You can potentially alleviate the frustration of a loan decline before it happens. The good news is that rates are still at historic lows, and access to Veterinary-specific financing has never been easier. With this knowledge, you can prepare yourself for future success, for both the loan process and Veterinary practice ownership.
Top 5 Fears Veterinarians Have About Practice Ownership (And How To Overcome Them)
There are many advantages to owning a veterinary practice over being an associate veterinarian and not owning a practice. For one, the average veterinary practice owner makes approximately 20% more in income than an associate veterinarian working for someone else. A veterinary practice owner also gets to choose what procedures he wants to perform and what type of animals he or she wants to work on. Heck, they even get to choose which animals they want to work on. They can also choose their own hours, pick the days they want to work and how much vacation they want to take. So, why aren’t veterinary associates owning practices? What are they afraid of? Here are a few fears we have encountered and how to overcome those fears:- Fear of the unknown – Associates feel they don’t have the experience in owning a practice. They haven’t managed staff. They haven’t kept financial records. They don’t know what marketing to put in place. They don’t know what benefits to give employees, how to hire or fire employees, or even how to balance a checkbook.
Fear not, you don’t have to know everything at once. You know how to do veterinary medicine. That’s the first step in owning a practice. You have a few years of experience working as an associate in a veterinary practice. You’ve observed the owner working with and managing staff. You may have experience leading a team in school, playing sports, etc. These are all examples of good experience in handling staff. You don’t have to know how to keep books right away. We suggest getting a veterinary bookkeeper and then getting educated on reading financial statements. This can happen over time. Bottom line is if you are good at what you do and willing to learn the other parts of practice ownership, you’ll be just fine.
- Fear of taking on more Debt – Read Robert Kiyosaki’s book, “Rich Dad, Poor Dad”. Not all debt is created equal. There is good debt such as student loans and practice debt that helps generate an income and there is bad debt such as credit card debt where you just borrowed money because you wanted something. Practice debt used to buy a practice that will help you make more money and build equity in an asset (the practice) is a positive thing. As long as it’s a good practice with good cash flow, you’ll be money ahead in the long run.
- Fear of the Corporate Giants – Don’t fear the corporate giants. They have their own niche targeting the bargain shoppers and lemmings who follow the crowd. They also have a high turnover in their staff and doctors. You will provide excellent service with the same staff and veterinarian that the clients will see every time they come to your office. In a corporate environment, they’re not sure who they’re going to get.
- Fear of not knowing what to look for – This is a valid concern. You can educate yourself in a number of ways. There are great resources via podcasts, YouTube, etc., that can help you know what to look for. Quite simply, you start by looking at your desired location, then look at the cash flow of the practice and after that, you can get into the details. There are consultants and brokers who can also help you with reviewing practices. Identify your team that will help you overcome this fear.
- Fear of a recession – Recessions happen, typically every 8 to 10 years and last 10 to 12 months. You cannot avoid recessions or downturns in the economy, it’s part of life. But, during recessions, employees typically get laid off of work. If you own your own practice, you’re probably not going to fire yourself. You’ll probably keep yourself employed and busy. Owning a practice is a deterrent from getting laid off during a recession.
These are a few of the fears that we’ve seen over the years, and there are others as well. But, the best thing you can do is educate yourself and talk to practice owners, brokers and bankers. Seek advice and counsel from everyone you can. This will help you make a wise decision in moving forward with practice ownership.
For a chance to get advice from a team of experts all in one place – broker, banker, attorney, etc., we have 4 Practice Ownership seminars coming up this fall, all are free! Click the link below for more information.
They’re Heeeere…
These DSOs are groups who are looking to consolidate the dental industry similar to what has been going on with pharmacies, surgery centers, and hospital systems for many years. In fact, as a side note, two-thirds of pharmacy revenues come from corporate-owned pharmacies. The DSOs, especially the large ones, are backed by private equity money looking for good returns on their money. Smaller group practices are typically backed by local or national banks. The private equity groups like the dental market as there are good margins in owning a dental practice. I’ve heard they can typically get a return of 15% to 20% after paying an associate salary and all other overhead. They don’t require financing, so they don’t have the debt service payments that individuals may have. They often consolidate the “back-office” functions – Human Resources, accounting, and billing to save money. They also can negotiate better insurance reimbursements and dental supply prices than the solo practitioner. For staff, they can offer decent benefits packages as a result of economies of scale. However, they may not pay staff wages as well as solo offices. The larger groups range from 30 practices under ownership up to several hundred locations with groups like Heartland Dental.
What are they looking for when they acquire a dental practice? Many of them claim they will pay a premium for a practice. I’ve been working as a practice broker for almost 15 years, and I’ve never seen a group, DSO, or Private Equity investor purchase a practice for an above market price. Most have purchased practices at market, or even slightly below. They like larger practices doing at least $800,000 and up. That doesn’t mean they won’t buy smaller practices, but the larger ones are more appealing. They like to acquire smaller practices in the area where they already have a larger practice so they can consolidate the smaller practice into the larger practice. Most of them want the selling doctor to stay on and work in the practice. Many of them want the seller to stay for up to 3 years. Most will negotiate down to 2 years. They usually do not give you your entire purchase price upfront. They’ll give you 80% of the purchase price at closing, you will have to wait for the other 20% to be paid out upon certain conditions being met. Those conditions include serving your agreed-upon employment term, the practice production staying at where it was before or even growing, and other conditions may be possible such as hiring an associate, managing the practice, etc. If you don’t meet your conditions, the DSO may pay none or only a part of the last 20% of the purchase price. And, if after a few months you decide that working as an employee for the group isn’t what you thought it would be, or you decide to move out of the area for health reasons, or for some other reason you decide to leave the practice and not meet your term, then too bad for you. You forfeit the 20% that the DSO owes you.
The small groups, DSOs, etc., will also tell you that they prefer you not get someone to represent you. That includes an attorney, a consultant or a practice broker. They want to use their experience, their sales tactics and their gaggle of attorneys to negotiate a great deal, FOR THEM! Yes, they’re not looking out for your best interest. They could care less if most of your retirement nest egg is in your practice. They care about building their market share so that they can make as much money for their investors as possible.
My advice if you have received a letter in the mail from a DSO or small group is to don’t go it alone! You’ve been a dentist for quite a few years for crying out loud and haven’t negotiated a multi-million-dollar deal, dealt with aggressive attorneys or a large corporation. Whether you use a broker, attorney or consultant, get someone on your team to represent you. Our group at Omni has negotiated many deals ranging from $500,000 to $7 million and up. This is what we do and have expertise. Feel free to call us anytime to discuss your transition, an offer you received, or anything else where we can provide knowledge. We’re always glad to help.
*Footnote: “Dental Service Organizations – The What and Why of DSOs – Part 1 of 6” Posted on May 13, 2019 by Sara K. Stock. www.stocklegal.com/blog/dental-service-organizations-the-what-and-why-of-dsos
Value vs. Price – Choose Wisely
Price is the consideration (cash, note, barter, etc.) paid to a seller to acquire an asset. Sellers receive price. Value is the benefit received by the buyer from the use and ownership of the acquired asset. Buyers receive value.
I illustrate this point by asking buyers to consider four similar practices:
Practice A grosses $400,000 and is priced at $275,000. All too frequently, buyers zero in on price as the primary practice purchase issue while ignoring the issue of value. However, buyers stand to benefit much more by receiving high value than by paying a low price, since the primary practice value is the net income the buyer takes home from the purchased practice. I ask buyers if this is a good deal. Most buyers admit they do not know.
Then, we look at Practice B, which grosses $400,000, of which the hygienist produces $100,000 and the seller produces $300,000. After paying all the overhead expenses and all of the purchase payments, the buyer will have a net income of $140,000. Without even knowing the price, most buyers believe that Practice B is a good opportunity. Knowing the price and gross alone does not make for a well-informed decision. Knowing the cash-flow derived value, or net income, received in return for work performed by the buyer, does allow for a well-informed decision.
Consider Practice C, which grosses $400,000 and is priced at $300,000. After paying all of the practice-overhead expenses and all of the purchase payments, the buyer will receive value, or net income, of $150,000. Now examine Practice D, which is very similar to Practice C. It also grosses $400,000 but is priced at $250,000. After paying all the practice-overhead expenses and purchase payments, the buyer will receive value, or net income, of only $125,000.
This comparison shows that it is possible to pay a higher price for a practice and still receive more value, or net income. Differences in fixed expenses, such as rental cost, can cause such differences. Which practice would you choose?
While we do not suggest overpaying for any practice, we do point out the old saying, “You get what you pay for.” Since “what you pay for” is net income in the case of dental practices, higher-priced practices generally will yield higher net incomes, even after making the payments. In the case of purchasing a practice, it often is safer to pay slightly too much than too little.
We strongly suggest that if you are considering buying a practice and are seeking professional advice on price, be sure that you also receive a practice cash-flow analysis to learn all of the important facts — especially the answers about practice value, the net income you will earn.
How to Buy a Practice
This is a very important decision and time for you and your family, so it’s critical to build your team of trusted advisors, such as veterinary specific broker (with a commercial real estate license), lender, CPA, attorney. These professionals have done many unique transitions, and often with each other, so they work well together and know how to provide you with a successful transition. You can use your relative or friend in these professions, but they can’t know the things veterinary specific advisors know. Experience and knowledge in a select niche are worth its weight in gold.
Can I afford a practice and associated real estate?
Veterinarian-specific lenders understand the veterinary industry and understand that you may have student loan debt in excess of $150,000. If the practice cash flows and provides you with the money to pay your practice and student debt, plus living expenses, you may be good to go. If you are thinking about a start-up, you will most likely need to work part-time somewhere else as you grow your new practice. Your trusted advisors can provide you with ideas to assist with your startup as well as potentially referring to a veterinary-specific marketing company. So, the answer is, typically, yes, you can afford a practice and associated real estate.
Sometimes, depending on the seller and your finances, you may rent a few years. The things to consider here are that if you rent, you may still have the seller “visiting” when they want and still act as though it’s their building and try to deter you from making your own decisions. It’s hard to make changes and you will someday understand this! If you rent, you will want your attorney to ensure there are solid details surrounding future purchases.
Some veterinarians prefer to own their own real estate and that can be beneficial for those with property ownership goals. Leasing in a commercial space or strip mall can be worth the potentially high rent if you have the opportunity to gain increased collections.
What do I need to know when looking at potential practices?
Where do you want to live and work? Once you determine the general location, look for a practice with a good and visible location and parking.
Work with your broker or buyer-representative to assist you to review the formal valuation or the following statistics.
Last 3 years financials to see collections and expenses. Some expenses may be backed out that would not pertain to the new veterinarian, such as “large” continuing education, cars, 401K, and family members on the payroll that may not have an active/necessary function in the practice.
I want multiple offices.
Having multiple offices can be profitable if done correctly. Ensure you have solid processes in place that can be replicated. Consider doing a demographic study to determine where you want your locations. If clients may be going to more than 1 location, ensure your veterinary software is capable of being accessed by all locations.
What do I need to know/do before starting my first day in my new practice?
Work with your CPA to set up your entity, accounting system, payroll, and tax payments. Plan to have a confident first conversation with your new team. They will be anxious about the transition so you will want to put your arms around them and help them understand you want to continue the quality care and any small changes will only be for the better for clients and team. Be prepared for difficult questions such as asking for a wage increase, change in schedule, or complaints about other team members. Guide the team on how you want them to discuss you to the clients and how your goal is to retain clients.
Become familiar with your veterinary software. Most veterinarians and teams do not maximize the reports and statistics available to you. Remember, your veterinary software and accounting system are the 2 biggest tools you have to run your practice.
Purchasing a practice, with your team of trusted advisors, should be a pleasant process that leads to a profitable and enjoyable career!