Buyer Articles

 I meet over 100 veterinarians each year who are looking to buy an existing veterinary practice.  Of those, I would estimate that 40% have not done any research on what is involved in buying a practice. Of the other 60%, very few of them know the beginning to end process of buying a practice.  They don’t teach you how to buy a practice in veterinary school, so we don’t expect you to know everything.  While I can’t cover all the steps in this article, I can give you some guidance on where to start and what steps to take before buying a veterinary practice.

The very first recommendation I have is that you should be at least 2 years out of school.  I have seen doctors buy a practice right out of school, but the majority of them struggled for two to three years before they finally figured things out.  So, here are the steps you should take to become educated in buying a practice:

1. Contact a bank that finances veterinary practice acquisitions and make sure you can qualify for a good loan.  The days of just having a DVM behind your name and being qualified are gone.  Banks now require decent credit scores, cash in the bank, and in some cases a current associateship.

2. 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.  A “rule of thumb” is that a practice is typically worth between 85% and 95% of its’ last 12 months production.  Remember, that’s a rule of thumb.  I’ve seen practices go for as high as 110% of production and as low as 50% of production.  A formal valuation is the best way to get the true value of a practice as not all practices are the same.

3. Think about where you want to practice.  You’re probably going to be there a while, so you might as well like the area.   Also, research demographics.  There are excellent demographic sites that sell great demographic information for about $500.  It will tell you where the best locations to practice are.

4. Put together a good team.  Get referrals for a good veterinary attorney, a good broker or consultant and a good accountant.  They’ll help you analyze the practice, do the legal work and help you find a practice.

5. Study up on practice management and veterinary financial ratios.  You should know that lab fees should not be any higher than 10% of the practice production.  Or, that staff expense should be between 20% to 25% of production.  Be an informed buyer.

6. Be prepared for your due diligence.  You need to know what to look for when you do get to the point of buying a practice.  Scrub the financials, practice management reports and audit charts.  Work with your consultant to thoroughly go through the practice.  Take your time and do not rush into it.

7. Finally, spend some time with a 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?  Once you’re comfortable with the numbers, then go take a look at the practice.

By being an informed veterinary practice buyer, you will avoid a lot of headaches and potential problems down the road.  There are practices that are excellent and practices that you may want to pass on.  Being educated and knowing the difference is critical in your veterinary practice acquisition success.

-Rod Johnston, MBA. CMA

 

• Minimum of 3 years Tax Returns and Financial Statements
• Minimum of most recent 3 years annual productions, collections, and adjustments
• Most recent production by procedure code report
• Fee Schedule
• Patient demographic information
• Accounts receivable and insurance receivable aging
• Employee census information
• Copy of the lease
• List of included equipment and furniture
• Outstanding treatment plan report

Now that you have these reports, it’s essential you understand what they mean.  If you don’t know how to read financial statements or tax returns, be sure you have a knowledgeable OMNI accountant on your team.  If you need help with the practice management reports, hire a consultant or third-party practice broker, like myself and my OMNI colleagues.  We can help you evaluate the practice.

In the long run, hiring OMNI experts to evaluate the reports will more than pay off.

A couple of years ago, in 2010, banks that financed buyers in a practice transition, tightened their credit requirements.  They began requiring dentists to be out of school for at least 2 years, they would only finance up to 80% of the last 12 months’ production or they would require the seller to take a note back for part of the loan.  In addition, they would absolutely not finance a new dental school graduate and many wouldn’t even do a dental practice startup.  Rates were up around 7% or higher.

It was a rough year for sellers looking to do a practice transition or sale and also tough on practice sales for practice transition brokers.  Practice sales were completely in the tank.

Fast forward to 2012, bank rates are as low as 5.25% and most around 5.75% to 6%.  They will finance up to 85% of the dental practices’ last 12 months of production and typically no longer require the seller to take a note back.  In addition, they’ll even finance dental real estate purchases if the real estate is available at a great rate.  If you’re in the market, or on finance to buy a practice, or think you can’t sell your practice because banks are not financing practice sales, think again.

Banks are back on the field of play and ready to loan you money so get in the game!

With so few practices on the market, I often get the question “Should I just start a new dental practice?”  Since I am a commercial real estate broker specializing in helping dentists find new locations as well as being a practice broker, I can give you an educated answer.  That answer is “it depends”.

Here are 10 questions to ask yourself to see if you are a candidate to do a scratch start practice:

1. Do the demographics support another dentist in the area?  (1,500 people per 1 dentist)
2. Do you have the patience to do a startup?  (ADA says it takes 24 to 36 months to break even)
3. Do you have another income, or 12 months of cash reserves, to support yourself while you get your new practice going?
4. Are you good at project management – managing contractors, designers, vendors, etc., to get things going?
5. Have you hired staff before?
6. Are you good at self-promoting and marketing?  You may need to go door to door to get recognition and to get patients coming in.
7. Have you set up insurances, bank accounts, patient financing, etc., before?
8. Do you have good credit and some cash reserves in the bank to obtain a loan?
9. Do you have enough experience (minimum of 2 years) to jump in and get things going?
10. Do you have the fortitude to succeed?  There will be down times when you want to throw in the towel.  You need to fight through those down times to achieve success.

I have helped over a dozen practices get started in their new practices in the past few years.  From finding locations to consulting on the entire setup.  Each practice has achieved break-even in less than 18 months.  If you are on the fence on whether to do a startup, give me a call, and I can help with analyzing your situation.

The very first recommendation I have is that you should be at least 2 years out of school.  I have seen dentists buy a practice right out of school, but I’ve seen the majority of them struggle for two years until they finally figured things out.  Now that I’ve got that out of the way, here are your steps:

• Contact a bank that finances dental practice acquisitions and make sure you can qualify for a good loan.  The days of just having a D.D.S., or D.M.D. and being qualified are gone.  Banks now require decent credit scores, cash in the bank, and in some cases a current associateship.  Try to avoid SBA loans if you can as they can be expensive with early payment penalties.
• The next step is to understand a little bit about practice valuations.  You don’t want to go into a sale not knowing if the practice is worth the price listed or not.  A “rule of thumb” is that a practice is typically 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 110% of production and as low as 50% of production.  For a book on Practice Valuations, contact me and I’ll send it to you.
• Think about where you want to practice.  You’re probably going to be there a while, so you might as well like the area.   Also, research demographics.  There are excellent demographic sites that sell great dental demographic information for about $500.  It will tell you where the best locations to practice are.
• Put together a good team.  Get referrals for a good dental attorney, a good broker, and a good accountant.  They’ll help you analyze the practice, do the legal work and help you find a practice.
• Study up on practice management and dental financial ratios.  You should know that lab fees should not be any higher than 10% of the practice production.  Or, that staff expense should be between 20% to 25% of production.  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 practice.  Is it an older dentist selling that hasn’t done much treatment in the last 5 years?  (buyer beware) or Is it a conveyor belt dentist that has done very spec of dentistry, and then some, on all the patients, so there’s none left for you.  Know how to spot these things.
• Finally, spend some time with a 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?  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 gold mines and practices that you should not touch.  Being educated and knowing the difference is critical in your practice acquisition success.