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
Seeing the Jungle through the Trees
All practices have something wrong with them. Some have more problems than others. The key to analyzing and acquiring a practice is having a vision and being able to know how to overcome and fix the problems.
Case Study #1 – A practice has historically produced $800,000 but is now down to $400,000 with no new patients coming in the door. Turn and run, or look into it further? If you looked further you would find that the doctor has had a health problem. He’s turning away 10 to 15 new patients per month while he’s getting treatment. He has been doing primarily hygiene appointments and x-rays for the past two years. By the way, he is booked out 3 months in hygiene and has over 1,200 active patients. The purchase price is $300,000. A buyer with vision purchases the practice and in his first year, he collected $900,000.
Case Study #2 – A practice in a nice neighborhood has been in existence for 45 years. The doctor is 67 years old and as it often is with older doctor practices, the collections have gone from $1.2 million down to $500,000. As it also is with these practices, he still has one full time and one part-time hygienist, two front desk, and two assistants. His overhead is 75% and he’s taking home $100,000 per year. The equipment is old and the practice hasn’t been updated since Jimmy Carter was President. It’s a dog of a practice. We sold the practice to a buyer for $350,000 who bought it primarily for the good location. The lease was up for renewal, so we assisted the buyer in getting money from the landlord to buy new flooring and repaint the interior. He re-upholstered the old Adec chairs. He offered one of the front desk employees a small severance package to leave the practice. He had the entire staff working the phones and sending letters to patients to get the hygiene columns filled. Within two years he was collecting over $1 million.
Case Study $3 – A practice is collecting $350,000 in a downtown metropolitan area. The doctor is earning around $40,000. There is a hygienist, assistant, and front desk staff. The practice formerly produced $800,000. The doctor is doing a lot of “watches” and not much treatment. The price is $275,000. Bank XXX tells the first buyer they will not loan on the practice because there is no cash flow. The first buyer walks away. Buyer two comes along and likes the practice. She’s also told by a different bank that the practice will not cash flow. We explain the opportunities in the practice to the buyer and how it doesn’t cash flow based on prior years’ collections. However, we are certain the practice will grow a minimum of 10% in the first year and more likely 20%. We suggest to the buyer that they let us help them find a lender who will lend on the practice based on future, projected collections. We speak with a couple of banks and find one who sees the vision of the practice with a young buyer who is ambitious and wants to grow her own practice. The bank agrees to loan on the practice. The doctor does $50,000 her first month in the practice and grew the practice 30% in the first year.
These are all true examples of transactions where doctors were able to see the forest through the trees. They had a vision and confidence in their ability to grow a practice. Not all practices are like these, but if you can see that the practice has a good foundation, or a good location, or good “bones”, you can pick up a practice where you’re not spending $1 million to get a practice that may not grow, but rather spending a lesser amount for a practice that will grow. We are happy to help identify these opportunities or point you to the right resources who can help you out in your quest to be a practice owner.
Current Trends For Veterinary Practice Buyers
Since Omni started in 2004, we have sold well over 300 practices. Prior to approximately seven years ago, the majority of the practices had been sold to individual veterinarians buying their own practices. The past seven years, most of our sales have been to corporations. They have been paying big bucks to acquire practices. They have been paying associates handsomely to work in those practices. But is the trend flipping again back to individual buyers?
Corporate buyers have always told us that they want to acquire large practices with two or more doctors working in the practice. They have been doing that successfully. So well, that it’s hard to find a multi-doctor practice that isn’t owned by a corporation. I know, there still are some, but a lot of them have been gobbled up by the big guys. And they’ve paid a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) ranging from a low of 6 to as high as 20 (or more) in certain cases. One of the requirements for the sellers is that they stay in the practice and commit to work for anywhere from 2 to 5 years in their practice after it’s sold depending on what’s been negotiated. Here’s where the corporates are now realizing what happens when the doctors are done with their commitment. The selling doctor may retire completely. The corporate then needs to get another associate. Associate veterinarians are not easy to find these days. Thus, the rush to open up a few more veterinary schools. So, that leaves them with a practice with one less doctor if they can’t find an associate.
Here’s another trend we are seeing. Some of the smart, entrepreneurial younger veterinarians, in their 40’s and 50’s for example, who sold their practices and have fulfilled their commitment to a corporation are now back on the market looking for a practice. They got tired of some of the corporates telling them which supplies and equipment to use and, in some cases, even which procedures to perform. (Yes, I know, they’re not supposed to dictate clinical work, but some do).
As I previously stated, corporations have been passing up on acquiring the majority of the solo doctor practices. We see lots of practices with only one veterinarian collecting a million dollars or more, booked out a month or two, working six days per week and they just can’t find, or afford an associate. Some of these practices, if they had two doctors, would quickly grow to collect $1.5 to $2.0 million. Those practices are prime acquisition targets for the solo doctor who sold to the corporate, has practice management skills, can retain the selling doctor, and quickly grow the practice. They can potentially then sell the practice in a year or two to a corporate as they now have a multi-doctor practice if the seller stays on. Or, they can hold onto the practice and reap the cash flow from the now two-doctor practice.
Note to the young buyers out there that have been out of veterinary school for 3 to 5 years, you can do this too! The seller has the experience of running a practice. Many that we speak with are willing and want to stay on to mentor the buyer and help run the practice, they’re just getting tired and want to cut back a few days. Most love being a veterinarian and want to continue the clinical aspect of veterinary work. They just want to pass on the management to the buyer and work less days. So, the opportunity is ripe for veterinarians who are tired of working for a corporation and want to own your own practice. You don’t even have to sell to a corporate. You can hold onto it and make it your own practice for years to come and be proud of what you’ve built, or the legacy you’ve carried on.
There are a lot of great solo-doctor practices out there waiting for a buyer to come along. The potential is both lucrative and gratifying to the buyer and the seller. You don’t need to work in a corporate environment the rest of your life. You can enjoy your freedom and work in your own practice. The choice is yours.
We’re always just a free phone call away and happy to help in any way we can.
Read MoreThe Importance of a Good Team When Purchasing a Dental Practice
Buying a practice can be a daunting task. That’s why it’s important to not only have the skills and education to analyze a practice, it’s also important to have a good team on your side. On your team, you will want a Certified Public Accountant that has a big emphasis or specialization in your field. They need to know the industry, numbers, etc., they should also be accredited in practice valuations. The second person on your team will be a dental specific attorney. There are too many idiosyncrasies to not have someone who doesn’t specialize in your field. Non-compete provisions and other conditions are specific to dentistry. A banker that specifically works on practice loans is another important member. They will know the reasons why a practice may be what it is and explain to the underwriters what’s going on in the practice. You will also want a broker who has done many transitions. Having an experienced broker will help make the transition as smooth as possible. Another person that may be necessary is a dental consultant. The consultant can help analyze the practice and make sure it’s what you are looking for. Omni Practice Group has a list of many of these team members. If you would like our preferred list of vendors, please e-mail us at info@omni-pg.com.
Read More