Buying a Practice

Over the past several months, the economy has been going quite well.  The Dow Jones average is up over 21,000 and setting all-time highs.  Employment levels are up while unemployment levels are down.  Current unemployment levels in King, Snohomish and Pierce counties are at 3.3%.  Amazing numbers for a strong economy.
The strong numbers have played a part in the increase in practice sales.  Practice owners who are over 55, are seeing the strong numbers and returns in their portfolios and deciding now is the time to retire.  Buyers are also watching the economy and realizing it’s a good time to buy a practice.  Interest rates are still good at between 5.25% and 5.5%.  Consumer’s discretionary income is up freeing funds for consumers to do elective and cosmetic dentistry.   (I know you shouldn’t base your dentistry on discretionary income, but many do).
The result of all of this is that practice listings and sales are up.  We typically carry an inventory of 10 to 15 practices and we’re now up to approximately 25 practices.  We have spoken to other brokers and most are experiencing a similar increase in business.  The interesting thing is that valuations are still staying true to normal formulas and historical numbers.
What this means to you is you can either be a participant in this booming market, or you can be a bystander and watch opportunity pass you by.   If you would like to get any information on any of our practices, let us know.  Consultations and phone calls are always free!

Understanding how many patients, or what type of patients, are in a practice is an important part of evaluating a potential practice to purchase.  What is one man’s trash is another man’s treasure.
When you are evaluating a practice, you may be told that there are a certain number of “active” patients in the practice.  That term “active” is one of my least favorite terms when trying to evaluate or sell a practice.   One person may define “active” as having been in the office once within the past 24 months.  Another person may define it as the patient having been in the practice once in the last 12 months.  And yet a third may say the patient is “active” because they came into the office at one point or another while the doctor was practicing.  It doesn’t even matter to them how long ago it was, or if the patient is even alive.  If I were in your shoes, I would throw out what anyone says and count the charts myself.  If the practice is digital, I would look at the number of hygiene appointments seen in the past 12 months and divide by two to get the number of active patients seen that year.  You can gross it up by 50% to account for walk-ins and other types of procedures, but that should give you a ballpark of the number of active patients.  Another quick rule of thumb is to divide the annual collections by $1,000.   A practice producing $500,000 per year, should have in the neighborhood of 500 patients ($500,000 divided by $1,000 per patient)Patient demographics is another thing to be aware of.  Buyers often blow off a practice that has an aged patient demographic.  Little do they know that a lot of elderly patients pay cash for their treatment and they still want their treatment.  They also have more required work than patients that are in their 20’s, 30’s and 40’s.   These patients are very profitable patients.

Hopefully looking at these two areas of patient demographics will help you make the right decision when evaluating a practice.

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By Jim Vander Mey

Practice Transition Advisor

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.

1. 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.
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.  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.
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.   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.
4. 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.
5. 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 overstaffing issue?  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 veterinary practice.  Is it an older veterinarian selling that outsources surgery and does very little dentals? 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.
7. 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.

Owning and growing a dental practice can be one of the most challenging things in dentistry.  Advertising for new patients can be hit and miss and expensive.  That’s why one of our favorite strategies is to purchase another practice and merge it into your existing practice.

The reason you would consider doing a merger is because you get all of the revenue and current patients from the new practice, but you don’t get all of the expenses.   You don’t bring over the fixed expenses like rent, telephone, electricity, etc.,  You already have those in your practice and don’t need to incur them again when you bring over the practice you just acquired.

As an example, say you own a practice that collects $600,000 per year. You have overhead of $390,000 with 30% of the overhead in fixed expenses – rent, utilities, insurance, etc., Another practice comes on the market that collecting $500,000 with overhead of $325,000 with fixed expenses again at 30% or $150,000. You purchase the practice for $350,000 giving you a debt service payment of $3,500 per month.  You work closely with the broker to ensure 100% of the patients transfer to your practice. Your practice now goes from $600,000 up to $1.1 million in revenue.  You incur the variable expenses of the second practice, but you do not incur the 30% fixed expenses of $150,000 because you already have rent, utilities, insurance etc., at your current office. In essence, you just gave yourself a $150,000 raise, less $42,000 in debt service and dropped your overhead to the neighborhood of 55%. It would take you much longer to do this if you just did marketing and advertising. By consolidating practices, you get instant growth and income. If you have a practice for sale near you, you should consider merging it into your practice in order to achieve quick growth.

​Owning and growing a veterinary practice can be one of the most challenging things in the veterinary field.  Advertising for new clients can be hit and miss and expensive. That’s why one of our favorite strategies is to purchase another practice and merge it into your existing practice.

The reason you would consider doing a merger is that you get all of the revenue and current clients from the new practice, but you don’t get all of the expenses.  You don’t bring over the fixed expenses like rent, telephone, electricity, etc.  You already have those in your practice and don’t need to incur them again when you bring over the practice you just acquired.

As an example, say you own a practice that collects $600,000 per year.  You have overhead of $390,000 with 30% of the overhead in fixed expenses – rent, utilities, insurance, etc.,  Another practice comes on the market that collecting $500,000 with overhead of $325,000 with fixed expenses again at 30% or $150,000.  You purchase the practice for $350,000 giving you a debt service payment of $3,500 per month.  You work closely with the broker to ensure 100% of the clients transfer to your practice.  Your practice now goes from $600,000 up to $1.1 million in revenue.  You incur the variable expenses of the second practice, but you do not incur the 30% fixed expenses of $150,000 because you already have rent, utilities, insurance etc., at your current office.  In essence, you just gave yourself a $150,000 raise, less $42,000 in debt service, and dropped your overhead to the neighborhood of 55%. It would take you much longer to do this if you just did marketing and advertising. By consolidating practices, you get instant growth and income. If you have a practice for sale near you, you should consider merging it into your practice in order to achieve quick growth.