Seller Articles

A high percentage of veterinary practice owners own the building their practice is located.  The longer the doctor has owned the practice, the more equity they may have in the building.  They also are paying themselves a high rent for tax planning purposes.  One of the questions we get asked when a veterinarian is considering selling their practice is, “Should I also sell my building?”

One thing to consider when selling your practice regarding the real estate is, do you want to be a landlord?  We have years of experience being a landlord and there are pros and cons.   The pros are that you retain the building and get a monthly rental payment.  Hopefully, that rental payment covers the mortgage, taxes, maintenance, insurance, and any replacement of major capital items.  That includes when the HVAC system or roof fails and they need replacing.  The other pro may be an appreciation of the real estate.  Currently, we are in a high real estate market.  Real estate markets are cyclical.  They go up and they go down.  There is timing involved in a sale.   You time it right and you can reap your rewards of all the years you have owned the building.  Time it wrong, and you feel a little pain from not selling at the height of the market.

The cons are like the pros.  Being a landlord requires you to be on call 24 hours per day and 7 days per week.  If a heavy storm occurs and the snow collapses the roof, the wind blows a tree onto the building, or the parking lot floods into the building, guess who gets the phone call?  That’s correct, you!  We have been on the receiving end on calls that happen at 2:00 in the morning when the building started to flood.

Another con is when the lease is up and the tenant decides they want to own their own building.  They didn’t tell you that they purchased the building next door and you now no longer have a tenant!  The odds of getting another veterinarian to start up a practice in your building is very low.  It will also be difficult to get another tenant quickly.  Potential tenants are scared away because the building was formerly occupied by a veterinarian.  They think there will be odors, or the general public has known that location as a veterinary practice location and it may be hard to change the general public’s view of that location.  There are three veterinary buildings within five miles of our office that have been vacant for several years due to this exact thing happening.

The third con is timing the market.   We’re currently in an up-cycle market.  With interest rates and building inventory low and demand high, building values and prices are on the high end.  Holding onto the building so you can get some cash flow and then sell the building later could cause you to lose hundreds of thousands of dollars.  Also, a building has more value to an owner/user than it does to an investor.  That means when you sell your practice, a buyer may be willing to pay 100% of market value, or slightly higher than market value in order to acquire the building.  Whereas, an investor will try to negotiate and get the best possible price they can get.

In summary, owning your own building while you are in practice is the smart thing to do.  You build equity, pay yourself rent, and can do anything you want to the building.  But after you sell your practice, it may be a different story.  Consult with your transition broker, who should also have commercial real estate experience, and get sound advice to help you make the right decision.

1.  How many dental practices has your broker sold?  If your broker just started selling practices and has sold between zero practices and ten practices, you may consider finding someone with more experience.  Every transaction is different in the practice transition world.  The seller, buyer, staff, patients, clinic, location, lease, building, attorneys, bankers, and others are all different for each practice.  You must be able to manage different personalities, different types of leases, different building sales, loans, etc.  It’s a complex mix to try to do with little experience.
2. Who does your broker represent in the sale?  Dual representation, where the broker represents BOTH the seller AND the buyer is illegal in several states and I question the ethics of it in all situations.  You want a broker who will represent your best interest as a seller.  Not the best interest of both the buyer and the seller.   If a negotiating point comes up, how is the broker going to ethically work through the conflict by representing both sides?
3. Is the broker licensed to sell a practice and real estate if the real estate is included in the sale?  Some states require a broker to have a real estate license to sell a practice or any type of business.  All states require a broker to have a real estate license to sell real estate.   Check with the state department of licensing to see if your state requires a license and if the broker you are interviewing is licensed.
4. Does the broker have any certifications or designations to perform a practice valuation?  Designations may include a certified valuation analyst, accredited business appraiser, etc. Having a designation means they have spent the time to learn the ins and outs of a valuation and not just a simple rule of thumb.  Certifications and accreditations require weeks and months of training, rigorous testing as well as review by a peer group of valuations.
5. How does the broker perform their valuation?  Do they do a site visit?  Do they just use a rule of thumb valuation, which can be misleading?  Do they use a cap rate, book value or production acquisition value?  There are various types of methods and doing the valuation.  Understanding how they get their numbers is important in the process.
6. Has the broker sold practices to corporates?  If so, have they been compensated by the corporate group in addition to being paid by the seller?  This may be a tough question for some.  Receiving compensation from both the seller and a corporate buyer can be illegal in some states.  At a minimum, it should be disclosed to the seller that they are being compensated by the corporate buyer.
7. Does the broker have a list of buyers ready to go?  Having an active list of buyers will speed up the process of selling the practice.
8. Where does the broker advertise the practice for sale?  If they say “our website and the state association website” then you may consider moving on.  A good broker will go above and beyond and advertise across the nation on many different websites and publications.
9. Is your broker local, or at least familiar with your market?  National brokers will sometimes sit from the comfort of their recliner while having you show your own practice, meet with buyers, send you documents and do most of the work.  Local brokers will meet you at your practice, show the practice themselves and do what they are good at – selling practices.
10. Are you comfortable with the broker’s personality and style?  You’re going to be working closely with your broker through the transition process.  The amount of time maybe up to 100 or more hours.  Be sure you are comfortable with that persons’ style, demeanor and philosophy.  Ask them questions about how they show the practice, what they look for in a buyer and how they determine a good match for your practice.

Choosing the right broker is an important decision.  You spent a good amount of your time, money and emotional value building your practice.  Your staff and patients have become like an extended part of your family.  Wouldn’t you want to choose the best broker to look at for your best interest?  Asking these questions of your broker will help ensure that you have the best broker in your area. ​

1.  Potential change in capital gains tax.  You may have read that Washington state is proposing adding a capital gains tax of 9%.  California already has a capital gains tax of 13%.  Other states are also considering either implement or increasing their capital gains tax rate.  I don’t know if this is going to happen or not, I don’t have a crystal ball, but I suggest you talk to your advisers and get their thoughts on capital gains.
2. Interest rates are starting to go up.  The Federal Reserve just had an increase in interest rates a couple of months ago.  The interest rates on practice loans typically lag home loan rates by six months or so.  We have had a nice run of low-interest rates that have been below 5%.  I expect they’ll be going up over 5% and probably end up between 5.25% and 5.75% on the high end.
3. Corporate practices are becoming more active.  There are more and more corporate and smaller groups buying practices at above-market multiples.  We had several doctors who were not considering selling, but when we told them they get a million dollars or more from a corporate buyer than a single individual buyer, they decided the additional funds were worth it.   They sold their practice and made a lot of money all while continuing to work in the practice.  Last we checked they were ecstatic with their decision and enjoying being a veterinarian again.
4. Management headaches – Let’s face it, managing a business isn’t what it used to be.  New taxes such as the new employee leave tax in Washington are being thrust upon us.  Finding good help has become tougher and tougher.  A good economy hasn’t meant higher-paying jobs for entry-level staff at Fortune 100 companies.  Figuring out how to compete against corporates and other veterinarians down the street has become a daunting task.
5. Uncertainty.  Uncertainty is a scary thing.  The economy has been going well, but how long will it sustain itself.   The stock market is up and down like a roller coaster lately.  In addition, we don’t know what the insurance companies will do with reimbursements.

These are a few things to consider if you’re on the fence about selling your practice.  We are always happy to sit down and buy you a cup of coffee/tea and discuss your individual situation. We’ll even give you an approximate value of your practice from both an individual buyer and a corporate buyer standpoint.  Talking through different options always helps in making your decision.  Best wishes for an extremely happy and healthy New Year!

​Happy New Year!  We hope that 2018 was full of health and happiness.  We helped over 60 doctors buy, sell or start a new practice.  Those that sold are now free from their duties of managing a practice.  They no longer have to do their books, manage staff, clean toilets, or do whatever most business owners have to do.  I speak from experience as I am a business owner and do all those things myself as well.  You may not have sold your practice in 2019, but I thought I would give you some things to think about that may have you considering selling in the coming year.
 

1.  The potential change in capital gains tax.  You may have read that Washington state is proposing adding a capital gains tax of 9%.  California already has a capital gains tax of 13%.  Other states are also considering either implement or increasing their capital gains tax rate.  I don’t know if this is going to happen or not, I don’t have a crystal ball, but I suggest you talk to your advisers and get their thoughts on capital gains.
2. Interest rates are starting to go up.  The Federal Reserve just had an increase in interest rates.  The interest rates on practice loans typically lag home loan rates by six months or so.  We have had a nice run of low interest rates that have been below 5%.  I expect they’ll be going up over 5% and probably end up between 5.25% and 5.75% on the high end.
3. Corporate practices are becoming more active.  We’ve been getting calls from some of the corporate practices such as Heartland and a couple others.  They have entered the market and buying practices.  They bought 10 in Washington and 7 in Oregon last year.  They will be more active in the coming years.  We have not sold a practice to them yet, but more buyers will help drive the practice prices up.
4. Change in family leave law.  This is a minor effect, but it’s an added tax to small business owners.  They can choose to pass it on to the employees.  I admit I haven’t studied this one to any extent yet, but it’s something to keep in mind.
5. Uncertainty.  Uncertainty is a scary thing.  The economy has been going well, but how long will it sustain itself?   The stock market is up and down like a roller coaster lately.  In addition, we don’t know what the insurance companies will do with reimbursements.

These are a few things to consider if you’re on the fence about selling your practice.  We are always happy to sit down and buy you a cup of coffee or tea and discuss your individual situation.  Talking through different options always helps in making your decision.  Best wishes for an extremely happy and healthy New Year!
 
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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:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.