Seller Articles

​All practices are not created equal.  We list several practices each year that for one reason or another, do not sell.  It’s a frustrating experience not only for the seller, but for us as a broker.  Here are some reasons that your practice may be difficult, if not impossible, to sell, and how to avoid not selling your practice.

1. Your overhead is too high.   Practice buyers and their supporting cast of CPAs, bankers, etc. want the practice to not only support the debt it’s going to incur, but also pay the buyer a minimum salary.  The ratio the bankers look at is called the debt coverage ratio.  Most of the time, they want to see the debt coverage ratio of 1.2 times to 1.  That means for every $1.00 in debt payment, they want to see $1.20 of net income to cover the amount borrowed.

   How can you improve this, so you have a good debt coverage ratio?  Make sure your overhead is under control.  The national average overhead is 65%.  You should be at, or below, the overhead level of 65%.  The preference is to be below the 65% overhead mark.  Go through your expenses with your accountant or consultant and figure out how to improve your overhead and cash flow.

2. Your collections are going down.  Bankers don’t like to see annual collections going down every year.  That tells them patients are leaving the practice and seeking treatment elsewhere.  It also may trigger a question on the reputation of the practice.  Another question may be, “Is all the dentistry done, and there’s nothing left to do?”

   You can fix this by keeping your numbers up year after year.  At least be relatively flat, but it’s best to grow your practice at least slightly every year.

3. Staff overhead/problems.  One thing we see often in older practices is that the staff overhead is above the target of 20% to 25% of total gross collections, including taxes and benefits.  If you’re way above that, you need to look at both sides of the equation.  If an assistant is making $45/hour, or front desk making $60/hr. and your staff overhead is at 40% of total collections, you have a problem that a buyer does not want to inherit.

   It’s a tough position to be in, but if you’re a couple of years away from selling your practice and your staff overhead is at 40%, you should either increase your collections considerably by cranking up production, or ask the staff to take a pay cut.  If they don’t want to take a pay cut, you may consider letting a staff member go – the buyer will be doing it anyway so you might as well get it over with.

4. Lease issues.  We have seen practices not sell because there are problems with the lease.  Reasons include: the lease being too high, the landlord wants to tear the building down and not extend the lease, the landlord wants the seller to stay responsible for the lease for the entire ownership term of the buyer, or the landlord being unreasonable with proposed new terms.

   Negotiate with your landlord when your lease is up for renewal.  Add an “Assignment Clause” to your lease.  This states that you can assign your lease to a buyer when you sell your practice.  At that time, you will be removed from any responsibility from the lease.  Also, work with a commercial broker to make sure you are getting current market rates on the lease and not way above market.

5. Low Production.  Low producing practices, below $400,000 per year, are hard to sell.  They are viewed by buyers as a startup practice, especially if there is a downward spiral in the practice.  Buyers and bankers want a practice with solid cash flow that they can instantly make a living and not have to work another job as an associate.

   Sell your practice when the collections are high.  This is the smartest thing you can do in a practice transition.  I have seen doctors sell now for $300,000 when they could have sold 3 years ago for $600,000.  They lost $300,000 in the purchase price by waiting too long.  Remember, just because you sell your practice does not mean you need to stop working.  You can always work as an associate.

These are a few things that keep a practice from selling.  Be sure and prepare your practice and yourself to sell about 5 years before selling.  Call us and we’ll meet with you to give you guidance on what you need to do to your practice to sell 5 years from now.  We are happy to help at no cost to you.
 
info@omni-pg.com
877-866-6053

By Rod Johnston, MBA, CMA & Jim Vander Mey, CPA, ABI
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Everything has a cost.  If I hit the snooze button on the alarm one time, my cost could be that I potentially get to work late.  If I get up early and don’t hit the snooze button, the cost is not being able to sleep an additional 10 or 15 minutes. I’ve been around the block long enough to know timing is everything.  If I would have bought $10,000 worth of Microsoft stock in 1985, I would have stock worth $3,000,000 today.  On the flip side, how many near-death experiences can I account for where if I would have stepped off the curb a split second earlier, I would have ended up in the hospital?

And what is the cost of holding onto your practice for a few more years and not selling?  You get the opportunity to work more and make more money, right?

Right now, practice values are at an all-time high.  Corporate buyers are paying up to 10 times your earnings before interest, taxes, and depreciation (EBITDA).  The historical figure is 1.5 to 2 times EBITDA.  They have been lowering their threshold on annual revenue requirements and have been looking at practices with values as low as $650,000.  But, we have recently seen a small shift in their tone.  The corporate buyers have been scrutinizing practices a bit more.  Their offers on practices have been a bit less than they have in the past.  Few groups are looking at smaller practices.  It seems their buying frenzy has slowed just a little bit. What does this matter to you if you’re holding onto your practice?  Well, if you currently have an EBITDA of $300,000, your offer today may be 8x EBITDA, or $2.4 million.  If the trend continues and corporates lower their offers, your offer may go down to 5X EBITDA, or $1.5 million.  You just cost yourself $900,000 by waiting a few more years.  Sure, you made $400,000 in income over those few years, but you could have still made an income had you sold the practice and continued to work for the corporate acquirer.Granted, we don’t have a crystal ball.  We don’t know how quickly the corporates are going to reduce their offers and by how much.  However, we do have economic history, a bit of analysis, and common sense.  Corporates want the bigger practices making over $1 million.  Approximately 33% of practices collect over $1 million per year.  The corporates and small groups already own a large portion of the practices that are high-producing practices.  They make the highest margins on these types of practices.  As they use up capital and run out of large practices to buy, their focus will then be on making their practices as profitable as possible, thus, lowering their offers on practices as this happens.

So, just like choosing to hit your snooze button versus continuing to sleep in, there is a cost in holding onto your practice.  The smart thing to do would be to sit down with your trusted advisor.  Whether it be your accountant, financial planner, or your friendly neighborhood broker, someone can help you analyze how much it may cost you to hold onto your practice.  We can always be reached, at no charge at info@omnipg-vet.com.

By Rod Johnston, MBA, CMA & Jim Vander Mey, CPA, ABI

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.

You don’t choose your family.  You don’t get to choose when you’re born.  And you don’t get to choose your name given to you by your parents.  But you do get to choose who your practice broker is going to be.  So, how do you go about making sure you pick a broker who is going to represent your best interest and do a good job for you?  After all, you have spent your blood, sweat, and tears building your practice.  You want someone who is going to take good care of your transition.   Here are some things to consider when making your selection:

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. ​

Happy New Year!  We hope that 2018 was full of health and happiness.  We helped many veterinarians 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.  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!