Purchasing or Selling a Practice
Feasibility Study
Does the owner of the practice you’re looking to purchase already have a price in mind? Has the practice that you’re looking to purchase already had a formal valuation done? Often times we are contacted by veterinarians looking to buy a practice thinking they need us to revalue a practice, when instead, we can do a Feasibility Study on the price or valuation report.
The Feasibility Study starts with our analysis of the past three years tax returns and valuation report, if a valuation has been done. The purpose is of a Feasibility Study is to determine if the price/value of the practice subject to the transition has the cash flow to support the debt burden needed to purchase the practice. It is designed to give the potential new owner an idea of what they could expect to make as a return on their investment into the practice based on the historical financial performance of the practice subject to the transaction. Whether you’re buying a practice or buying into a practice this is likely to be one of the biggest investments of your life. Our team of professionals dedicated the veterinary profession is here to help!
Practice Valuation
Transition Consulting
You have found a practice, the price is right and you’re ready to take the leap, NOW WHAT?? At Lacher McDonald our team of professionals is there to assist with everything from choosing an attorney, tax advice and entity selection, financing and loan options, contract negotiations, and any other issues that come up as part of the transition process. We understand that this is likely the first (and possibly only) time you will be part of this process and our team is there to hold your hand every step of the way.
Financing
Now that you have decided to either start a new Practice or buy an existing Practice, “How do you pay for it?” Being adequately financed greatly increases the likelihood of a successful practice. If you are panicked about cash flow from the beginning, you will spend more time worrying about the financing then growing your practice.
We prepare a forecast of operations for your first two years owning the Practice. The purpose of the forecast is to develop realistic expectations regarding the revenue and related costs of owning your Practice. This forecast becomes an important tool to help you evaluate the level of revenue needed to support the costs and desired profit margin. The forecast then becomes a part of the financing package that is presented to potential lenders.
For a new start up Practice, adequate financing is needed for the building (if real estate is involved), equipment, inventory and working capital. Working capital is the area that is most often overlooked and yet is vital to the successful start of your new Practice. We help our clients determine how much working capital is needed based on the forecast of the new Practice for the first two years of business.
For the purchase of an existing Practice, adequate financing is needed for the assets of the Practice and working capital. An existing Practice has history to provide a starting point for a forecast. The forecast is important to the lender and perhaps more important to the new owner to demonstrate that the Practice is a viable business.
We work with a number of veterinary and traditional lenders on financing for new and existing veterinary Practices. We have helped many of our clients obtain the necessary financing to allow them to fulfill their dream of Practice ownership.
New Owner Concerns
Veterinary school provided you the tools to be a Doctor of Veterinary Medicine, but are you prepared to own your own practice? Running a practice will test your business orientation, staffing skills, ability to make key decisions, direction and leadership skills, resource managment skills (e.g. cash, inventory, information system), etc. at the same time you are being the Doctor.
As the owner/DVM you are the Chief Executive Officer (CEO) of the practice, just like CEO’s of Fortune 500 companies. One primary difference between you and other CEO’s is that your business revolves around your time spent being a Doctor. The more time the Doctor spends doing Doctor things (i.e. diagnosing, prescribing, and treating) the higher the revenue for the practice. So, you have the challenge of being the CEO while continuing to spend as much time as possible doing what you were educated and trained to do – – take care of the animals.
We have worked with Veterinarians from starting/acquiring a practice, through growing and tweaking the financial/operational performance (journey strategy), to an exit strategy. It may be your first time starting or running a business, but we have helped hundreds of clients through all aspects of this journey. Providing our clients with guidance in business, financial and operational issues is our primary role. We focus on providing you the tools and support to help you be an effective CEO while still being the Doctor.
Practice Exit Strategies
In planning your life goals, what are your plans for your work strategy? Even young graduates, in thinking about their careers, will benefit from thinking about where they want to be in 30 or 40 years. Some of you love what you are doing and are hoping to “die with your stethoscope on”. Others want to retire or at least change direction at 50 or 55 or some other age. There is no right or wrong answer.
However, no matter what direction you want your life to take, it is important to have some idea of what is involved in helping your choice become a reality.
If you are an associate and all you ever want to be is an associate, the execution of your choices is a bit easier. It is important that you have a personal financial plan, that you monitor it periodically, and that if you are off track from achieving your goals, you seek help from someone who can put you back on target. It is important that you keep your skills up to date and that you keep yourself valuable to your employer so that you can maintain your life style in the manner to which you are comfortable.
If you are a practice owner, it is never too early to be concerned with your exit strategy. If you are part of a multiple doctor owner practice, having well drafted buy-sell agreements is very important. These agreements need to be reviewed periodically by your legal, accounting and consulting team, as well obviously, by yourself to be sure they fit your needs. The areas that especially require review are the formula for determining the sales price for the practice, any discussion of ownership of the practice that may change as more doctors become owners, definitions requiring the exercise of the buyout terms as well as other areas that may change simply due to the passage of time and law changes. If there is an age difference between the owners, the formula for determining the sales price is well written and supported by facts, then your exit strategy may be well under control.
If you are a multiple doctor owner practice and all of the doctors have the same time frame for retirement and the practice cannot support the price you each want for your shares, you need to spend more time and effort on getting things in line.
At Lacher McDonald & Co., CPA’s, we have helped many veterinarians transition their practices to the next generation of practice owners. We have helped clients draft, evaluate, and revise the buy-sell agreements. In addition, we not only provide sellers and purchasers with a realistic value of the practice being considered, but continue to help with the actual transfer of ownership. Having someone there, who has been down the road before, can help make a major life change much less stressful.
Advistory Team
As the owner of your Practice, it is important to surround yourself with experts that provide you with guidance needed to best operate your business. These expert advisors become your “Board of Directors.” As your Practice grows, it becomes increasingly important to utilize your advisors to both minimize potential problems and capitalize on opportunities.
Your advisory team will typically include:
Accountant – Your accountant should be familiar with Veterinary Practices. They should be providing you with Veterinary specific financial statements. They can be an excellent source of information regarding tax planning, buy vs. lease decisions, determining the entity that is most appropriate for you and your Practice and providing timely financial statements that will help you manage your Practice.
Practice Manager or Hospital Administrator – As your Practice grows, hiring a manager to coordinate the day to day operations becomes a key to you maintaining your sanity while focusing on treating patients.
Attorney – Your attorney can be a tremendous resource for dealing with incorporation documentation, employee manuals, and employee dispute issues. The cost of paying for an attorney to address issues up front is often much less expensive than facing a lawsuit that may have been avoided.
Lender – Your banker can be more than the person you mail the mortgage payment to each month. A good relationship with your banker will help when it is time to upgrade to that new digital radiograph machine or when you are going to build a new building for the Practice. Some Veterinary specific lenders will provide you with information and feedback to help you identify opportunities in your Practice.
Insurance agent – This person can do much more than provide you the lowest possible rates. They can help you determine the appropriate insurance that works best with your needs and the needs of your Practice. At what point is workers compensation insurance needed and who should be covered?
Practice consultant – Ideally this person is involved with you on an ongoing basis. Depending on the needs of the Practice, this person or firm should be proficient on issues specific to the Veterinary profession including: analyzing the financial statements and Key Performance Indicators, improving client compliance, marketing, staffing challenges, and keeping you aware of trends and opportunities within the profession and your Practice that will help you be more comfortable with your Practice while making it more profitable.