Posted Oct. 1, 2014
First-time buyers can easily become overwhelmed by all there is to learn about ownership and its requisite responsibilities. However, experts in veterinary practice transactions agree on a few basics.
For one, potential buyers need to have their financial house in order. David McCormick, past president of VetPartners, says buyers need to have three things. The first is two to three years’ practice experience.
“The lender wants to see you’re able to practice medicine without it consuming your whole head so you can also focus on owning a business,” he said.
Second is the ability for an associate to live within his or her means and have good credit. The third recommendation is to have $15,000 to $20,000 in liquidity to be used toward the purchase process to cover the costs of an accountant, attorney, broker, consultant, and lender.
“As long as you have those three requirements and the purchase price is fair market value, whether the price is $100,000 or $5 million, the lenders will loan the money,” McCormick said.
Fair market value is what the practice would be worth to the average person. Investment value of a practice is what it’s worth to a buyer and is a measure of whether the practice meets the buyer’s needs. Understanding the difference between the two and why it matters is key, says Dr. David King, owner and president of Simmons Southcentral.
He recalls a buyer who was interested in a north Dallas practice that earned $115,000 in after-debt income. The potential buyer had a few houses, a boat, and high credit card debt. Dr. King estimated that he needed a practice with at least $110,000 in after-debt income.
“This buyer’s basic need was $110,000 annually in order to meet these liabilities and to eat, drink, and stay dry. Therefore, the investment value for him didn’t work because it was too close. That $5,000 cushion was not enough because any hiccup in the practice and somebody was not getting paid. The fair market value was good, but the investment value meant it wasn’t a good fit, so he either had to get rid of some toys or find a bigger practice with more after-debt income,” Dr. King said.
Another thing buyers need to consider besides price and location is philosophy, or picking the right kind of practice. Dr. Karen E. Felsted, president of Dr. Felsted Veterinary Consulting, has had a few clients who wanted to buy a certain practice, but their vision of the quality of medicine they wanted to practice was higher than what was currently being practiced there.
“You have to ask ‘If I’m going to go in and practice different medicine, can I move clients up to my level of practice? If you want to do more and want clients to pay, is that doable?” Dr. Felsted said.
Also, in preparing for ownership, McCormick suggests associates go to practice management sessions at conferences to learn soft skills such as leadership, communication, team management, and inventory management.
Finally, Melisa K. Edwards, vice president of veterinary practice finance at Bank of America, cautions aspiring owners to do their due diligence. When buying into a practice for instance, this means getting pre-qualified, having professionals such as a lawyer and accountant in place, starting the conversation with the owner about buying in and what the time frame would look like, and then trying to move toward a binding contract as quickly as possible. “I am seeing the can kicked down the road by owners, which is frustrating a lot of associates and forces them to consider starting up on their own,” she said.