Path to Ownership
I’ve recently joined my school’s chapter of the VBA (VBMA for the Americans). Since I’m taking notes on this shit anyway, I thought I might pass on some of the info. This week’s talk was a webinar, given by Jess Trichel DVM, from Live Oak Bank, and focuses on how moving into practice ownership works.
She compares buying a practice to buying a puppy – if you were advising someone on purchasing a puppy, you would recommend that they consider: why they want a dog, breed, lifestyle, commitment, a puppy vs an older animal, etc etc.
So if you are buying a practice, you need to consider:
· your lifestyle and commitment
· what you want from a practice
· what type of practice you want
· a new practice vs an existing practice
and you need to be prepared to wait for the right one. You need to be set up for success with this purchase, and that means making a business decision, not an emotional one – I would love a Doberman puppy, but at the minute I have a lifestyle which might just suit a geriatric Labrador.
When you’re buying your practice, you will need:
· a broker (like an estate agent – generally they work for the seller, but if you chat to some they can let you know if something you might be interested in comes on the market)
· a CPA (an accountant who works for you and can understand the numbers of what you want to do)
· an attorney who specialises in transactions for all the legalese and the fine prints
· and a banker – because you need money from somewhere
To run your practice, you will need:
· a mentor (anyone who has run a small business, not necessarily a vet – you may have multiple, and they act as a sounding board and a source of common sense)
· key staff (head nurse, nurses, vets, receptionists)
· marketing (need to engage customers and increase value perception)
· a practice manager (maybe… depending on what you want to do and how your practice runs)
You need to choose the right practice for you to make this a success. Is it your style of medicine (this is what your customers will be used to and what they will demand from you – do you want a practice where everyone is used to demanding antibiotics and steroids, or one where the clients expect more investigation?). Are you happy with the staff quality (you’re buying the team – you need to fit in, and you need them to be happy to be able to keep your staff and your clients). Do you like the community – is this a place you want to live and work for the next few decades? What are the clients like, and what do they want from you? Is this the type of practice (breed of dog…) that you want and that suits you (I will never buy an equine referral practice, or a beagle – what would you never choose?).
Once you have found the perfect practice, you need to work out what is for sale – is it the practice and the land it sits on, or just the practice and you will have to pay the seller rent? Which would you rather? These are tangible assets which you can buy, but you are also buying the goodwill of the practice (intangible – brand, team, customers, customer history – in other words, the revenue stream). The price of the goodwill is calculated as a factor of the profitability of the practice – this is what you need people that understand numbers and transactions for.
Importantly, you should understand why the seller is selling – is there a new competitor in the area, is the population moving away because of a factory closure, do they just want to retire? Obviously, you want the latter reason, not the first 2.
What are the revenue trends of the practice doing, and are they explainable? For example, declining revenue over the last 3 months explained because a vet was off sick and they could not source locums, so the volume of work was decreased.
To buy the practice, you’ll need financing from a bank. Before they hand you out any old wad of cash, they’re going to want your tax returns, CV, personal financial statement (what you owe vs what you own), and the business tax returns and balance sheets (they will do a cash flow analysis to see if this business can support you). They will look at the business’s net operating incomes and margins – how much money is available and how efficiently earnings are produced. They will consider the practice margins compared to industry standards, the loan terms and any adjustments to historical cash flow necessary (ie the owner’s son has been dramatically overpaid for washing the practice windows for the past few years, or you were an associate taking a salary and you will now be taking an owner’s allowance).
When the bank offers you a loan, the buyer has to put in some money too – generally this is 10% equity or 50% of your liquid assets – this amount is minor compared to the price of the purchase, but is a big amount for the buyer. The seller may offer a seller note, where they loan you (or their bank loans you) a set amount of money which you pay back + interest of a period of ~25years.
The bank will often, in addition to giving you the capital you need to buy the practice, give you some working capital (a month’s running costs for the practice to let you buy inventory and pay staff etc – otherwise you might own a practice but you can’t run it). Your total loan amount = business £ + real estate £ + soft costs + working capital - (seller’s note + equity) + interest.
You then need to pay back the annual debt – a chunk of the seller’s note + a chunk of the bank’s loan, so the bank will assess the business profitability to see if the business can sustain this loan. (You should probably have a quick look at that too…).
You can set yourself up now to look more appealing to the banks in a few years’ time – keep an eye on your lifestyle (debts, spending habit, credit report), get any business education you can (basics of accounting etc), network with people at trade shows etc..
The presentation included a case study of a young vet, 2 years graduated, who wanted to buy a practice. She was $200k in debt, with very little assets compared to that (a car, ~$10k in the bank). She wanted to buy a practice for a total of $2.2m, with an annual revenue of $950k. These numbers look horrific – how can someone with that much debt, on a $74k wage, with only $10k in the bank, possibly be loaned $2.2m 2 years out of vet school? But they gave her the loan, and the practice is doing well, with an even bigger turnover than it had before she took over – so it just goes to show that it is all possible.