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5-year veterinary practice turnaround
When a practice owner needs to sell soon but fears the practice is worth too little.
Editor's Note: This story lays out a hypothetical scenario—a "What if...?"—with a veterinarian whose practice needs a turnaround. Visit thecvc.com to find out where you can see these authors together teaching on these topics.
Jameson Animal Hospital has three full-time practitioners, is located in a large and reasonably prosperous suburb and grossed about $1.3 million in 2013. Dr. James J. Jameson, the sole owner, is in his early 60s and starting to think about succession planning. What he'd really like is to sell the practice in the next year or so and retire. Unfortunately, he's not sure how to get started and has a suspicion that this process make take longer than he thought and that his practice isn't worth what he really wants to get for it.
Run the diagnostics
Based on seminars, journal articles and discussions with colleagues, Dr. Jameson thinks he may have a No-Lo practice—a practice with no or low profitability and value. His first step is to call on a consultant for a professional appraisal of the practice to determine the true profitability. If the practice is No-Lo, he also needs help to uncover the big problems. Is the low profitability due to poor doctor productivity? Too much overtime? Drugs and medical supply costs? Too many discounts and missed charges? Once the problem areas are identified, Dr. Jameson can take the steps needed to correct them and improve the profitability of the practice. This economic baseline is essential not only for diagnosing the problem but also for measuring the success of any improvement initiative.
Of course, finding a qualified appraiser with experience in valuing veterinary practices is critical. The appraiser should have a strong degree of financial knowledge, experience in valuing veterinary practices and formal appraisal training from a recognized appraisal organization. One option is the consultant directory for VetPartners (vetpartners.com), an association of veterinary practice management consultants and advisors. Appraisal reports vary from one page to more than 50—the depth and type of information included should be agreed on before making the decision to hire a particular appraiser.
Enlist a manager
As Dr. Jameson looks over his financial numbers, he realizes that at 28% of gross revenue his support staff costs are much higher than the average of 18% to 22% quoted by the American Veterinary Medical Association and the American Animal Hospital Association. While his pay scale is in line with the size and location of hospital, he's not training or using his staff well enough. Employee turnover is also extremely high. He knows this, but he hasn't been able to fix it—he doesn't have the time to focus on better hiring, better training and regular evaluations to give team members feedback. His tendency is to hire the first person that walks in the door—especially if an applicant has any veterinary experience. While he hasn't conducted exit interviews, he knows the overall lack of team management is the crux of the problem.
Although he had always believed that a practice manager was an expense he couldn't afford, Dr. Jameson now realizes that the opposite is true—he can no longer afford not to have someone with human resources and operational experience. While he has been paying himself the 3% to 4% of gross revenue commonly allotted for management, he would gladly use that money to contribute to the hiring of a qualified practice manager. Plus, even though he designates one day a week for management duties, he only has time to put out fires and would much rather be doing what he's best at: seeing patients and generating revenue. Dr. Jameson makes the decision to begin the search for an experienced practice manager with strong communication skills, previous management experience and demonstrated leadership ability to improve practice performance. He believes the investment in the right manager will more than pay for itself.
Dr. Jameson is unpleasantly surprised to find that his hospital's average client transaction (ACT) is lower than most other practices of his size, and a review of the medical records shows that clients are often declining the practice doctors' recommendations. He knows that many of the protocols and systems at ABC Animal Hospital are in need of revamping, but decides that it would be most advantageous to begin by focusing on the improved use of treatment plans and a more proactive reminder system.
Dr. Jameson realizes that one of the greatest sources of confusion and client dissatisfaction is the not knowing in advance what anticipated procedure costs are. Rather than using treatment plans proactively as an education tool for clients, they are only given upon request, when a pet is hospitalized or on the day of surgery. His first step is creating templates in his practice management software for preventive care protocols and dentistry, since these are the most frequently needed services. The services and items included in these templates will be based on the practice's standards of care. The templates can then be quickly customized by a technician during the examination process. He also intends to implement a policy where no services are performed without a client first agreeing to the costs, which currently is not the case and often leads to surprise over the invoice and an uncomfortable situation for the reception team.
As for reminders, Dr. Jameson's system is used for vaccines and annual treatments such as heartworm tests and fecals and the callback function is used only for surgeries. His new changes include phone, email or postcard reminders:
> before a prescription expires that requires specific blood work for refills
> one month after Grade 2 or greater periodontal disease is diagnosed and a treatment plan is provided but an appointment is not scheduled
> 10 days after a recheck appointment was recommended but not scheduled.
Dr. Jameson also plans to increase the number of follow-up phone calls the practice makes. Most important on his list are calls the day after every visit or procedure, and additional calls three days and seven days after non-preventive-care visits. The technicians will be responsible for all surgeries and non-preventive care appointments (unless a doctor has specifically indicated that they wish to make the call themselves), while the front desk team will call all of the routine visits.
Dr. Jameson is also asking his associates to enter reminder and call-back notes on an individual basis as well; for example, when a client is going to "wait and see" whether a pet gets better, the doctor puts in a call-back reminder for two to three days to see how the patient is doing.
Add services clients want
While Dr. Jameson is interested in monthly preventive care plans as well as introducing laser therapy and acupuncture as new services, he is unsure whether there is interest in these modalities. Several years ago he invested in an ultrasound machine, but until his recent eye-opening practice appraisal and financial analysis he had never realized that the amount of usage was not even covering his lease payment, and he doesn't want to make the same mistake again.
Dr. Jameson decides to send an email survey to his clients gauging their current satisfaction with the practice as well as their potential interest in specific new services. See dvm360.com/clientsurvey for a sample. He also asks his staff to engage clients in this discussion when they are at the practice. He also decides to invite 100 or so clients to an independently facilitated "dessert meeting" where they will be asked to share their experiences with the practice and provide recommendations for areas of improvement and services they would like to see offered for their pets. This may seem like a lot of people, but only a fraction will accept the invitation. He will then use the information gathered from these sources to determine the best course of action on the new services he'd like to add.
Identify potential buyers
The last part of Dr. Jameson's quest to sell his practice is, of course, finding the right buyer. Many practice owners sell to one or more of their own associates, but Dr. Jameson isn't sure whether his doctors want to be owners. Like many other owners, he hasn't spoken to his associates about possible ownership in a long time. He imagines they'd be afraid of the debt they'd need to shoulder or concerned about the impact on their personal and family time or their underdeveloped management skills. What those associates may not know, though, is that good quality financing is available out there, even for those with a high level of student debt. Also, many associates decide the financial security and future retirement benefits outweighs a short-term loss of personal and family time. And those management skills? They can be learned. One thing Dr. Jameson should do is ask his associates where their management interests lie and get them involved. This builds associates' confidence in their business and management savvy and gives them a truer look at what owning a practice is like.
If the associates decide they're not interested in buying, there are other options, of course. Dr. Jameson can market the practice himself or engage the services of a broker. There are also practice conglomerates interested in purchasing practices or partnering with veterinary practices that fit their business model and culture. In any sale, keep in mind some crucial criteria: the price, the ongoing medical and management responsibilities the owner may have to provide to the practice and the real estate terms if the practice owner also owns the real estate.
Finding a buyer can be difficult and time-consuming; Dr. Jameson understands that the more options he can identify, the more likely he can craft a sale that best fits his goals. He also realizes that all buyers prefer good quality practices with at least average profitability; expanding the pool of options doesn't negate the need to improve the profit margin.
Although he has a lot to do, Dr. Jameson feels good about his momentum to develop a realistic and motivational exit strategy – one in which he can earn the greatest return for all of his hard work and enjoy a long, healthy retirement.
Dr. Karen Felsted is president of Felsted Veterinary Consulting. Jessica Goodman Lee joined Brakke Consulting in 2011.