9 tips for a successful veterinary practice purchase or sale
Follow these tips for future financial success in practice ownership.
Practice ownership is not for everyone, but for those who do want to captain their own ship, the majority will buy an established practice. Here are the lessons I've gleaned from nearly 20 years' practice in buying, selling and owning:
Buy at the right price. Practice ownership is often, but not always, a good investment. There are a number of key elements to buying and structuring your purchase so you hedge the odds toward success. An obvious one is to purchase the practice at the right price. Get involved in the valuation process and understand what your monthly obligations will be.
Aim for a 10-year loan—even if you don't have to. When I first started, banks wanted new practice owners to be able to pay off the loan in seven years ... then it was 10 years ... and now it's often 15 years. The longer pay-off period sounds alright—a lot quicker than a 30-year house payment—but what it really accomplishes is a higher selling price made affordable by smaller monthly payments over a longer time frame.
In my opinion, a practice should bring in steady cash to pay off the practice purchase loan in 10 years. Of course, anyone in practice knows that a decade is a good chunk of time. During this period, you could burn out, become disabled or experience another major life change. I would consider 15-year terms at the right price but work hard to pay it off based on a 10-year amortization schedule. (Make sure there are no prepayment penalties and the like). This will give you wiggle room if needed, and if you had to sell in five to seven years, at least you'd have some equity built up.
Enjoy the good interest rates. It wasn't unheard of 10 or 15 years ago for practice loans to range from 9 to 12 percent. Now, if you're savvy, they range from as low as 3.5 to 7.5 percent. If an owner is willing to provide the financing, he or she may want a little higher interest rate, because generally it's an unsecured loan. This may have some value, because banks tend to be a lot less sympathetic than previous owners, who are more likely to be considerate of the "slow times" and may not enforce late fees as diligently.
Buy young. It's ideal to buy earlier rather than later—that is, three to five years out of practice. Time goes quickly, and the sooner you're able to pay it off, the sooner you can be making a better living.
Get regular valuations. Once you start or buy a practice, have a professional value it at least every three years so you have an idea of value and what you can do to enhance it.
Watch for buyers. I know a number of practitioners who have started relationships years before selling in hopes of a future sale. This keeps the broker out of it, which means a better price for the buyer and more profit for the seller.
Craft a good sale. For sellers, a big question is, do you help finance the buyer's purchase or completely cash out? Cashing out is nice in these uncertain economic times, but there is something to be said for receiving monthly mortgage payments. I like to let the bank provide the majority of it—say 75 percent—and ask the seller to provide 25 percent. This cuts down on risk, but gives the seller some monthly income as well.
Hold onto your real estate. Should you buy the real estate under your practice—and keep it when you sell? Owning the land and sometimes the building tends to be a good investment, although some got hurt during the recent market collapse. My general rule of thumb is to buy the real estate if it's available and reasonable and then pay it off in 10 to 20 years. And when it comes time to sell your practice, hold the real estate as rental investment. Buyers don't always like this idea, so you might structure an option to sell the real estate after five years at a specified price.
Hold onto your practice as long as you can—or as long as you want. As far as when it's best to sell your practice, if you have good cash flow and other veterinarians to run it, then consider holding it as long as you can and simply provide management oversight. Don't forget—once you sell, that cash flow will end.
Veterinary Economics Editorial Advisory Board Member Dr. Jeff Rothstein, MBA, is president of the Progressive Pet Animal Hospitals and Management Group in Michigan.