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How can I afford a veterinary practice today?
Many veterinary associates these days wonder whether buying a practice is still a viable option in today's economy. After all, how can they take on additional debt when they're already saddled with their student loan burden? Read on for the answer.
Associates: If you're like nearly half of the non-owner doctors who participated in the Benchmarks 2010 study of Well-Managed Practices, you want to own a practice someday but you're not sure it will be financially feasible. And that could be making your boss nervous, because 65 percent of the owners who responded to the same survey said they're planning to sell their practice to an associate. Add in factors like the rocky economy and monumental veterinary student debt, and many in the veterinary profession are asking, "How can anyone afford to buy a practice today?"
To begin to answer that question, let's first take a look at what "affordability" actually means. When it comes to a veterinary practice, affordability depends on three things:
> the total earnings available to the owner after all practice expenses have been paid
> the cost, after taxes, of the annual loan payments
> the personal financial resources of the buyer.
Bottom line? If the practice you're considering is valued fairly, the loan terms are reasonable, you have a sufficient down payment (10 percent to 20 percent), and you're conservative with your personal spending, then the earnings after purchase should be sufficient to cover your loan payments and any additional tax liability resulting from ownership. Here's how it works.
DR. SELLER, MEET DR. BUYER
Dr. Seller's practice generates $1.5 million of revenue and is valued at $1.1 million: $200,000 in net asset value and $900,000 in goodwill value. The earnings available to the owner—or the return on investment—are $208,000 after paying the operating expenses, fair-market compensation for all the veterinarians, and management compensation (3 percent of revenue) for the owner.
Dr. Buyer is purchasing 100 percent of the practice, has a 10 percent down payment ($110,000), and will finance the balance ($990,000) over seven years at an interest rate of 6.25 percent (prime plus 3 percent). Dr. Buyer's annual loan payments come to $175,000 for both principal and interest.
In order to answer the affordability question, Dr. Buyer's advisor completes an affordability analysis that shows how her income and expenses will change over the loan term assuming a conservative 3 percent growth rate in revenue, owner earnings, and asset value (see "Cash flow from buying").
Cash flow from buying
The analysis assumes that Dr. Buyer's veterinary salary covers her normal living expenses and that she'll continue her current levels of personal spending—in other words, she can't go buy a Maserati or take an extended European vacation anytime soon.
The increased income from her management compensation and ROI will go toward her loan payments and paying the taxes on her increased income from ownership.
With this purchase, Dr. Buyer is ensuring her future financial security by building equity in an asset that she'll sell down the road. The analysis also shows that the value of the practice is projected to grow to approximately $1.36 million by the end of the loan term of seven years (see "Equity from buying").
Equity from buying
The report also clearly shows that this purchase is affordable. Dr. Buyer's financial position improves dramatically when she becomes an owner and will improve further when she sells the practice—a win on both fronts.
SOME OPINIONS ON OWNERSHIP
Of course, the financial risks aren't the only considerations when you're buying a practice. Other factors include personnel-related issues, management responsibility, and the added time commitment. Recently I asked a group of my own clients, "Knowing what you know now, would you choose to own a practice again?" All but a few responded with a resounding yes! Here's a sampling of their comments:
"Absolutely! I knew owning a veterinary practice was going to be a lot of hard work, but I'd reached a point in my career where I was no longer satisfied being an associate.
"The satisfaction of building a great team that works well together and provides great care for clients and patients makes the hard work and sacrifices worth it.
"I started working in veterinary medicine 24 years ago as a high school student, was an associate veterinarian for nine years, and now have been an owner for six years.
"During all of this time, I've had wonderful role models and mentors. Without their faith and encouragement, I don't know that I would be an owner today."
—Dr. Kristi DeLeon, owner for six years, Mt. McKinley Animal Hospital, Fairbanks, Alaska
"Knowing what I know now, I can't imagine not being a practice owner. Practice ownership, despite its headaches, heartaches, and hassles, is the best way for a veterinarian to develop financial security."
—Dr. Darren Williams, owner for 16 years, Mayde Creek Animal Health Center, Katy, Texas
"I never planned to be an owner when I got out of vet school—certainly it wasn't my dream to do so. It just happened. I'm glad so far, although I'm not sure if I will be in 10 years when I want to retire! I like being able to make changes without begging for permission or meeting with stonewalling when it comes to new ideas."
—Dr. Elizabeth Callahan, DABVP (equine), owner for 18 years, Veterinary Medical Center, Easton, Md.
"While there are times when I think it would be easier to be an employee, I can't imagine ever working for someone else again without having any say."
—Dr. Ronald Gaeta, owner for 20 years, Dunbarton Equine, Brookfield, Conn.
"Yes, knowing what I know now, I would choose to be an owner. There are days that aren't all that romantic, but both the financial and personal rewards make ownership more than worth it."
—Dr. William Armbruster, owner for 20 years, Greenhaven Animal Clinic, San Jose, Ill.
"Absolutely! I know the headaches and angst of owning a practice are numerous, but after 29 years of ownership I would never trade it in for being an associate. Besides the financial rewards, the ability to control how the practice runs and not be subordinate to someone's else's practice style was tantamount to me."
—Dr. Richard Jacobson, owner for 20 years, Farmingville Animal Hospital, Farmingville, N.Y.
After weighing the pluses and minuses, only you can determine if practice ownership is right for you. Do your homework. Educate yourself about the business side of your profession by attending practice management sessions at continuing education meetings. Attend hands-on workshops that delve into the specifics of business like the Progress in Practice workshops. Read veterinary publications like Veterinary Economics and nonveterinary publications and books. The opportunities that practice ownership provides are exciting—and you just might find that you get what you need.
Denise Tumblin, CPA, is a Veterinary Economics Editorial Advisory Board member and president of Wutchiett Tumblin and Associates in Columbus, Ohio. Please send questions or comments to firstname.lastname@example.org.