Maximizing profit means stripping the practice of capital by a variety of means...
Veterinary practice succession planning is a career-long endeavor, not a five-year plan. Your succession plan evolves from the entire history of the practice, its culture, its clients and patients and its employees. The economics of such a succession plan, though numbers-driven, derives from a unique mix of philosophy, policies, procedures and protocols. The first two articles of this three-part series described valuation concepts, appraisal standards, cultural attributes, assets and liabilities, plus the intangible factors lending to a practice's good will value.
Marsha L. Heinke
The ultimate value of a practice entity theoretically resides in the net effect of total assets less total liabilities; however, the succession of a veterinary practice to new ownership rests in much more than the opinion of an appraiser. A successful transition is as much about emotions and beliefs as it is about price and cash flow.
Key attitudes, relationships, business processes, practice systems and leadership vision result in personally rewarding and financially satisfying experiences in veterinary practice buying, ownership and selling.
The parties to a practice's succession have as much to do with a successful transition as does a theoretically objective measurement of excess earnings value.
Recognizing and appreciating the following revelations can strengthen your practice and succession plan:
Maximizing profit means stripping the practice of capital by a variety of means: avoiding raises and implementation of benefit plans; nixing computer systems, technology, and medical equipment upgrades; deferring repairs and maintenance, or short-cutting patient care while maintaining high fees. The maximization philosophy might be attractive to practitioners who plan on locking the practice door behind themselves on retirement. However, it is not a good plan if you hope to sell your practice to another practitioner.
This strategy might be entertained as an attractive alternative when hearing about underground economy schemes in casual conversations. To the contrary, it is possible, even working within the letter of the current burdensome tax code, to make an attractive living as a veterinarian and through investment as a practice owner.
Cheating leads to diminished value through unverifiable expense adjustments, understated income and a practice culture that scares away knowledgeable buyers. The potential costs of defense—which includes legal and accounting fees plus penalties, tax and interest after the fact of audit or investigation—become contingent liabilities that are hard to measure until event occurs and concludes.
Communicate, communicate, communicate.
If you avoid talking with key personnel such as partners and fellow shareholders, especially regarding practice operation decisions and succession issues, then expect intense internalized resentment based on fear resulting in big negotiation problems later.
Offering a carrot and jerking it away might cause more than a sulky disposition in the harness. Don't make the succession plan faux pas of perpetually promising what you can't or don't plan to deliver. This is a sure plan to lose good associates.
Carrot corollary: You can suffer from communication overload and too much disclosure. It's lonely being an owner. But be wary of what, when, and to whom you reveal feelings, thoughts, hopes and prayers. Too much indiscriminate communication can be a bad thing. Find balance in all things.
Likewise, if you are looking to buy into a practice, the same rules hold. Don't promise co-workers raises, benefits or other enticements to occur when you become an owner. You won't buy any love with anyone when you are on the other side of the administration desk and can't make good on promises for which cash does not exist. It is a scary proposition when you have ultimate responsibility for paychecks and payroll tax submission. Besides, you might undercut your negotiation opportunities with the current owner when your promises imply she or he is just an old scrooge. Bad mouthing your current employer is not a good strategy for ownership.
Be a student of human nature. Do you know your normal personality or behavior style, that of your potential successors or the person sitting across from you at the negotiation table? If you don't, then you might be limiting your success in all phases of practice transitioning, leadership and client development.
Specializing in avoidance behavior can be a sure ticket to diminished practice value. Time away from the practice might be fun, and excused on the premise of "giving back to the profession", but long absences can be an unforeseen impediment to eventual sale at a desirable price. Balance your work and personal life. Be attentive to a significant financial investment.
Don't ever underestimate hidden agendas, but try to guess what they might be. No matter how well you've planned things out, consulted with professionals, communicated prudently and carefully, and been attentive to practice operations, Murphy's Law will come to operate. Hey, you are dealing with emotional human beings, not routine surgical procedure certitude.
A practice's culture takes years to ferment. Implementing overnight change of practice philosophy and goals without significant trauma to the practice's economic structure is impossible. The devotion to employee training, appropriate fee structure, business systems and internal controls, client base type and renewal, medical and surgical care standards, client communications, and overall practice leadership must evolve through years of commitment and tending. Massive changes in a short time to maximize practice value are fraught with difficulty. Immediate, drastic changes after acquisition can result in financial failure.
Here is an overriding, easy checklist for improving the economics of your practice-succession plan. Always ask:
As a potential purchaser, reverse the above questions, and ask these:
Thoughtful response to these questions can help in day-to-day management decisions throughout the practice life cycle.
Be aware that all legal entanglements of the practice have a bearing on its economic reality. Be sure to a review and amend all contracts and documents linked to the practice's operations. Competent advisors and appraisers will seek this information and encourage the formality of it. Employee agreements, leases for real estate and equipment, compensation packages, retirement plan obligations and shareholder/member/partner agreements are primary candidates for ongoing review in accord with current practice operations and owner goals.
As a final thought, consider arranging periodic re-valuations of the practice by a professional. Depending on the particular circumstances, annual, bi-annual, or tri-annual valuations might be appropriate. Talk with your accountant and attorney about when it would be appropriate to obtain updated valuations. For management purposes, an estimation of worth every-other year might be all you require. That way, you have updated knowledge about the potentially most-valuable asset in your investment portfolio, your veterinary practice.