Ready to retire? Here’s how to prepare to sell your hospital

News
Article
dvm360dvm360 October 2022
Volume 53
Issue 10
Pages: 52

Maximize profit and minimize hassle by viewing your practice through an investor’s eyes

Veterinary practice sales are progressing at a rapid pace given the increases in practice valuations and the 8% to 12% growth that hospitals experienced during the COVID-19 pandemic.1 Most of these sales are made to investment groups such as private equity firms and corporate veterinary groups, although some practices still make successful internal transitions via purchasing associates.

The question of whether to invest in real estate (ie, hospital design and construction), in the event of an upcoming sale is an interesting one. Most advice is focused on the sale of the practice rather than the treatment of
real estate, and yet it is important to think of both and be prepared. Here are primary issues to consider:

  • Does a separate real estate group own the real estate? These owners may have some overlap with the current practice owners, but they often do not completely overlap and their interests are often different. Thus you’ll need to consider both the practice and real estate ownership in future transactions.
  • Are you trying to solidify a sale via associates or are you trying to sell to outside investment groups? Your approach to any real estate upgrades prior to sale may vary based on what you are trying to accomplish.
  • If you want to sell to outside entities, will you sell the real estate with the practice? It may not make sense to hold on to real estate in the event of sale of the practice to investors for the following reasons:
    • The investors may take the practice in a different direction.
    • The real estate may need to be owned by the investment group so they can do with it what they need to remain profitable.
    • Veterinary clinics are purpose-built buildings. In many cases, there is more value in the practice than in the building, as the building ceases to be sellable without the context of the practice within it. There may be better investments for the real estate owner than an older, purpose-built building, unless the land is extremely valuable.
    • Investors consider return of investment (ROI) primarily, meaning that they care more about the potential of the practice than the earnings by themselves, or the quality of the building. If the building can be tuned up by the time you are looking to sell to turn greater profit, that is a consideration. But new investors usually don’t care much about what color your lobby is painted, unless they think they can repaint it from teal to white and turn a profit.
  • The valuation of a practice is not the same as a property appraisal. The valuation of a practice typically uses the earnings before interest, taxes, depreciation, and amortization method and is modified with a multiple that considers other factors. Again, this method doesn’t consider your new reception desk or the tile you put in your lobby, except that those upgrades are expenses on your books.

With this in context, should you do any upgrades prior to a sale? There are a few important factors to consider.

Improving profitability

This is a big motivator. Whether you are selling to associates or to a corporation, your earnings and profitability matter because they can make the sale more attractive to buyers and allow you to sell at a higher price to an outside investor. Remember, however, that the outside investor is most interested in their ROI, so it’s important to invest in the areas that improve profits without increasing costs more than is advisable for the practice.

Given how expensive remodeling is, you should get solid financial advice before investing in any upgrade. That said, here are 3 of the best strategies others have used:

  • Add more exam rooms. Many older hospitals have a larger ratio of back-of-house to front-of-house space than we see in newer hospitals. What about converting the spacious owner’s office to 2 new exam rooms? This move will, for most practices, immediately improve profitability, especially if it allows the practice to hire another veterinarian and/or use veterinarians’ time better.
  • Add a new service. Can one of your enormous dog wards be converted into a dental space? Again, don’t do this unless it is easy and immediately relieves pressure on your practice so that you can become more profitable by using space and time more efficiently.
  • Reduce trappings of the past, including giant lobbies, private offices and bathrooms, and other spaces that are potentially unprofitable, within reason. It is still important to maintain quality staff work and break spaces.

Attracting and retaining associates

It is no secret that there are more jobs advertised than there are veterinarians applying to work them. If your strategy is to sell to one of your associates or a group of your associates, then you will need to potentially attract or retain them. This is too much of an uphill battle for some practices, and they would rather sell to investors who could pay more and provide better benefits. But for others, sales to younger associates are still possible. There are entrepreneurial young associates who would prefer the autonomy of private practice.

If you are potentially selling your practice to associates, take the following steps.

View your practice as if you were an investor

Keep excellent books, work on profitability, and understand the market around you. Is it saturated? Or is there a lot of unmet potential? Although an architecture firm is not the same as a veterinary practice, our architecture firm made the successful transition of ownership to new partners over a period of many years. During that period, we focused on improving our business and profitability, encourage the buy-in of new partners. The senior partners have now retired, and the transition was successful.

Regardless of the business type, without a strategy toward better profitability, young owners are not motivated or able to invest their time and money. Viewing your practice as an investor and focusing on increased profits may spawn the need to remodel, expand, or relocate your practice.

Simple updates to the exterior of this hospital created a fresh, clean, professional look. (Melrose Animal Clinic before)

(Melrose Animal Clinic after) (Photos credit to Ethos and J A Greene Construction Services, LLC)

Make it look professional

Nothing in construction is less expensive than a gallon of paint. A fresh coat of paint and some new art and signage can make a tired old hospital look better. It matters! As the original owner, you no longer see the old salmon-pink walls, but your associates do. Invest a reasonable amount to make your hospital look less tired and dated. Purchase some new equipment as well, because equipment can be depreciated. Think face-lift, not major remodeling. It’s amazing what a minor upgrade can do for morale and for the look and feel of your hospital. Your clients will love it too.

Focus on lifestyle

Since the beginning of human civilization, older generations have complained about younger generations and their lack of work ethic. The truth is these complaints are often unfounded. It is more difficult for Generation Y and upcoming Generation Z veterinarians to support their lifestyles the way previous generations could. Expenses are high, demands are many, and life
is very, very complex. As a working parent and second-generation architecture practice owner, I understand some of these demands. So how do you focus on supporting those who will run your practice in the future?

  • Create flexibility with work. This might not be an architectural idea, although it could be. You could invest in better technology
    to allow some select work to be done from anywhere. You could design doctor workspaces to be similar to hotel business office spaces
    for multiple part-time doctors rather than designated desks for full-time doctors.
  • Create perks at work. This could mean helping your staff meet childcare or pet care demands while they’re at work. This does not necessarily mean “bring your dog or child to work,” as there are other ways to provide help, including financially. Other perks could be free snacks for those long days when they miss a lunch break. Remember to help staff with their transition back to work after having a child. A lactation room is essential to many new mothers and doesn’t take much space.

Let it go

It’s hard to let go of your practice. You spent a tremendous amount of your life there. You raised your family around your practice. It is sentimental and painful to move on. But regardless of whether you’re turning over the reins internally or externally, letting go is part of a successful transition. Here are things you should consider:

  • Declutter and get rid of junk, memorabilia, and old items. You’ll never need them again, and no one else will either. (For more information on how to declutter, see this article on the organized hospital.)
  • Store items that don’t need to be in the hospital somewhere else, such as a storage unit. These may include inactive files (before you can legally shred them), older equipment, and seasonal decor.
  • Share your space. Start ceding your space (physically and operationally) to others as a way of disconnecting yourself. Start taking on a business advisory role rather than a main medical role. This will allow clients to bond with new veterinarians and offer other veterinarians new experiences. This helps motivate them to continue working at the practice and, if they are associates, invest themselves more fully.

In the end, no practice sale is like any other. You may not want to take on any personal risk, and you may wish to sell your practice as is. Or the real estate investment group may not be on board with any hospital upgrades or may be unaligned with the practice ownership group.

Regardless of the situation, ask yourself whether investment in your physical building may make sense for your ownership transition. In some cases, it can help you sell a more profitable practice to an investor or make that successful sale of stocks to associates. Consider this your last effort toward hospital design, part of your legacy to yourself and to the practice you built and love.

Heather E. Lewis, AIA, NCARB, AAA is a partner at Animal Arts, an architecture firm in Boulder, Colorado, and a frequent conference speaker on hospital design. She’s a devoted advocate for minimizing pets’ stress and anxiety during veterinary visits. She has designed practices and shelters that range in size from 1200 square feet to 110,000 sq ft.

Reference

Why are so many veterinary hospitals selling to corporate? Ackerman Group. April 4, 2022. Accessed September 1, 2022. https://eval.ackerman-group.com/ why-are-so-many-veterinary-hospitals-selling-to-corporate/

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