Starting a practice: Is it beyond your reach?

Associates with a yen to open their own practice often face what might seem an insurmountable barrier.

They're strapped for cash.

Because of outstanding student loans, a new graduate's net worth, in some cases, might be negative $100,000 or more.

That doesn't mean indebted veterinarians should write off buying a practice, experts say.

With some experience as an associate and a record of paying bills on time, there's a good chance new graduates can obtain financing for a practice with decent cash flow.

Want to open shop? Take these steps, experts say

"We see a lot of 100-percent financing these days," says David Gerber, DVM and president of Simmons & Associates Northwest Inc., a consulting firm for veterinarians seeking to buy or sell a practice.

"Those who assume that, because they have no cash, they're out of luck might be surprised at what is possible," he says.

Vince Dailey, president of Vine Street Financial in Atlanta, a division of Branch Banking and Trust Co., agrees: "We understand that some people have large student loans, possibly in the $150,000 range or more. Less than that is better, but that's still not a barrier to lending where there's good credit and certain other criteria are met."

Dailey's firm is a direct bank lender specializing in financing veterinary practices and offering long-term loans of up to 25 years.

"Some young vets think they have to pay off student loans right away," Dailey says. "I tell them just the opposite. Save your cash. Use it toward your down payment. Student loans are on cheap terms, don't hurt your credit and can run for 30 years. As a practice owner, you'll earn much more than an associate and can pay off your (student) loan later at a faster rate."

Dr. Carin Smith, DVM, a consultant, trainer, author and speaker who works with veterinarians on business issues, says the brokers and lenders she meets in her Washington-state business (Smith Veterinary Consulting) tell her it's the practice's financial condition that clinches the sale.

"The practice must provide enough cash flow for the buyer to generate cash to pay off their school loan, business loan and personal living expenses. So the buyer doesn't necessarily need a lot of extra cash," she says.

The experts point out, however, that recent graduates should first acquire a few years of experience before trying to buy a practice.

"It's usually not wise for a brand-new graduate to open a practice. They're still learning medicine. They don't yet have all the expertise they'll need," says Gerber, who was in practice 15 years before starting his business in 1993.

Today's average first-time practice buyer is out of school three years to 10 years and has excellent credit without much net worth, Gerber explains.

Dailey says his firm tells young borrowers they should have a year's experience at minimum, and preferably three to five years.

Most start-up practices, Dailey adds, are associates who buy out an owner, because that usually involves the least amount of initial capital. Many new owners acquire space in strip-centers, where the cost of setting up a business might be in the $400,000 to $500,000 range. Opening a brand-new building at today's construction costs could cost upward of $1.5 million, Dailey says.

Smith urges young buyers to use professional help as much as possible. That would include a certified appraiser, financial planner, perhaps an attorney — the whole process of doing one's homework before taking the plunge.

"This is a huge investment. It is no time to cut corners by trying to do it all yourself," Smith says.

Failure to be thorough often leads to business failure, says veterinary business consultant Dr. Thomas Catanzaro, DVM, MHA, FACHE and diplomate of the American College of Healthcare Executives.

"Right now start-up practices have a failure rate of about 10 percent in the veterinary-school states," Catanzaro says. "That's mainly because a preponderance of new graduates want to stay in their home states. So they open these small storefront practices without proper planning."

Catanzaro, who operates Denver-based Veterinary Practice Consultants/Catanzaro & Associates Inc., says the problem manifests itself in "a huge maldistribution of veterinarians around the country. For example, right now they could use five DVMs in Alamagordo, N.M., but no one is answering the need."

Before the 1990s, failure of start-up practices was almost unheard of, Catanzaro says. "We just didn't have the density (of practices) that we do now."

While most of today's failed practices are the small storefront variety, "the big super facilities sometimes go down, too," he says. For example, he knows of a 20,000-square-foot facility that cost about $2 million to build and then failed recently because it generated only about $500,000 in cash flow.

"They overbuilt. The capacity they thought they were building for just isn't there. They didn't do their homework," Catanzaro explains. "Unfortunately, they don't teach business savvy in most veterinary schools."

For those who do plan properly, however, and are ready to seek financing for a new venture, good credit is key.

Gerber says he can't over-emphasize its importance. "Lenders look for that first — how well you pay your bills. It's more important than having many assets," he says. "Bad credit is a huge black cloud."

It's not a negative for a buyer to have some debt for a home or car, Dailey adds.

"That's usual and expected," he says.

But he and Gerber say it's excessive credit-card and other consumer debt that most hurt a practice buyer's chances.

Their advice: Always pay down credit-card and consumer debt first, and then try to build at least some cash toward a down payment.

Lending systems

Young DVMs who want to open a practice have two types of lenders to approach, Gerber says.

The asset-based or collateral-based lender — mostly banks — look for assets equal in value to the loan request. Cash-flow-based lenders consider whether the practice has enough cash flow to meet payroll and other regular operating expenses, pay the owner a reasonable salary and earns enough to make the loan payments.

"Typically, today it's the cash-flow-based lender who better meets the needs of young buyers," Gerber says. "It works less often with asset-based lenders because the value of a veterinary practice often is based 80 percent to 90 percent on good will and client lists, and there's no collateral in that."

Dailey says his firm doesn't use a specific debt-to-loan ratio for a practice loan, as many institutions do for home loans.

"We aren't formula-driven," he says. "No matter what it may say on paper, we know or can find out the true value of a practice, and that's what we look at. Essentially, I want the buyer to be able to earn $100,000 a year in the practice and be able to pay the debt. As an associate, they earn much less, maybe $60,000 or $70,000."

Good time to buy?

"Our Simmons group had a great year for practice sales last year," Gerber says, "and I continue to stay busy here in the Northwest. The market is active. Interest rates are up, but stable and still attractive, so yes, I'd say it's a good time."

Dailey points to urban growth while Smith notes an advantage for new veterinarians. "It's a buyer's market," she says.

Aspiring veterinary practice owners should talk to brokers and consultants, check out practices for sale that are posted at veterinary conferences and trade shows and look at advertisements listed in major veterinary publications.

"See what's out there," Dailey says. "Maybe you feel you're not quite ready, and yet there's an opportunity that's just perfect for you. In that case, we probably can help."