Ideal Practice Benchmarks
By Jim Vander Mey, CPA, ABI – jim@omnipg-vet.com
People love benchmarks. They want to know how many glasses of water we should drink each day. How much we should work out every week. Or, how many miles per gallon our cars can achieve.
There are also benchmarks to look at when you are buying a practice. They may not necessarily be deal-breakers, but they help determine what you will need to do to get to your target. Here are some of the benchmarks you should look at and calculate when buying a practice:
- Staff overhead as a percentage of collections – 20% to 25%. If it’s higher, the practice is overpaying staff, underperforming collections, or too many staff.
- Facilities Expense – 7% to 9% of collections – Too high and the practice is either paying high rent, space is underutilized or production is too low.
- Supplies – 5% to 7% of collections – If this is too high, it could be that the practice is using high-end supplies, or the supplies inventory (or vendor) is not managed properly.
- Marketing expense – 3% to 5% depending on the growth stage. A practice that is looking to grow will have a high percentage. A static practice may not spend much on marketing at all.
- Collection Rate – Minimum of 98% for a well-run practice. A low rate means the front desk is not keeping up or managing the accounts receivables very well.
- Total Overhead (all expenses less owner and associate pay) – Ideally should be less than 85%.
These are just a few benchmarks to analyze when looking at a practice. Remember, if the practice you are analyzing does not meet or exceed these benchmarks, it does not mean it’s a bad practice, it simply means you have work to do in those specific areas.
Contact me if you would like more information.
Read MoreSeller Carrybacks and Veterinary Practice Transitions Today
You’ve heard the term “Seller Carryback,” but what does it mean?
Seller carryback financing is when the seller of a given property, or in this case, a seller of a veterinary practice and assets, acts as a lender for the buyer if a conventional bank will not offer the full amount that the buyer needs to close the sale.
Years ago, it was commonplace for a retiring veterinarian to act as the lender for someone to purchase a veterinary practice. Seller financing was driven largely by the fact that banks and financial institutions had yet to embrace the industry like they do today. Therefore, there was a wide variety of structures, interest rates, terms, etc. that were built into those transitions and the exchange of funds between the buyer and seller.
Much like the rest of the veterinary world, the industry and the financing supporting transitions have evolved. In most transactions, it is quite common for the seller to receive all the cash at the time of closing, which is ideal. However, certain circumstances still exist where seller participation in financing is a requirement. In these cases, the buyer’s lender will require the seller to carry a certain portion of the purchase price. Usually, that amount is 10-25% of the total purchase price. Why would a bank need that, you might ask? Some common scenarios include: a declining revenue trend, uncertainty around the buyer’s production capability, and tight cash flow, to name a few.
Every lender has different standards around seller participation, but here are some common features of that path in the current environment:
- Term: Most carrybacks are amortized similar to the buyer’s bank loan. Payments based on a 10-year repayment are common.
- Rate: Since these loans are typically junior to the bank loan it is not unusual to see a seller note 0-2% higher than the banknote. Right now, around 5% is reasonable.
- Prepayment Penalty: Sellers typically want to receive the funds over a shorter timeline of 10 years. Most carrybacks do not have prepayment penalties so that the loan can be paid off or refinanced within 24 months of the transition.
With talks of increasing capital gains taxes in the near future only time will tell how prevalent carrybacks will become.
For more information, please contact us today.
Read MoreThe Business Side of Veterinary Medicine – Theft & Embezzlement
Experts estimate that more than 70 percent of veterinarians are embezzled with an average loss of $200,000. But, because the embezzlers often steal small amounts of money over many years, the thief is never noticed. The US chamber of commerce estimated that 75 percent of employees steal from their workplace and that most do so repeatedly.
A majority of people, if given an opportunity, will take advantage of a situation to steal from their employer on the following frequency:
-3 percent will steal daily
-7 percent will steal weekly
-20 percent will steal 4-12 times a year
-70 percent will steal 1-2 times a year
-4 in 10 doctors experience theft in some form from the practice. 1 in 3 veterinary practices experiences monetary theft from their practice.
The significant types of theft in veterinary practices are:
-Time
-Office supplies
-Veterinary supplies
-Goods and services in Kind
-Money
All types of theft can hurt the bottom line of the practice. The Monetary thief, in most cases, has the most negative effect on the practice bottom line. Most veterinarians find it hard to believe that their handpicked, trusted, longer-term staff would steal from the practice.
Here is an unfortunate, and real-life, example. A veterinarian had a highly successful practice with five employees. One was a long-term office manager who came to work early and left late every day. She managed all the financial transactions daily along with the insurance and statement billing. The office manager took an extended vacation. While she was gone, the office sent out statements and received numerous calls from patients that their statement was incorrect and that either their insurance had paid the bill, or they paid on the day of service by check or credit card. The doctor had the staff investigate all the disputes and found out that the office manager had embezzled more than one hundred thousand dollars over the years. He was devasted and could not believe that the long-term, most trusted employee had done this to him.
Methods that have been used by staff to steal from the practice:
Zero Charge- Patient comes in for services, and the office staff member posts a zero-balance charge and pockets the money. At the end of the day, the computer collections balance to the deposit slip. No one notices.
Falsify Deposit Slip– Employee brings the doctor a deposit slip to sign for the day matching all the collections taken in for the day but then takes out all the cash from the deposit bag or envelope and changes the deposit slip when depositing the money.
Multiple Adjustments to Accounts- Courtesy discounts like cash discounts or senior discounts are used. Employee charges the full amount to the patients and keeps the cash discounts and pockets it.
Fictitious Vendor- Employee sets up a fake business with an account and has doctor sign supply order checks for supplies. The employee deposits these checks into an account and keeps the money.
Internal Controls
Make sure that even your closest friend in the veterinary practice is being watched. Here are some suggested internal controls to help prevent thief and embezzlement:
Segregation of Duties– Make sure one person does not control all cash flow processes.
Daily Audit Trail– Review daily transactions to catch zero balance postings.
Rotate Duties– This will help to reduce the chance for embezzlement.
Verify the End-day Report to Deposit Slip– Ensure that you see the end-of-day report and it balances with cash deposits. The doctor should be responsible for depositing funds in the bank.
Review Bank Statement– Take time to review the statements monthly.
Require Vacations– All employees must take vacation days that they have earned.
Performance Plans– If the practice meets specific goals and the practice is increasing its revenue, give incentives to employees in monetary form.
Background Checks- Make sure you follow through on background checks before hiring new employees.
Verify References- Check all references.
Having internal controls will help protect the practice and staff that are honest and want to do a good job. It will also help everyone stay focused on their tasks and goals at hand and take away the opportunity for someone to embezzle. You don’t want to have good employees turn into liabilities.
Omni Practice Group has been helping veterinarians for over 15 years developing plans to transition their practice. Our goal is to help you find the right buyer and make a smooth transition of your practice when the time is right. Contact us today for a free no-obligation consultation with one of our Practice Transition Advisors.
Read MoreWhat You Need to Know Before Signing a Covenant Not to Compete
You’ve graduated from veterinary school so naturally, you’re ready to get your feet wet and start practicing. Nearly every veterinarian will be an associate at the beginning of their career and with that comes the dreaded associate contract. You found a great associate opportunity and you’re eager to start collecting paychecks. But before signing that contract, particularly the noncompete clause, be aware of the details that could prevent your opportunity to start your own practice in the areas/neighborhoods you desire.
A covenant not to compete, otherwise known as a non-compete agreement, or restrictive covenant, is a clause in the contract that prohibits the restricted party from engaging in services similar to those of a non-restricted party. Non-compete agreements may restrict a veterinarian’s actions by time, location, and clients.
Here are some valuable tips before signing a non-compete agreement for veterinarians who plan on owning their own practice in the near future.
Be sure you understand every detail: Associate contracts are designed to protect the owner more so than the associate. OMNI Practice Group highly recommends you have an attorney who specializes in veterinary Associates contracts review all legal documents before signing. If you don’t already have an attorney, we will be more than happy to recommend one.
Advocate for the minimal non-compete radius: A standard non-compete radius should be between 3 to 5 miles. Keep in mind the radius is “as the crow flies.” In more rural areas, we have seen up to 15 to 20 miles, but of course try to negotiate for less, especially if you plan to stay in the area.
The shorter the better: We’ve seen unfavorable terms of up to five years. Typically, your non-compete clause should only be enforceable for 1 to 2 years. Try to negotiate to a shorter period, that will work in your favor when you’re ready to own your own practice.
Be sure your non-compete only covers the location in which you are employed: If your employer owns multiple locations, but you’re only seeing patients at one specific office, make sure your non-compete only applies to that location.
Notice of resignation: Keep in mind that when you’ve found the ideal practice to purchase or if you decide to do a start-up, the process can move rather quickly. We’ve seen contracts that require the associate to give up to 6 months’ notice before leaving their position – a fair amount of notice is typically 30 days. Be sure to negotiate the least amount.
My rule of thumb when it comes to associate contracts is “Less is Best” …well, with the exception of wages!
When you’re ready to purchase a practice or just want to discuss the process in preparation please feel free to give us a call at 877-866-6053 for a free, no-obligation consultation. We’re here to help you!
Read MoreSteps to Purchasing a Practice
By Happy New Year! Thank goodness 2020 is over and we can start looking forward to 2021. We all hope this is a year of change. We hope to begin getting control of Covid-19 with vaccines and some immunity for those who caught and survived COVID. There will be a change in the Presidency. Hopefully, there will be a change and restaurants can be fully open again. But what about you? Is this the year you change and become a practice owner?
Most veterinarians dream of eventually owning their own veterinary practice. But veterinarians tend to put off ownership for a variety of reasons. A couple of big reasons are that you have never done it before, you are not familiar with the process, or you’re just completely afraid of the unknown.
A great philosopher once said, “If you can dodge a wrench, you can dodge a ball”. What does that have to do with buying a practice? A lot, actually. What the philosopher is referring to is that if you can dodge an object, a wrench, for example, you can dodge another object, such as a ball. Applying this theorem to the practice buying world, if you have ever completed a major purchase, or made a major decision, the process and steps are the same.
We know you have made major decisions in your life, otherwise, you wouldn’t have a DVM behind your name. You decided which veterinary school to go to. In doing so, you did research. You looked at the pros and cons of each veterinary school and weighed them. You may have talked with some friends or mentors who went to those schools. You analyzed other factors like the location, cost, and how good of veterinarians the schools have turned out. You also may look at socio-economic considerations. Then, you made the decision and lived with it. And here you are facing another major decision in your life. Purchasing a veterinary practice.
Buying a veterinary practice is similar. The first step is figuring out the variables of what type of practice you want. Where do you want to practice? How many rooms do you want to have? Do you want to own the real estate? Do you want a practice with high production or one that you can build? Once you’ve come up with your criteria, the next step is to locate potential practices that may be on the market. You may also consider doing a startup. You analyze the practices that are on the market. You may see one or two you like. You contact the broker to get information on the practice. This is typically called a practice prospectus or practice offering memorandum. Some brokers will send tax returns, profit, and loss statements, and practice management reports up-front. You get all this information, and it looks like it is written in Latin. You may not have any clue how to read the reports. The broker can go over the numbers with you, or you can also hire an independent broker, phone a friend who knows business, or possibly a CPA. After you have looked at the numbers and that passes your and your advisor’s scrutiny, the next step is to go see the practice.
You contact the broker and set up a showing of a couple of practices. Looking at a practice is like looking at a house for sale. You may see things you like and things you do not like. But know that things can be changed. We have had doctors decide they don’t want a practice because the carpet is outdated, or the paint is ugly. There are people who can paint and change out the carpet. They do it for a living. They’re called painters and carpet layers. So, don’t exclude a practice because it is ugly. Have a little vision and think about how you may make it your own style.
Another one that throws potential buyers off is equipment. The exam tables may be dated and worn, the x-ray machine may be old, etc. Prices of equipment have come down. Remember, you may be in this practice for 20+ years. Spreading out the cost of new equipment, even if it’s $50,000 or $100,000, can be as little as $2,000 per year.
After you have looked at the practice, you like the location, but there may be one or two things that do not fit your criteria. Remember that the cash flow of the practice is always the number one consideration. I have been selling practices for 15 years and I have seen some ugly, small, outdated practices collecting $1,000,000 and taking home $500,000. I have seen ugly practices collecting $400,000 and taking home $250,000 on 3 days of work per week. Don’t judge the book by its cover. It is what’s inside, or the cash flow inside that really counts.
After you have decided that this is a good practice and you would like to purchase the practice, you make an offer through a letter of intent. It is a non-binding agreement where the broker typically provides a template. You can either come up with your own offer or work with your advisor to come up with the offer. If it’s a good practice and the broker has reasonably priced the practice, make a good offer close to or at the asking price. DO NOT LOW BALL THE PURCHASE PRICE IF YOU ARE SERIOUS ABOUT PURCHASING THE PRACTICE! You will just upset the seller and they won’t even want to work with you after receiving a low-ball offer.
You will want to begin contacting bankers who specialize in veterinary practice financing. Brokers know most all of them and which ones are lending at the moment. Ask the broker for a name or two. The banker will ask for your personal financials. They love to see you have some cash in the bank and not much credit card debt. Bankers will be more interested in how the practice is doing. They love to see a practice with great cash flow.
You next jump into due diligence on the practice after the offer has been accepted. You go into the practice on the weekend and go through the charts, x-rays, equipment, etc. There are checklists you can use to do the due diligence or bring along an advisor. However, be careful with advisors as some will just want to look for the bad things in the practice. Don’t throw out the baby with the bathwater if they point out vaccine appointments are not what they should be. Remember, almost everything can be fixed. Just note it and continue on.
If everything goes well on the due diligence, you let the broker know you are moving forward. The seller’s attorney will draft up agreements. You will then hire your own attorney. Ask your advisor or broker for a veterinary specific attorney. Using a non-veterinary attorney will cost you additional money. We have seen non-veterinary attorneys charge double, triple, and more to put agreements together. After the agreements have been “agreed” upon, the next and final step is closing. At closing, you sign the agreements and take over the practice.
There are some additional steps in the process that your broker can help you with, but these are the basic steps in purchasing a practice. So, just like purchasing anything else or making any major decisions, you just need to go through the steps, rely on your advisors, and dodge those wrenches! As always, we are here for you for a free consultation, just give one of our experienced brokers a call.
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