- When should I start thinking about and preparing to sell my practice?
The earlier the better, but no later than 3 years prior to selling your practice in order to optimize your sales price and find a good buyer match. Practice values are typically based on 3 to 5 years of financial information with the numbers weighted heavier towards the most recent years. If you focus your last 3 years in your practice on maximizing collections, overhead and updating your practice, you will come out money and time ahead.
- Will I get a higher price if I ramp up production for another year?
Typically, no. Since values are based on up to 5 years of production and net income, simply ramping up numbers for one year will not increase the value a whole lot. In fact, if it goes up too much in one year, a potential buyer and banks may even question why the production all of a sudden went up in one year.
- Should I buy new equipment or remodel before I sell my practice?
If you are 5 to 10 years away from selling your practice and your practice is looking dated, then you should update the practice. That can range from simply painting the practice and installing new carpet, up to replacing tables, adding new x-rays and other technology. If you spend a lot of money too close to the sale, you will not get the depreciation write-off that you would get if you had done it much earlier. The exception to this rule (there’s always an exception, isn’t there?) would be digital x-rays and computers. If you are not digital, don’t have computers, or your computers are 10 years old, you should consider adding those before selling.
- What are buyers looking for in a practice?
Individual buyers like to see a well-run practice with a decent amount of production, typically over $500,000 per year, average to low overhead (below 75% is good), somewhat up to date look and feel to the practice and a good location.
Corporate buyers like to see similar things, but also want the seller to stay on and work in the practice for another 1 to 3 years (depends on which corporate buyer). They also want the seller to carry-back approximately 20% or more of the purchase price of the practice. This means you get 80% of the purchase price upfront and then you receive the rest of it – 20% after you’ve completed your 1 to 3-years work requirement and have met established production, and other targets in the practice. If you don’t reach those targets, you may not receive the final 20%.
- I have an offer from several corporate buyers, why do I need a broker?
It’s been said that “the man who represents himself has a fool for a client”. A broker wears many hats in a transition. Finding a buyer is only one small role they play. The broker also takes a look at the offer and looks out for the clients’ best interest. Corporate offers are all not alike, so brokers also play the role of analyst by looking at each offer. They have to understand accounting, finance, the law, contracts, and even human resources. If you try to do this all yourself, you will end up costing yourself, your family, your staff and patients more time, money and grief than if you just hired a broker in the beginning. We have case studies where we have caught things in the offer that would have cost clients hundreds of thousands of dollars. We have helped negotiate and solicit more offers that have put hundreds of thousands and even one million dollars more than what the clients first offer was.
- The person representing a corporate buyer told us they prefer us (seller) to not work with a broker. Why is that?
They don’t want you to use a broker because it weighs the negotiations in their favor and gives them an upper hand. They have powerful attorneys, CPAs, and professional negotiators to pit against you. They may first knock on your door with a friendly neighborhood veterinarian as their representative, but behind that friendly veterinarian lurks the professionals hoping you don’t have anyone helping you out. They’re able to get lower prices, better terms and corporate favored contracts if the seller doesn’t have a broker.
- I own my building, should I keep it as a rental for future retirement income?
In the current real estate market, the short answer is “no”, especially if you’re considering a corporate buyer. We have pictures and case studies of sellers who kept their building only to have the veterinary corporate buyer move out of the building two years later to a new building they built down the street. The seller is left with an empty building that was a veterinary practice and will be difficult to find a tenant. The exception could be if you have an extraordinary building in a fantastic location on a busy street with great visibility and the building is in pristine condition – these practices make up less than 10% of all veterinary buildings.
- I want to do an associate to own transition. Can you help me with that?
Absolutely. We can help with pretty much any type of sale. Whether you want to do an associate to own transition, a straight sale to an individual, a corporate sale, or anything in between, we can help. We will show you all the options and scenarios to help you make the right decision. Often times, doctors think they want an associate to own transition and not sell to a corporate. But, when we show them that they can make $500,000, $1,000,000, or more by selling to a corporate, they change their mind. We’ll help walk you through each scenario to do what’s best for you and your family.
- I want to continue working in the practice after I sell, is that possible?
It depends. If you sell to an individual and your practice isn’t large enough to support multiple doctors, then the answer is probably not. But we can help identify the right buyer for you who will allow you to do what you want to do. In fact, one of the questions we ask is “What is your dream transition scenario?” We then go from there and do our best to make your dreams come true.
- I want to make sure my staff and clients are taken care of. How do we make sure that happens?
We like to call ourselves matchmakers. We spend time getting to know you as a veterinarian, practice owner, family person, etc. We ask a lot of questions to find out what your needs, wants, and dreams are in a transition. We then go out and find a perfect match — whether it’s an associate, individual buyer, or a corporate. Even corporate buyers have their own unique personality, culture, philosophy, and terms. We make sure that the buyers who will want to buy your practice are a good match for both you and your practice.
Do you have more questions? Attend one of our upcoming Practice Transition Seminars this fall, where we will go into all of the above in more detail, and you’ll get a chance to discuss your situation with a panel of experts – broker, banker, attorney, CPA, etc. – all in one place.
Thinking of selling your practice but don’t want to pay the broker’s commission? Think again. History shows that any time you sell your business and/or real estate yourself, the chance of failure of the transaction is over 50%. A commission will be much more digestible than the result if you try to do it yourself. We receive calls from senior veterinarians stating they sold their practices and took payments and it didn’t work out. After one year, they often must take the practice back and struggle to resurrect it to try and sell again. This is typically an experience that is new to both buyers and sellers. It takes time, marketing expertise, sales experience, buyer and advisor contacts, and lots of patience.
Your broker may spend hundreds of hours on your transition and your time is better spent at the clinic and planning your retirement agenda. Brokers do lots of specialized marketing which can be costly and time-consuming, and it includes many weekends and evenings meeting with potential buyers. When working with a broker, the average practice sells in about 6 months so selling it alone can be much longer. Your broker should have a list of qualified buyers and a commercial real estate license. If you own your space, it’s often critical to sell the building at the same time or get a solid agreement together for future purchase. Time and time again we see senior veterinarians sell the practice and lease the space with a loose agreement and lose their renter. The buyer decides they like a newer building down the street and leave you with an empty veterinary building.
A good broker will determine the value of your practice and there is much that goes into this process. It’s not just about collections. Everyone’s goal should be to sell at a fair price in a timely manner. If the price isn’t “right”, the banks won’t finance, and you certainly don’t want to carry the loan. If you get pressured to sell too low, which we often see, you can lose tens of thousands of dollars. Brokers spend a lot of time working with all the trusted advisors you need such as veterinary specific banks, CPAs, and attorneys to determine the value of your practice and facilitate a smooth and successful transition.
You Don’t Have To Retire If You Sell Your Practice
By Rod Johnston, MBA, CMA
A few years ago, I decided to sell my house in Kirkland, WA. I wasn’t planning on moving anywhere. I still planned on living for quite a while longer. I didn’t have any health issues, nor was I downsizing from my 1,100 square foot house to a smaller house. I purchased the house almost 20 years prior and it was nearly paid off, so I had quite a bit of equity built up into it. I had just decided it was time to harvest the equity I had built up in the house and use part of the equity to buy something else, part of it to put towards retirement, and part of it to have as a safety cushion for a rainy day. I’m glad I sold the house as it was over 1/3 of an acre and had a lot of flower beds and landscaping. It was also getting older and required quite a bit of maintenance.
I’m telling you this story because you can do the same thing with your practice. You have put in many years of hard work in your practice. It may need maintenance every year that you may be tired of taking care of. After 20 years of staff issues, they may be getting to you. Maybe you just had a new corporate move in down the street, and you’re worried about competing against them. It could be that you just want to be a veterinarian and just want to see patients – not manage staff, clean the office, pay the bills, deal with the leaking roof, post to the office Facebook or Twitter pages, come up with new ads to get clients in the door or any of the other 100 items that are required of a veterinary practice owner. I know, as I’m also a business owner – and who do you think cleans our toilets on the weekends?
No laws say you must own a practice to be a veterinarian. You can Harvest your Equity from your practice and continue to be a veterinarian. Imagine getting hundreds of thousands, if not millions, out of your practice, continue to work in your own practice, or go to work in a different practice if you choose and no longer have to manage a practice. You can put the money you receive to work for you in a retirement or investment account. You can free up some of your time to enjoy your family. You can buy a vacation home that you’ve always dreamed of, or just simply put the money away for a rainy day and continue to work.
So, what are the steps to Harvesting Your Practice Equity?
- Set up a free consultation with one of our advisors.
- Have a practice valuation done on your practice.
- Meet with your financial advisor to discuss your plan and the valuation.
- Meet again with an Omni Advisor to discuss possible options in selling your practice and the feasibility of working back in the practice.
- Let Omni take over the selling process and find a buyer that matches your needs. The “your” is vitally important as we are matchmakers and want to find a buyer who will be a near-perfect fit for you, your practice staff, clients, and the community.
- Close on the sale of your practice and plan your new, less stressful life.
That’s all there is to it to take back control of your life. Of course, there will be some work between steps such as running reports, meeting with a potential buyer(s), and discussing options with your advisors. But if you rely on Omni and other experts, the process can be simple.
We have helped numerous veterinarians who sold their practice and are working back in their practice or are working for someone else and appreciating their newfound joy again being a veterinarian and helping animals get better. The first step is the easiest. Just give us a call at 360-941-2341.
Everything has a cost. If you hit the snooze button on the alarm one time, your cost could potentially get to work late. If you get up early and don’t hit the snooze button, the cost is not being able to sleep an additional 10 or 15 minutes. But what about holding onto your practice for a few more years and not selling? You get the opportunity to work more and make more money, right?
I’ve been around the block long enough to know timing is everything. If I would have bought $10,000 worth of Microsoft stock in 1985, I would have stock worth $3,000,000 today. On the flip side, how many near-death experiences can you account for where if you would have stepped off the curb a split second earlier, you would have ended up in the hospital?
How does this relate to selling your practice? Right now, practice values are at an all-time high. Corporate buyers are paying up to 10 times your earnings before interest, taxes, and depreciation (EBITDA). The historical figure is 1.5 to 2 times EBITDA. They have been lowering their threshold on annual revenue requirements and have been looking at practices with values as low as $650,000. But, we have recently seen a small shift in their tone. The corporate buyers have been scrutinizing practices a bit more. Their offers on practices have been a bit less than they have in the past. Few groups are looking at smaller practices. It seems their buying frenzy has slowed just a little bit.
What does this matter to you if you’re holding onto your practice? Well, if you currently have an EBITDA of $300,000, your offer today may be 8x EBITDA, or $2.4 million. If the trend continues and corporates lower their offers, your offer may go down to 5X EBITDA, or $1.5 million. You just cost yourself $900,000 by waiting a few more years. Sure, you made $400,000 in income over those few years, but you could have still made an income had you sold the practice and continued to work for the corporate acquirer.
Granted, we don’t have a crystal ball. We don’t know how quickly the corporates are going to reduce their offers and by how much. However, we do have economic history, a bit of analysis and common sense. Corporates want the bigger practices doing over $1 million. Approximately 33% of practices collect over $1 million per year. The corporates and small groups already own a large portion of the practices that are high producing practices. They make the highest margins on these types of practices. As they use up capital and run out of large practices to buy, their focus will then be on making their practices as profitable as possible, thus, lowering their offers on practices as this happens.
So, just like choosing to hit your snooze button versus continuing to sleep in, there is a cost in holding onto your practice. The smart thing to do would be to sit down with your trusted advisor. Whether it be your accountant, financial planner, or your friendly neighborhood broker, someone can help you analyze how much it may cost you to hold onto your practice. We can always be reached, at no charge at email@example.com.
A high percentage of veterinary practice owners own the building their practice is located. The longer the doctor has owned the practice, the more equity they may have in the building. They also are paying themselves a high rent for tax planning purposes. One of the questions we get asked when a veterinarian is considering selling their practice is, “Should I also sell my building?”
One thing to consider when selling your practice regarding the real estate is, do you want to be a landlord? We have years of experience being a landlord and there are pros and cons. The pros are that you retain the building and get a monthly rental payment. Hopefully, that rental payment covers the mortgage, taxes, maintenance, insurance, and any replacement of major capital items. That includes when the HVAC system or roof fails and they need replacing. The other pro may be an appreciation of the real estate. Currently, we are in a high real estate market. Real estate markets are cyclical. They go up and they go down. There is timing involved in a sale. You time it right and you can reap your rewards of all the years you have owned the building. Time it wrong, and you feel a little pain from not selling at the height of the market.
The cons are like the pros. Being a landlord requires you to be on call 24 hours per day and 7 days per week. If a heavy storm occurs and the snow collapses the roof, the wind blows a tree onto the building, or the parking lot floods into the building, guess who gets the phone call? That’s correct, you! We have been on the receiving end on calls that happen at 2:00 in the morning when the building started to flood.
Another con is when the lease is up and the tenant decides they want to own their own building. They didn’t tell you that they purchased the building next door and you now no longer have a tenant! The odds of getting another veterinarian to start up a practice in your building is very low. It will also be difficult to get another tenant quickly. Potential tenants are scared away because the building was formerly occupied by a veterinarian. They think there will be odors, or the general public has known that location as a veterinary practice location and it may be hard to change the general public’s view of that location. There are three veterinary buildings within five miles of our office that have been vacant for several years due to this exact thing happening.
The third con is timing the market. We’re currently in an up-cycle market. With interest rates and building inventory low and demand high, building values and prices are on the high end. Holding onto the building so you can get some cash flow and then sell the building later could cause you to lose hundreds of thousands of dollars. Also, a building has more value to an owner/user than it does to an investor. That means when you sell your practice, a buyer may be willing to pay 100% of market value, or slightly higher than market value in order to acquire the building. Whereas, an investor will try to negotiate and get the best possible price they can get.
In summary, owning your own building while you are in practice is the smart thing to do. You build equity, pay yourself rent, and can do anything you want to the building. But after you sell your practice, it may be a different story. Consult with your transition broker, who should also have commercial real estate experience, and get sound advice to help you make the right decision.