You have had a great career and now you are thinking about selling and transitioning out of your veterinary practice. You would like to get the best value for your practice. Do you just walk away? Being prepared can not only help you get the best price, it will help ensure a smooth transition.
Here are a few things you can do to help prepare for your veterinary practice transition:
- Know your Financial Situation – Meet with your financial advisor, CPA, or whoever gives you financial advice to get a good picture of where you are with your savings and investments.
- Get a Practice Valuation – A practice valuation will help you see how much equity you have in your practice. Additionally, a CPA can help you figure out what the taxes and net proceeds from your sale will be.
- Update Technology – Buyer’s like to see new technology in a practice.
- Cosmetic Updates – Have you updated the interior with paint and carpet in the last 20 years? If not, it’s time. Buyers like a practice with a fresh feel to it. A 1970’s feel was good in the 1970’s.
- Review Accounts Receivable Aging – Collect any past due accounts, send to collections or write them off. Also, review credits to either pay back to the patient or send unclaimed property to the State.
- Review Staffing – Are you over or understaffed? Adjust accordingly.
- Clean Up your Financial Statements – Make sure the expenses you’re running through your veterinary practice are related to your practice, or at least identifiable as an adjustment.
- Consider Ramping Up Production – If you are not sure how then hire a veterinary consultant. Ramping up your practice when you’re 3 or more years out will pay dividends on the sales price.
- Review Your Fees – Do you have the lowest fees in the area? Consider a fee increase to catch up.
- Harvest your Equity – Maybe you are a few years away from retirement but tired of being an owner. You should consider selling now, take the equity out of your veterinary practice and work back as a veterinary associate.
We’d be happy to answer your questions, give recommendations, and talk through the process of your transition. Contact us if you’d like to get together for a free consultation and a cup of coffee or lunch. Email firstname.lastname@example.org or call 877-866-6053.
Stock Sale. If you are incorporated, sale of the stock in your corporation to the veterinary practice buyer can potentially yield you the greatest tax savings, because the sale of stock is almost exclusively taxed at the lower fixed capital gains rate as compared to the higher, tiered ordinary income rates. However, and this is a BIG however, stock is a non-depreciable asset to the buyer. As such, the veterinary practice buyer is not able to write off the sales price and essentially ends up buying your practice with after-tax dollars. Consequently, a buyer is likely only to agree to buy your stock if you are willing to reduce your purchase price by 30 percent or more. For this reason (and many associated legal and liability complications), almost all veterinary practices are sold as “asset sales.” In other words, the seller retains his/her corporation and all of its stock and instead sells all of the tangible and intangible assets of the corporation (i.e., the veterinary practice). The buyer is then able to depreciate and amortize (write off) the entire purchase price.
Price Allocation. The IRS requires the total price of a veterinary practice for sale to be allocated to the various types of assets being sold and that the allocation be made according to the fair market value of the assets. As a general rule, the tangible assets are taxed as ordinary income above basis, and the intangible assets are taxed as capital gains. (Above basis means the difference between what you are selling the tangible assets for and your book value or depreciated value.) Any consideration for a covenant not to compete will also be taxed as ordinary income. Since fair market value is somewhat subjective, there is some room for negotiating the overall allocation of the purchase price. As a veterinary practice seller, you will save taxes if you can negotiate with a buyer for a lower allocation to tangible assets (equipment, furniture, fixtures, supplies, etc.) and a higher allocation to intangible assets (goodwill and patient records). (Unfortunately, it will benefit the veterinary practice buyer to have just the opposite allocation, so consideration must be given to making the allocation fair to both parties.)
Carry back a note. Sellers frequently ask us, “Won’t I save on taxes if I self-finance part or all of the sales price (i.e., carry back a promissory note from the buyer)?” The answer is, “No, but maybe . . .” As mentioned above, the portion of the price in an asset sale that will be taxed as ordinary income will be due in the year of the sale. That recapture will be taxed regardless of the receipt of any actual cash at closing, which means you owe the ordinary income tax associated with the recapture even if you do not receive a cent at closing. Consequently, if you do not want to have to pay to sell your practice, it would be prudent to ask for enough of a cash down payment to cover the tax liability you will incur from the recapture. Since most of the remainder of the sales price will be taxed as capital gains and since the capital gain tax rate is a fixed rate, the same tax will be applied and the same tax amount owed whether you receive that portion of the price now or paid to you over time; unless . . . there is a change in the capital gains tax rate before the note you are carrying is paid off. If the rates go up, you would be taxed at that higher rate on that income as it comes in. Otherwise, self-financing a portion of the price serves only to defer capital gains tax, but it will not lower the total tax. (Also note that the interest portion of any promissory note payments will be taxed as ordinary income to the holder, while the principal portion subject to capital gains will be taxed at the capital gains rate.)
Sale Timing. As discussed above, the tax associated with recapture over basis on the sale of tangible assets will be determined by your ordinary income tax bracket in the year of the sale. If you are planning to retire after the sale of your practice and, consequently, will have a drop in your ordinary income level, it may behoove you to strategically time the sale of your practice until after the start of the next tax year. Also, if you have owned your veterinary practice for less than one year, you should, if possible, wait at least one full year before selling it since the sale of goodwill within a year of ownership will result in the higher short-term capital gains rate being applied instead of the long-term capital gains rate.
“C” Corporation Consideration. If you are currently incorporated and being taxed as a regular “C” Corporation, the sale of goodwill by your corporation will likely be subject to double taxation, once as capital gains inside your corporation and then again as ordinary income when paid as a distribution to the shareholder(s). There is some case precedence that allows for the shareholder(s) of “C” Corporations in closely held and professional businesses to sell goodwill individually, outside of the corporation, thus avoiding that double taxation. If this applies to you, consult with your CPA and/or tax attorney regarding the details of such a tax strategy and its application to your particular situation.
1031 Exchanges. If you are selling a veterinary practice now and are planning to buy another practice within six months, a 1031 or “Like Kind” Exchange may be a tax deferral strategy to consider. It allows you to defer the taxes associated with recapture over basis you would otherwise incur with the sale of your tangible assets. A 1031 Exchange has very specific and rigid requirements. Consult with your CPA and/or tax attorney regarding the details of such a tax strategy.
Charitable Remainder Trusts. Charitable Remainder Trusts are not subject to capital gains tax. As such, a seller may potentially eliminate capital gains tax on the sale of his goodwill by donating it to a qualified charity. The downside, obviously, is that the seller must donate the goodwill proceeds to that charity. This is another strategy where you would want to receive guidance from your CPA and/or tax attorney.
Owning a veterinary practice can be like drinking water from a fire hose. It completely consumes you physically, emotionally, and intellectually. You not only wear the hat of a veterinarian, but you have to also play the role of human resources, accountant, marketing, public relations, lease negotiator, salesman, supply management, janitor, referee, etc. Whoever believes there is a 40 hour work week as a practice owner has not owned a veterinary practice. Yet, all the public ever sees of you are running in and out of the door telling them their furry friend needs treatment. They don’t see or appreciate your countless hours refereeing staff disputes, negotiating a new lease, fixing broken equipment, or installing a new light. They think you are gone fishing or at your lake house every weekend.
Many of you have recognized the power and need to delegate. You have people you can trust – your knowledgeable service rep now fixes your equipment, a skilled plumber who fixes the leaky sink, and an expert commercial broker who takes care of your lease. By delegating you have freed up your time, reduced your stress and let the experts use their skills to do what they do best.
When it comes time for your veterinary transition, you can try doing it yourself, but that’s like giving the patient a sharp veterinary instrument to spay their own pet. They don’t have the knowledge, experience, or skills to do it right and may end up bleeding in the end. Or, you can entrust your veterinary transition to the people at OMNI Veterinary Practice Group who have the experience, knowledge, and track record to help you achieve your goal giving you peace of mind, freedom, and more happiness.
Here are a few things you can do to help prepare for your veterinary practice transition:
1. Know your financial situation – Meet with your financial advisor, CPA, or whoever gives you financial advice to get a good picture of where you are with your savings and investments.
2. Get a practice valuation – A practice valuation will help you see how much equity you have in your practice. Additionally, a CPA can help you figure out what the taxes and net proceeds from your sale will be.
3. Update Technology – Buyer’s like to see new technology in a practice.
4. Cosmetic updates – Have you updated the interior with paint and carpet in the last 20 years? If not, it’s time. Buyers like a practice with a fresh feel to it. A 1970’s feel was good in the 1970’s.
5. Review Accounts Receivable Aging – Collect any past due accounts, send to collections or write them off. Also, review credits to either pay back to the patient or send unclaimed property to the State.
6. Review Staffing – Are you over or understaffed? Adjust accordingly.
7. Clean up your financial statements – Make sure the expenses you’re running through your veterinary practice financial are related to your practice, or at least identifiable as an adjustment.
8. Consider ramping up production – If you are not sure how, then hire a veterinary consultant. Ramping up your practice when you’re 3 or more years out will pay dividends on the sales price.
9. Review your fees – Do you have the lowest fees in the area? Consider a fee increase to catch up.
10. Harvest your Equity – Maybe you are a few years away from retirement, but tired of being an owner. You should consider selling now, take the equity out of your veterinary practice and work back as a veterinary associate.
Selling a Veterinary practice, also known as Veterinary practice transition, is a time consuming and often stressful experience, both for the seller and for the buyer. Even with a professional to help with the process, it can sometimes take years to complete. OMNI Veterinary Practice Group can help to streamline the selling process, making the transition smoother and much quicker for all involved.
Hard Work and Dedication
On average, it takes approximately 200 man hours to complete a transition from start to finish. The experienced team at OMNI Veterinary Practice Group work hard to complete the process as quickly as possible by focusing on each client’s needs, while maintaining complete confidentiality until the sale is completed. One way OMNI Veterinary Practice Group does this is by showing the Veterinary practice after hours, over the weekends, and will even conduct showings throughout the holidays as needed. When it comes to selling a Veterinary practice, OMNI Veterinary Practice Group is dedicated to the success of their client, before, during, and after the sale.
Keeping the Buyer Focused
Due diligence is a key part in Veterinary practice transitions. The experts at OMNI Veterinary Practice Group strive to keep buyers focused throughout each step of the process. Obtaining financing, for example, can be a complicated and drawn out step in selling a Veterinary practice. Through assisting buyers with the financing portion of Veterinary practice transitions, OMNI Veterinary Practice Group helps maintain the momentum of the sale up to closing, regardless of the type of transition needed to ensure the best possible outcome from both the seller and the buyer.
Hundreds of doctors have successfully bought and sold their practices through the OMNI Veterinary Practice Group. The experience allows the professionals at OMNI Veterinary Practice Group to handle a wide variety of Veterinary practice transitions throughout each step of selling a Veterinary practice, with creative transitions and solutions being a specialty. Some of the types of Veterinary practice transitions include:
- Setting up associate to own agreements
- Partnership sales
- Merging practices
- Outright sale of the practice
OMNI Veterinary Practice Group has the experience and resources to successfully perform all aspects of the transition process, such as:
- Real Estate Services
- Transitions and Sales
To learn more about how Omni Veterinary Practice Group helps doctors sell their Veterinary practice in the Washington, Oregon, and California area, please contact their team of experienced professionals for a free consultation.