I have heard from other practice transition consultants, bankers and attorneys who are telling me they are busier than ever. We, Omni Veterinary Practice group, are experiencing the same thing with more listings and more practices under contract than ever before. So, why are so many veterinarians deciding now is the time to sell? I believe it’s for a number of reasons:
- Interest Rates are rising. Buyers have had the luxury of living through ultra-low interest rates over the past five years. Historically, interest rates on practice acquisitions have been around 7% to 8%. The last five years, we’ve seen them dip down to an average of 3.8% and one bank offering loans at 1.89%! Crazy rates! Buyers are now seeing the rates creep back up. Current rates are around 5% to 5.5%. This is scaring some buyers into acting on their desire to own a practice. They feel if they wait, interest rates will be back to the 7 to 8% rate soon.
- Baby Boomers are reaching their peak. Baby boomers doctors make up the largest portion of the veterinarian population. Approximately 50% of veterinarians are now over the age of 55. The largest portion of the baby boomer population is now hitting their mid-60’s. These doctors are now selling and retiring. Along with this, as we age life events, such as health issues, or even death happens. We are seeing sellers with health challenges where they cannot work at the same pace as they were before, or they cannot work at all.
- Veterinarians tired of being Practice Owners. Several of our current listings are from doctors in their 40’s or 50’s who are just tired of being owners. Managing staff and managing expenses such as rent, employee benefits, etc., have caused owners to rethink their dream of owning a practice.
- Equity Harvesting. Veterinarians at the peak of their production in their practice are deciding to sell their practices and get the equity out before production goes down. Many are selling to either small groups or investor veterinarians who allow the seller to not only harvest their equity but also to work back in the practice. A perfect storm in most situations.
Whether you fit into any of these categories or even if you are in the middle of your career, you owe it to yourself and your family to have a transition plan in place. Life events happen. We meet with veterinarians of all ages to discuss their career plan and look at different options of how to sail into retirement, or even sell and work back. We put customized plans in place and offer solutions in the event the doctor needs to sell quickly.
Freshen up your practice – Buyers like to see a fresh, clean and somewhat updated practice. That does not mean you need to do a complete remodel and spend a $100,000. It does mean you need to take a look at your flooring and your walls. If you have large holes in your wall or your flooring was leftover linoleum from World War II, you should fix the holes and put in new flooring. Talk to your landlord, sometimes they will help with the cost. If you have equipment that is held together by the “fix everything” duct tape, contact your local equipment rep and have it fixed.
Update your technology – We run into an occasional practice owner that considers indoor plumbing as new technology. If you are in that category, or if you have not done any technology updates since Richard Nixon was president, you should look into digital x-rays and other technology that will not only appeal to buyers but will help you increase your production in the practice. Contact your equipment rep for the latest and great technology.
Financial Review – Have a meeting with your financial planner or advisor to see where you currently stand with your retirement portfolio. This will help determine how soon you can possibly retire, how much more you may need to put away to retire and/or how much you need to get out of your practice sale in order to retire.
Practice Valuation – You should get a valuation done on your practice. This will help your financial planner and you see where you stand with your entire portfolio. Some doctors rely heavily on their practice sale to be a piece of their retirement nest-egg, so if you don’t know what your practice may be worth, you don’t know what size of nest-egg you have. Call Omni for a free snapshot valuation.
Clean up your books – If you have been aggressive in running expenses and other items through payroll, you should work on making sure the books are clean. If you have multiple practices, but run all of your income and expenses through one tax id number, you should ensure you can separate the income and expenses of both practices. Meet with your CPA to analyze your numbers and see if you are in line with industry averages.
Grow your practice – One of the worst things you can do is take your foot off of the gas pedal. If you want to maximize the value of your practice, keep production at least level with prior years. A growing practice sells quicker and easier than a dying practice. If you don’t know how to grow your practice and make it more sellable, contact a consultant, or have a practice assessment done.
These are just a few items that you can do to help prepare your practice for a sale. If you work on these items now and over the next 3 years, you will maximize your practice value, enlarge your pool of potential buyers and be able to sell your practice quicker.
We counter this by asking them, “Who said you need to retire?” You can harvest your equity and either work back in the practice or go work for another veterinary hospital. What the CPAs and financial advisors may not see is that your practice collections numbers are going down, or that your blood pressure is skyrocketing due to the above-mentioned challenges of managing your practice to the point of a heart attack coming right around the corner.
If you have a good amount of equity in your practice, we can sell your practice and you can put the cash in the bank and work as an employee until you are ready to retire in 5, 10, 20 years, or as long as your heart desires. Transitioning out of your practice may be the way to enjoy your profession again.
If you think you might want to sell, we are happy to talk you through the process. Just give us a call at 877-866-6053 or email firstname.lastname@example.org to set up a free consultation.
by Jim Vander Mey
Practice Transition Advisor
- Assess your equipment. Upgraded practices sell faster. If you are more than five years away from retirement, I recommend a few upgrades such as recover your chairs if needed and freshen up the paint. If you want to sell in less than five years, stick to the paint and carpet because you will not get the tax benefit of major upgrades.
- Clean up your accounts receivable. Reimburse patient credits, collect old accounts and keep the A/R current.
- If you have an associate, make sure you have an associate agreement with a non-compete.
- If you have an employment agreement with your corporation and you are a C-Corporation, you may need to terminate yourself a few years before retiring. Consult your tax accountant.
- Consult your financial advisor and tax accountant. How much do you need to retire? How much do you have? What are the tax consequences?
- Get a practice valuation to see what proceeds you will get from the sale.
- Be realistic in the time it takes to sell. In remote areas, it can take a year or two. Metro areas, much less.
- Keep your production up as you near retirement. I see veterinarians slow down all the time in their last few years. Work the same number of days.
- Assess your staff. Do you have too many staff? Do you have one that should have been let go seven years ago?
- Have a practice assessment performed by a qualified consultant. Many will do it for free or a small fee. This may help show you some areas to improve over the next few years.
By focusing on these items in the coming years as you near retirement, you will avoid having your practice production and the price of your practice go down in your later years. Call me for a free consultation. I would be happy to take a look at your practice and give you my thoughts. Or, if you are thinking about transition right now, I have a database of buyers looking in your area. 877-866-6053 ext. 2.
By Jim Vander Mey
Practice Transition Advisor
Rule of thumb valuations are ones that are typically quoted and overly abused. The typical rule of thumb in a dental practice is a value based on a percentage of the practices gross collections. For metropolitan areas, the rule of thumb can be from 85% of collections up to 100% of collections. For a rural area, the value is typically 65% up to 85% of collections. Sounds simple and straightforward but why can this be inaccurate?
The first reason is the practice may have a good gross production number, say $800,000, but it also may be mismanaged with overhead of $750,000 leaving $50,000 leftover for debt service and salary for the doctor. Do you want to work for nothing? Using a rule of thumb approach, this practice, if in downtown Seattle or Portland, would sell for between $700,000 and $800,000. Secondly, you don’t know what is being run through the gross revenue production number. Is the practice on capitation plans, DSHS, or another low reimbursement program? Low reimbursement means low money to the practice, narrowing the margins. If you get a high volume of the low reimbursement programs, you can bump up your gross and leave little to pay off debt and doctors salary.
Another valuation method that can be dangerous is called the cash flow method. This method calculates an adjusted cash flow to the practice. The valuator will then normalize a doctors’ salary and calculate a value based on how much debt the practice can afford to pay. In some practices, the valuator will use a forecasted number to get the value even higher. This helps the seller when selling a practice, but is bad for the buyer as he or she is stuck paying a high debt payment each month.
Omni follows standards set by the Institute of Business Appraisers and the Society of Certified Public Accountants Certified Valuation Analyst program. We have on staff an Accredited Business Appraiser as well as two Certified Valuation Analysts. We use three different valuation methods to determine the value of a practice – the Production Acquisition Method, the Capitalization Rate Method and the Book Value method. Each of these methods focuses on a different aspect of the practice. After we calculate all 3 methods, we blend them to determine the total value of the practice. Blending these methods gives us a value that looks at the assets, cash flow, and overall collections of the practice – a full picture of the entire practice and not just a glimpse of one aspect of the practice.
If you are interested in hearing more about Omni’s Practice Valuations, send Jim an email or give us a call today at 877-866-6053.