Everything has a cost. If I hit the snooze button on the alarm one time, my cost could be that I potentially get to work late. If I get up early and don’t hit the snooze button, the cost is not being able to sleep an additional 10 or 15 minutes. 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 I account for where if I would have stepped off the curb a split second earlier, I would have ended up in the hospital?
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.
- Potential change in capital gains tax. You may have read that Washington state is proposing adding a capital gains tax of 9%. California already has a capital gains tax of 13%. Other states are also considering either implement or increasing their capital gains tax rate. I don’t know if this is going to happen or not, I don’t have a crystal ball, but I suggest you talk to your advisers and get their thoughts on capital gains.
- Interest rates are starting to go up. The Federal Reserve just had an increase in interest rates a couple of months ago. The interest rates on practice loans typically lag home loan rates by six months or so. We have had a nice run of low-interest rates that have been below 5%. I expect they’ll be going up over 5% and probably end up between 5.25% and 5.75% on the high end.
- Corporate practices are becoming more active. There are more and more corporate and smaller groups buying practices at above-market multiples. We had several doctors who were not considering selling, but when we told them they get a million dollars or more from a corporate buyer than a single individual buyer, they decided the additional funds were worth it. They sold their practice and made a lot of money all while continuing to work in the practice. Last we checked they were ecstatic with their decision and enjoying being a veterinarian again.
- Management headaches – Let’s face it, managing a business isn’t what it used to be. New taxes such as the new employee leave tax in Washington are being thrust upon us. Finding good help has become tougher and tougher. A good economy hasn’t meant higher-paying jobs for entry-level staff at Fortune 100 companies. Figuring out how to compete against corporates and other veterinarians down the street has become a daunting task.
- Uncertainty. Uncertainty is a scary thing. The economy has been going well, but how long will it sustain itself. The stock market is up and down like a roller coaster lately. In addition, we don’t know what the insurance companies will do with reimbursements.
These are a few things to consider if you’re on the fence about selling your practice. We are always happy to sit down and buy you a cup of coffee/tea and discuss your individual situation. We’ll even give you an approximate value of your practice from both an individual buyer and a corporate buyer standpoint. Talking through different options always helps in making your decision. Best wishes for an extremely happy and healthy New Year!
Ensuring you have a successful transition involves preparation and knowledge. There are numerous things you should do to make sure your practice is ready to sell. There are also several things you need to avoid in order to make your transition successful. Here are a few pitfalls to make sure to avoid:
- Letting your production go down prior to selling. We have seen many practices that were producing $300,000 to $500,000 a few years prior to contacting us. They thought they would cut down their days working and possibly hire an associate veterinarian. The associate ends up not producing as much, and then collections go down. The seller doesn’t take corrective action and production tanks. This can result in a loss of hundreds of thousands of lost practice value, if not more. So, keep your production numbers up.
- Counting on selling your practice to your associate. This always sounds like a great plan. You bring on an associate, train and mentor them and then you can slow down and eventually transition at your leisure. But you didn’t account for your associate getting married and moving out of state. Or, your associate decided they want to practice in another town. Or, your associate finding another opportunity in another practice. Or, you discuss the money issues and the relationship changes. We make plans and then… life happens. Statistics show that over 70% of associate-to-own opportunities do not make it to a sale. Be sure and get everything in writing and, if possible, use an intermediary. Additionally, consider having your associate put away money in an escrow account that is non-refundable.
- Not knowing your lease. …Or, at least, not understanding the impact some of the terms in the lease have on the sale of your practice. A tear-down clause can be a deal breaker. This is a clause which states the landlord can give you a 12-month notice to terminate the lease, so they can tear the building down and build a new one. It can be a longer notice and it can be a shorter lease. It’s very difficult to sell, if not impossible if you do not have a lease in place. Banks need to see that the term of the lease be as long as the term of the loan they are giving to your buyer, at least.
- Not selling your real estate with the sale of your practice. We have seen practices sold to corporates and to others where the tenant purchased the practice and, two years later, they move the practice to another building down the street with a larger space and better visibility. You’re now stuck with a vacant veterinary building. There are 3 vacant veterinary buildings within 5 miles of our office that were the result of this scenario. A careful analysis is required to determine what is best for your scenario.
- Not keeping tabs on your profitability (EBITDA). Valuations are based on the profitability of your practice. Letting your profitability slip by not actively managing your practice, letting payroll get too high, inventory out of control, etc., will result in the value of your practice going down considerably. In the case of a corporate buyer, it could be as much as a $10,000 in value for every $1,000 in EBITDA lost.
- Not evaluating all options. There are various buyers in the market. We sell to individual buyers, small group practice buyers as well as corporate buyers. When we ask sellers if they are okay with selling to a corporate buyer, we often get a reaction of, “No way. We won’t sell to that corporation(s).” We can introduce buyers where, after the sale, nobody would even know that you sold to a corporation because there were NO changes to the way the practice is being run. It isn’t always the case, but while an individual buyer may be limited to paying 2 to 4 times EBITDA, some corporates are willing to pay 5 to 10 times EBITDA (depending on the type of practice, etc. and in rare circumstances pay over 10 times EBITDA. We have come in after an individual owner was negotiating with a corporate buyer and we got them $1 million more than what they were originally going to accept. That’s a million dollars to help pay grandchildren’s education, bonus your hardworking staff, and enjoy retirement from working weekends and long hours for decades. If your practice proceeds are going to be used to fund your retirement, it can make a big difference in your retirement lifestyle.
- Not understanding the deal. Your transition may be a simple transaction where you are selling to an individual buyer, walk away, and retire. Even so, you still need to ensure that any long-term contracts, such as leases, are being taken over by the buyer, or a lease is in place, etc., Or, you may have a more complex transaction selling to a corporate. Corporate buyers often have clauses where you receive a portion of the sales price upfront and then additional dollars a couple of years later, but the practice numbers may need to remain the same or grow. Or, you may receive the 20% as payroll compensation instead of a purchase price. This might have tax implications. You may also be required to work back in the practice or other terms that need to be understood. Just be sure to have an expert who has experience in these transactions explain the terms of the deal to you.
- Having the wrong players on your team. The wrong attorney, accountant, broker, or banker can cost you potentially hundreds of thousands of dollars and an entire deal. Sellers often think they can use their friend or relative who is some type of attorney, bankruptcy, divorce, or real estate attorney whom they think will take care of them. The problem is, they don’t know the complexity involved in the deal and are not familiar with the terms. We have seen many transactions where this has occurred where an attorney who specializes in veterinary transitions may charge $5,000 but were charged $40,000 by their “friend” because they did not know what they were doing. The same can happen for an accountant, broker, or banker. We have stories for each where the wrong person costs the seller a lot of money and even the loss of a potential buyer.
- Telling your staff too early. A common question we get asked is, “When should I tell my staff about the sale of the practice?” We suggest the seller wait until the agreements are signed. Telling the staff too early may result in them leaving for another opportunity elsewhere. It also creates a fear of the unknown. Who’s the new buyer? Will my job stay intact? Will my pay be the same? What about my benefits and hours? Maybe I should find another job before I get laid off? Are they going to dictate how I practice? Will I have to change outside the lab? It may not seem like it is the right thing to do to wait until you’re near the end to tell the staff, but believe me, it is.
- Going it alone. Corporate buyers are throwing out offers to potential practice sellers left and right. Some are hiring DVMs to tell you that you do not need representation and that they will handle everything. But, is it the best offer you can get? Not only from a price perspective but best for your staff and clients, best fit, etc.? If you don’t know what the others have to offer, how would you know? A good broker knows all the other buyers and what kind of terms and pricing they typically offer. If you try to do it on your own, you could sell it to the wrong buyer for the wrong price. This also relates to individual buyers.
The pitfalls to avoid in a transition are many. I’ve just listed 10, but there are many more. Making any one of these mistakes could cost you thousands, hundreds of thousands, and even a million dollars. There’s too much to risk in not having experts on your side to ensure you don’t make these mistakes.
Take our advice and call us at 877-866-6053 ext. 2 for a free consultation on how to make your transition go as smoothly as possible.
The Seller May Not Receive Full Practice Value
A broker can help their client to achieve full value for the money they’ve placed into their business over the long-term. They can then work to obtain viable selling opportunities and to locate qualified buyers within the marketplace. Without this type of guidance, the seller may find their selling opportunities restricted. They may discover that they can only achieve a small proportion of their total Veterinary practice value in the sale. With corporate buyers in the mix, this can mean losing out on potentially a million dollars or more.
Sellers are unable to Handle the Legal Aspects Alone
The legal aspect of a practice transition is often a critical element within the Veterinary practice sale process. Buyers will have their lawyers review the business’s paperwork and any issues they find must be analyzed closely by experts in the legal field. Brokers often have significant legal experience or have a legal team on their side and can help handle any challenges that arise during the transition process, while keeping the seller’s needs as the foremost consideration. The broker will be available at any time via phone or email to answer the seller’s or buyer’s questions and move the transaction process along. This can help prevent the seller from making poor choices and becoming embroiled in legal challenges.
The Seller Doesn’t Have Marketing Experience
When bringing a Veterinary practice to the marketplace, the seller must be able to highlight the advantages of their business in a way that attracts qualified buyers. Brokers are often experts in this area. They can use their experience to craft compelling marketing materials for the seller and use their experience in the marketplace to build target buyer lists and send out high-value content to these buyer lists.
Sellers Cannot Handle Mediation with Buyers Alone
The buyer will likely have a lawyer driving their purchase process. The lawyer will be negotiating with the seller on all elements of the transaction, including the final price. Having a broker on-hand during this process ensures the broker can handle all mediation, negotiating on the seller’s behalf to get the right price and the ideal structure for the purchase.
Working with a qualified broker can help Veterinary practice sellers reduce their transaction challenges and secure a seamless sale. To learn more, speak with our team at OMNI Veterinary Practice Group at 877.866.6053 or visit our business website at www.omnipg-vet.com.