10 facts you need to know when purchasing or selling a practice (Proceedings)

10 facts you need to know when purchasing or selling a practice (Proceedings)

Aug 01, 2009

You have made the decision to sell. It is probably one of the most significant decisions you will make in your working life. Your practice and associated real estate is also probably your largest and single, most important asset. It may also be the case that your practice sale will be the main source of your retirement fund. The legal and tax structure of your transaction will play a significant role in how well you are protected for your future and how much cash you will ultimately walk away with. It's not the gross sale price that's most important; it's the amount of net cash after tax that you walk away with. Don't underestimate the importance of your professional advisors. They can make a significant difference in the final result of your transaction.

Today, age 65 may be the time when you collect social security but, with current medical advances, many are easily living into their 80's. With 20 to 25 years of good life remaining, age 65 is longer the age to absolutely stop working. Now, it would be nice to know that you have spent your working career not just making a good living and enjoying practice life, but also by rewarding yourself with an asset able to fund your retirement. This, along with other savings, will allow you time to enjoy the many years of life past age 65, independent of work.

To begin this process, it is extremely important to have a practice valuation done at least five years before planning the actual sale. This will provide adequate time to change the hospital cash flow if you are not satisfied with the initial valuation. Most hospital values are driven by the hospital cash flow in excess of amounts paid to the owner veterinarian(s) for their time devoted to veterinary services and management activities. Too often, practitioners make promises to associates for buy-in opportunities before they have completed the valuation and then are not satisfied with the results. At this point it may be too late to make significant changes. Sellers then sometimes take back offers already made, and, at this point, a good associate may be gone.

With the increasing number of baby boomers reaching retirement age, many practices will become available for sale, which is great for buyers, but maybe not so great for sellers. The pool of sellers will outnumber the amount of buyers, and corporate buyers will be more selective in their decision as to which practice to purchase. The number of veterinarians who enter the profession and want to own practices has and will continue to dwindle. The gender issue is an influencing factor, and we are seeing situations where more than one DVM may be stepping up to the plate to purchase a practice through a partnership venture. The rule of supply and demand will prevail. The successful practice will be a practice that has practiced a good quality of medicine and is adequately equipped with both medical and office equipment. The practice has also maintained adequate a fee schedule and developed good cash flow. It is predicted that practice buyers will not look at just the purchase price. They will not be afraid to spend good money for an opportunity that they believe provides them a good return on their investment. Other factors they may consider are: Location; facility, it's age and condition; whether it is owned or leased, and if leased what are the lease terms; demographics; practice stability; revenue/earnings growth potential; mix of services delivered; ability to transition the practice; staff quality; and effectiveness of the management systems.

There are also lenders now willing to loan doctors a good part if not all of the money for these opportunities if they have good credit. The basic criteria is that the practice will be successful enough to return the buyer a normalized salary for the provision of veterinary services and a management fee, and also provide enough excess cash flow to make the monthly note payments over a reasonable period of time, Today, that is a 7- to a 10-year period of time. These practices can be single-doctor practices that have performed exceptionally well but will most likely be multiple-doctor hospitals. This does not mean that they are single doctor owned, but are more likely to have more than one practitioner. They will also most likely be hospitals with $1 million or more of revenue, and will be well established in the community with a good location.

When it's that time to sell, make a clean break. Don't make the same mistake as many other practice owners who are selling the practice and proceed to negotiate sales, especially with associates, with a lot of strings attached.