The no-lo practice: Avoiding a practice worth less (Sponsored by AVPMCA)


The no-lo practice: Avoiding a practice worth less (Sponsored by AVPMCA)

Jan 01, 2008
By staff


Do you view practice ownership as job security or as an investment?

When this question was asked of both general and specialty practice owners who attended recent seminars, the answers were mixed. Those who saw ownership as job security praised the autonomy and control they gained by becoming owners. Those who viewed practice ownership as an investment reported varied expectations. Some said they were content to break even (i.e., just get the bills paid every month), while others said they expected returns on their investment as high as 25% or 30% each year.

Figure 1. How to view practice ownership like an investment
Most owners want their practices to provide them with more than mere job security. They want practice ownership to act like an investment and to build wealth for their retirement or for their heirs. But for ownership to act like an investment, owners have to view their practices as investments. See Figure 1 to learn how.

If you own or you plan to own a veterinary practice, you owe it to yourself to keep reading. The steps you take now can have a significant impact on your practice value and your ability to attract a qualified buyer. Even if your practice generates enough money to meet your personal and practice cash flow needs, would a potential buyer find that sufficient? Your needs are different from what a buyer may expect from your practice. After all, a buyer will be making payments on debt to acquire your practice and will expect the practice to generate those funds.

Just as you recommend regular exams for your clients' animals, you need to conduct a self-exam on your practice's health. In particular, you need to examine your true profit, which is an important component of practice value. Unfortunately, that hasn't been easy to do. The accounting principles that drive the reports you see are largely tax-driven (i.e., your financial statements are designed to minimize your profits to reduce your income taxes, not to give you a snapshot view of your practice's financial health).

In the absence of a reliable method for knowing if your practice is financially healthy and thus building value, you may own a practice that has little or no value. In the last few years, the number of practices with no value or low value has increased—to the point where the Valuation Issues Committee of the Association of Veterinary Practice Management Consultants & Advisors (AVPMCA) coined the term No-Lo Practice to describe these businesses.

This insidious disease is particularly dangerous because owners are often caught totally unaware until they try to sell the practice and a qualified practice appraiser gives them the bad news. That's much too late—by then the practice may be too infected and too diseased for short-term treatments to cure the illness quickly. As valuators, we don't like giving owners bad news, so we want to help you self-diagnose if you have a problem and show you how to fix it before it's time to sell.