ADVERTISEMENT

Practice sale or practice acquisition choices: when is the timing right so I can retire? (Proceedings)

source-image
Nov 01, 2010

The time for a practice sale depends on the following items: timing, personal health, interest in work, motivation for work, age, stress, funds, alternative investments and alternative activities. Some say you need 15-20 times your current earnings in investment funds for retirement. That means if spendable income is $100,000, then you need $2 million investment. You must know the value of the veterinary practice to hopefully get your retirement investment ($2 million in our example).

The purchase of a veterinary practice is likely to be the biggest financial commitment a veterinarian will ever make in his or her life. Therefore it must be very much analyzed, not only for financial reasons but for the personal issues involved. The buyer must decide if there is a match between the buyer and the clients and the style of medicine. There is also a need to match the buyer and the geography or location of the practice.

If those major philosophical issues can be resolved, then for the buyer the rest of the work has to do with the due diligence and feasibility studies, and getting buyer and sellers to agree on the details of the purchase.

Due diligence requires the buyer to study the style of medicine and the medical records as a minimum beginning review. Due diligence will include review of the factors needed for a feasibility study and financing and budget estimations. This includes review of several years of management financial history, quality medicine statistics, equipment quality, the fee schedule and review of invoices.

The review of the medical records to ascertain the compliance with medical standards should at least include reviewing for the depth and frequency of diagnostics, the methodologies of treatment, and frequency of client rechecks.

The minimum medical review should include the number of injections per patient on a sampling of the records, the number of diagnostic tests, the number of x-rays, and the number of prescriptions. This basic data is important to ascertain some quality of medicine.

Lastly, the minimum due diligence would include a fee schedule review. This may not be meaningful, if the buyer has not been working in a geographical area. If not, these figures must be compared to one of several sources of industry price surveys. Those include the American Animal Hospital Association, the AVMA, NCVEI, or National Commission on Veterinarian Economic Issues' baseline data. Another very good comparison of analysis of the pricing as compared to the bottom line would be to review the Well-Managed Practice Studies by Wutchiett and Associates and Veterinarian Economics Magazine.

After the above data has been reviewed, to see if there is room for improvement, the buyer can justify changing management and pricing to provide the cash flow, the next step is to review the practice from a fair market value (FMV) basis. This most likely will require a third party valuator to be involved. The cost of this practice valuation will vary from $6,000 to $10,000 depending on the state of the books and records provided to the valuator. It sounds simple, but it is very complicated to analyze the Profit and Loss Statements, the Balance Sheets, and make them coordinate with the Internal Revenue tax returns as a validation of real revenue and expenses.

A seller and a buyer can determine from a Valuator analyzing the data as related to the tax return, if a seller has been keeping some of the revenue off the books to save taxes or has been doing a large amount of bartering for services. The seller's action here would lower revenue and lower cash flow to decrease the value of the practice.

For sellers and buyers to understand areas of negotiability, they must understand the basic theories of practice valuation. Simply, a practice valuation requires a fair market value for the tangible assets plus the intangible assets including goodwill. The largest variable for seller's retirement or buyer's availability is the goodwill value, which is commonly based on excess earnings, times some capitalization rate. When this goodwill value is found and is added back to the assets and after the liabilities are deducted, a net fair market value for the practice can be determined.