VALUATIONS / PRACTICE APPRAISAL

Purchase/Sale of a Veterinary Practice: Entrance and Exit Strategies

Speech by Louis M. Gatto, CPA
Given at AAHA Conference in San Diego, California
March 9, 1997

You can plan your way into and out of your veterinary hospital! Both plans require that you know what you want. There are five overall options for entering into an equity position in the veterinary industry. They are as follows:

• Option 1 is for the associate to Buy In on a partner or shareholder basis

• Option 2 is for the associate to Buy the practice and become the owner

• Option 3 is for the associate to Start a practice either as a sole proprietor or a sole shareholder

• Option 4 is for the associate to Start a partnership with one or more veterinarians

• Option 5 is the Interim Startup where the associate goes from a house call practice into an owner.

All of these options have their own particular advantages and disadvantages.

Option 1, which is the buy in of an associate to become a partner or shareholder, has many distinctive advantages and very few distinctive disadvantages. The advantages to the buy in are that you already know the sellers, you know the staff, you know the level of medicine practiced, you know the clients, you should know the cash flow, you know the problems in the practice, you can probably achieve a flexible down payment and monthly payments, you have an idea of what to change, the business plan is easier to compile, and you should have an overall comfort with the practice. The disadvantages to the buy in are that the negotiations are done with someone you've been working with (making it tougher on you in confrontations), the valuation is more difficult because the seller usually has a set price in mind, you will be signing a larger note, the time it takes to get a piece of the practice is usually longer, there can be negative tax consequences, and you potentially have partner conflicts to absorb.

Option 2, with the associate buying out the existing owner, has all the advantages of Option 1, including the distinct advantage of now having control over the entire practice. The disadvantages are identical to Option 1, except that a potential new associate must now grow the practice in order to make it a partnership at some time in the near future.

Option 3, starting a practice from scratch as either a sole proprietorship or a sole shareholder in a corporation, has many advantages. All of the responsibility is on your shoulders. You set all the policies and procedures, you pick the staff, you exercise all management and control. In addition, a start-up can be cheaper than a buy in because there is no goodwill involved. The disadvantages really boil down to one: all of the responsibility is on your shoulders! You have no clients, you have no prior business plan to follow, your cash flow is in question, loans may be harder to find, you have no on-site peer, and there is more down payment required.

Option 4, starting a practice with one or more veterinarian partners, has the advantage of shared management responsibilities, shared financial responsibilities, and shared implementation of policies and procedures. Having two or more owners can also mean you're open more hours, you have a flexible work schedule, you can pick the staff, and in the long run you potentially have more gross and more draws. The disadvantages are that in the short run there is less draws available because you are sharing the net profit with a partner (meaning you may be required to work relief or emergency to make up for the reduced draws), it takes longer to execute this transaction because you have a partner to make decisions with, and partner relationships change when the cash flow and operations have reached a consistent partner plane.

Option 5, the interim step of associate to house call practice has certain advantages, such as it is very inexpensive to initiate this practice, you have total control, all responsibilities are on your shoulders, you have a limited clientele, and your expenses are reduced. The disadvantages are a limited gross, spoiled clients that are difficult to convert to a practice environment, you have to do it all, it is difficult to plan cash flow, and it is very difficult to market yourself.

A successful practice will stem from your ability to master four crucial areas: technical, financial, marketing, and management. Technical skills, your ability to practice good veterinary medicine, will be the easiest of the four for many of you. But you'll find that your ability to manage and market your hospital could be the most important.

Exit strategies for owners revolve around the following five topics: self, practice, land and building, rented building, and buyer. Self is the most important aspect of an exit strategy. Understanding what you want out of life, what goals you would like to achieve, is crucial in developing an exit strategy. Wanting to stay healthy, to teach your grandchildren, to maintain a happy family, all of these play an important role.

With regards to land and building, it is our recommendation that you keep the land well groomed, keep the parking lot well maintained, and keep the property well maintenanced from the curb to the lot line. Don't do any expanding, don't replace anything unless broken or untrustworthy, and request a title report. With regard to a rented building, best that you keep the building again well maintenanced from curb to lot line. Don't do any expanding, don't replace anything unless broken or untrustworthy, discuss with the landlord a 15 year lease, and discuss with the landlord his intentions regarding the building.

For the practice, we recommend that you keep only staff which are rated 7's, 8's or 9's, you hire based on ownership qualities, hire veterinarians who's strengths are your weaknesses, schedule the transfer of management responsibilities to an associate, and train everyday. The clients should be moved to the associates, especially the A and B clients, make the C clients into B clients, get rid of all your D and E clients, and send all client's sons, daughters, grandsons and granddaughters to those 47, 37, and 27 year old associates. As far as equipment, replace only the basics, no new toys, and keep it all very well maintenanced. With regard to furniture and fixtures, replace only reception and exam room furniture and give your receptionist an annual $1,000 budget to keep the front looking good and fresh.

Financially, we recommend you disclose your real cash flow by not putting through those quasi business expenses for the next 3-5 years. Prepare a once-a-year expense report for auto, meals & entertainment, continuing education, insurance, travel, office supplies, repairs & maintenance, other asset purchases, pets, pet food, parties, doctor bills, laundry, dues, telephone, gifts, computer supplies, accounting fees, and contributions; and, file the expense report in November of each year. The goal here is to make the cash flow as high as possible prior to valuation. Also, prepare a cash flow for the one year period after your departure from the hospital for the new owner.

Administratively, bring the personnel and management files up to snuff, prepare budget versus actual reports, review your AAHA status if applicable, request an OSHA review, and keep all your invoices filed on a payee basis. As an owner, our overall recommendation is to stay as focused on the practice the last five years as you did the first five years.

The buyer should be given some focus so as to determine the key terms and ratios to negotiate ie. value, down payment, interest rate, terms, and special terms. Prepare an independent practice appraisal. Evaluate the buyer as it relates to experience, confidence, energy, their plan, and their capital. Also, meet with the buyer to evaluate medical protocol, practice philosophy, medical protocol, potential staff conflicts, potential client conflicts, and also request them to work two days with you, and two days at the practice without you.

Finally, put together a sales package for the buyer which discloses the practice history, practice philosophy, practice competition, practice staff, practice profile regarding active clients, inactive clients, number of active patients, number of canine, feline, exotics, etc. and your gross by service code, your gross by doctor code, and the number of invoices per month.

Planning is obviously the key to any entrance or exit strategy, and we highly recommend going beyond the planning stage to the pondering stage.

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