Financial Opportunity, Challenges Ahead

With the economic struggles of late, finding a way to bring money into the practice is essential.

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Albert Einstein had it right when he said, “Necessity is the mother of all invention.” For veterinarians, the Great Recession forced the profession to find a way to become more business savvy and sustainable. 

Amid the economic crisis, a sharp change in veterinary product sales has had some practice owners concerned about their hospitals’ long-term strength.

“Veterinarians want to know where they stand in the eyes of lenders and they want to know what they need to do to keep their practice in the green,” says Michael Andrews, DVM, chairman of the National Commission on Veterinary Economic Issues (NCVEI) and owner of Woodcrest Veterinary Clinic in Riverside, Calif. “Focusing on profitability is what NCVEI is suggesting to owners for maintaining practice revenue and building on it.”

Veterinary-exclusive sales of maintenance products is a thing of the past. Building on and marketing procedures and modalities offered is the focus for 2011, experts say.

One of the first steps in making a practice profitable and attractive to lenders is demystifying why patient visits have declined, Dr. Andrews says. The results of a Brakke study on that very question are expected to be released this month at the North American Veterinary Conference. Practitioners can expect some actionable advice for adapting to the altered economy.

“NCVEI encourages veterinarians to be more efficient in all areas of practice, to be convenient to clients and educate them on the perks of first-hand veterinary care. These outweigh Internet searches and dial-up pharmacies,” Andrews says. “If a practice is experiencing fewer clients, spend more time with the ones scheduling appointments.”

While many practices ended 2010 with little or no revenue growth, 2011 promises new opportunities as well as challenges, experts say.

“Some hospitals are down 10 to 15 percent in 2010,” says Gary I. Glassman, CPA, a principal with the accounting firm Burzenski & Co. of East Haven, Conn. “Practices that suffered the most are parallel to cities hit hardest by job losses and the housing market. Most practices wrapped up 2010 flat or with single-digit gains, judging by our clients.”

Creative Payments

Clients who lack cash, credit cards or pet health insurance have a difficult time complying with medical recommendations for their pets, veterinarians say. But regardless of whether the economy is up or down, veterinarians can increase revenue by offering a wider variety of payment options.

Some practices hold checks or bill clients’ credit cards monthly as a means of a payment program,” says Joe Simrell, co-president of ExtendCredit.com of Aliso Viejo, Calif. “But the problem is, until now, there was no easy way to assess the credit risk of allowing clients to pay this way.

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ExtendCredit.com, an online provider of customer financing plans for small- and mid-sized businesses, is helping veterinarians who need an alternative to conventional third-party financing. The new program offers payment plans mutually agreed upon by the veterinarian and the pet owner.

Veterinarians sign up online to start using ExtendCredit.com services and pay a $40 monthly fee,” Simrell says. “At this point, the veterinarian can decide what interest rate they want to charge clients based on their credit bracket when they apply to use the program.”

The company encourages veterinarians to request an upfront partial payment, and then determine the length of the loan. Interest is compounded monthly on the declining balance.

Veterinarians also can offer the service to clients interested in dental hygiene and puppy plans.

Information about the program may be obtained at ExtendCredit.com/petcare-credit or by calling (888) 364-2808.

Lender’s View

Banks that cater to veterinary borrowers say they look at lending opportunities in new ways now.

“Although most practices aren’t experiencing the 7 to 10 percent year-after-year growth of days past, banks know it’s a more challenging environment and we’re looking at how individuals are responding to changes rather than simply noting their practice revenue is down,” says David Lucht, president of Live Oak Bank, with offices in Atlanta, San Francisco, Wilmington, N.C., and Colorado Springs, Colo. “We are still doing a lot of start-up and acquisition lending, but we are evaluating more carefully in means of cash flow coverage because there’s not a lot of growth in the industry.”

Borrower fees of about $30,000 that had been waived for Small Business Administration loans because of the economic crisis may be reinstated in 2011. These loans are popular among veterinarians initially looking for practice financing.

“Many clients wanted to refinance before the end of 2010 because of the anticipated fees for 2011, creating a bit of a surge in activity,” Lucht says. “Fees associated with SBA loans will be less of an issue when the economy is better, since the economy is key in veterinary practice growth. Right now, rates are still very good on SBA loans, in the range of 5 to 5.5 percent for start-ups.”

Having good credit and asking for a sensible amount is a winning formula for a loan, Glassman says.

“One of my clients just had a $1.5 million loan approved with 100 percent financing, so there are opportunities to be had under the right conditions,” he says. “Since lending criteria are lender specific, veterinarians have to weigh which opportunity will work best for what they need. SBA just changed its loan criteria mandating an independent appraisal commissioned by the bank. With SBA loans, 20 percent of the total practice cost paid by the veterinarian is common.”

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Cole Gillespie, national sales manager for Banc of America Practice Solutions of Westerville, Ohio, says the lender looks for practitioners who save money, live within their means and find opportunities in a down economy to market their services to clients.

“We aren’t seeing multiple veterinarians going in on buying a practice together like you might think would happen in this economy,” Gillespie says. “We’re seeing more expansions to additional locations. This isn’t a stagnant industry.”

Gillespie notes that business loans are different from home or car loans in that a house or vehicle still has value with or without a person inside it.

“We’re big advocates of fixed-rate loans because it’s a risk going with a variable rate,” Gillespie says. “We have concerns going into 2011. Some say the economy is improving, but we don’t know if it will be a double-dipper recession and if we need to protect our investment as a lender. Unemployment is still at an unacceptable rate.

“Currently, a 10-year, fixed-rate loan is at 7 to 8 percent. This is a safer bet when choosing a loan because rates will go up, and when they do, variable rates will move up with them.”

Talking with a CPA before approaching a lender may help potential borrowers because the accountant can perfect a business plan presentation and anticipate bankers’ questions.

“Presenting documentation and being prepared for what the banks are looking for will make the loan applicant appear more organized and will mean less back and forth time with the bank,” Glassman says. “Expediting the process is always high on the veterinarian’s list.”

VeterinaryLoans.com processed more than $43 million in borrower-lender matching requests through the third quarter of 2010, says the company’s Byron Farquer, DVM, AVA, who also is a broker with Simmons and Associates.

“More veterinarians will be looking into loans in 2011 because practices can put off capital expenses and reinvestments for only so long,” Dr. Farquer says. “I believe the economy will start to improve by the third quarter of 2011 and that should improve consumer spending.”

Experts say 100 percent financing is rare in today’s lending climate and shouldn’t be relied on. The lending process has been forever altered because of the economy, they say, and money will be allocated with greater caution.

Other Variables

“It’s just fundamental good underwriting to want veterinarians to have skin in the deal, too,” Live Oak Bank’s Lucht says. “Part of the reason so many banks got in trouble and took clients down with them is because they were giving out bad loans.

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“We see that veterinarians are working harder at marketing their services than they ever thought they would, and we know other industries’ portfolios are really ugly compared to what we see with veterinarians. Portfolios that don’t show a heavy reliance on product sales are essential.”

Geography and practice type play a big role today in the success of veterinary hospitals. Rural areas and specialty practices are suffering more than urban markets and primary care practices. California has some struggling areas and other places faring better. Northeastern states and Texas are doing well for the most part, Lucht says.

“Veterinarians rely on the economy in about a three-mile radius from their practice, so evaluations are really city by city,” Lucht says. “This industry still has one of the brightest outlooks. Pets continue to be a consumer priority. There’s no way to outsource veterinary services, and a limited number of veterinary colleges means less competition.”

Linda Workman, MS, DVM, executive director of VetPartners, thinks the economic recovery will be slow for the veterinary profession, pointing to NCVEI/VetPartners Profitability Estimator results from Oct. 8 that revealed the average profit margin by that date was 9.76 percent. Just over 25 percent of practices participating in the survey had below-average profit margins of 8 to 12.99 percent, and nearly 37 percent reported margins of less than 8 percent. Practices can estimate their profitability at VetPartners.org.

Dr. Workman says practice owners are becoming more aware of the negative impact of excessive discounting, giveaways and missed charges.

“Profitability percentages have actually increased in many practices that have made themselves lean,” she says. “We are hoping this model will become the new practice model even after practice revenues return to normal.”

Visits Over Products

Glassman, of Burzenski & Co., says product sales typically make up 27 to 33 percent of veterinary practice revenue.

“Having a third of total revenue coming from product sales is a thing of the past,” he says. “Veterinarians who want to still offer products to clients need to communicate their price compared with the competitions’.”

Workman emphasizes the need to “pump up the volume” in 2011.

“Dog and cat visits are down and we need to bring the numbers back up,” she says. “We need to attract new clients while taking care of the ones we have. I think 2011 will show a greater shift to external marketing, social media and online marketing.

“Some members fear that owners may too quickly forget these difficult times and return to their old ways of inefficient management. Other VetPartner members are confident that practices will stay leaner even when the economy turns around.” 


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