Practice Lending Looking Up In The New Year

2013 looking like a year to invest in your own veterinary practice.

If you’re looking to step out of the shadows and buy your own veterinary practice–or if you’re looking to sell and hang up the ol’ surgical gloves–2013 may be your year.

Banks with cash to lend are looking for you. If that sounds like a commercial, it may be just the pitch potential practice buyers and sellers will hear this year.

A business lending environment that has been less than stellar since 2007 may be nearing an end, and borrowers may once again start feeling more like coveted customers and less like they’re waiting in line at the department of motor vehicles.

“There’s capital available for the first-time practice owner,” said Bill Murray, senior vice president with Bank of America Practice Solutions, headquartered in Columbus, Ohio.

That’s one of the nation’s largest and best known lenders speaking like a salesman with money to hand out. And Murray has plans to make more loans in 2013.

“We’ve tripled the amount to capital we’ve lent to the veterinary industry in the last couple of years,” he said. “And we expect to see that type of growth going forward for the next two or three years.”

In fact, the plans for Murray’s veterinary division call for drastically more lending in 2013.

“We’re expecting to see another big growth spurt of 35 to 40 percent,” Murray said.

Lending growth began slowly in 2011 and picked up steam, he said. As of November, Murray’s division had grown the capital it loaned by more than 33 percent over 2011.

Such robust lending plans, which are also being reported by other lenders focused on the veterinary practice market, could mean that if you’re looking to start a vet practice—and that practice has solid financial numbers and you have a good business plan–you can expect good service.

“There’s definitely competition in the market again,” Murray said. “In the last 12 months we’ve seen a lot of smaller banks looking to boost their earnings.”

Continued low interest rates are key to this anticipated lending uptick. For a long time, banks have been making very little money off deposits and individual and business accounts, so more and more lenders, such as those already lending in the medical field, have expanded their lending to veterinary practices, according to Murray.

“You’re seeing a lot of lenders that maybe don’t have a specialized division that focuses on veterinarians, but maybe they have a health care sector,” Murray said.

Practice Transition
The majority of those Murray expects to be his customers in 2013 and beyond will come from the practice transition business.

“A lot of those businesses are now coming to market,” Murray said.

One scenario he’s seeing is the retiring clinic owner: She has decided the economy is coming back, she has finally got some of her 401(k) retirement savings back, and the sale she’s put off for the last few years is looking good thanks to a keen interest from the up-and-coming associate with a bit of a savings account and ample experience.

“We’re seeing a flood of new practices transitioning to new ownership,” Murray said.

A Few Pieces of Advice
Fixed or variable?
Loans typically have variable or fixed interest rates. Some borrowers are drawn to the surety of a fixed rate, while others like a floating interest rate that is lower and will allow them to retire debt at a quicker pace. But there’s a price to pay for variable rates, and it’s that “They carry the risk that the interest rate may go up,” said Travis York, business line manager of the veterinary division of Live Oak, based in Wilmington, N.C.

Debt service
1.1 times debt service is an ideal ratio, according to York. That means for every dollar a month clinics must pay in debt, they should have $1.10 per month in cash flow. “When we’re evaluating, we’re really looking to the cash flow,” York said.

Borrower basics
Lenders like Bank of America are looking for borrowers with good earnings and a solid employment history, as a veterinary associate who has demonstrated the ability to save and make sound financial decisions. “You don’t need the big house or the big car before you have the job,” Bill Murray, senior vice president with Bank of America Practice Solutions, advises.

Target practices
The quality of a practice is often taken into account by lenders when deciding whether to make a loan. A practice that isn’t operating efficiently, has too much staff overhead, cash flow problems or debt may not be a good candidate for a loan. A clinic with profit margins in the 20 to 25 percent range will keep interest rates low and improve the chances for loan approval, Murray said.

Regional considerations
Associate veterinarians seeking to purchase or open a practice often get hooked on a certain geographic area. To ensure that you are getting the best deal and the best fit, Murray advises buyers to “cast a wider net.”

Seller advice
Have your practice evaluated by  a professional to find out what it is worth, and do it before taking your practice to market, Murray says.

Business plan
The U.S. Small Business Administration offers free instruction on creating a business plan on its website. The site takes visitors through everything from writing an executive summary to financial projections. It also has a section on funding requests. 

Business loan tips offers business loan tips. They include: Set up a bank account at a bank that deals with your size and type of business; manage the account effectively; borrow a short-term loan and pay it off quickly; and get to know your banker and help her understand your business.

Use your assets as collateral wisely. Investment website advises: Keep detailed records of your assets’ worth; know what you can use as collateral, such as real property or cash savings; understand the risks, and seek a financial adviser if possible; negotiate with the lenders if you can for better terms; consider peer-to-peer lending (websites like enable borrowers to choose a loan and a purpose and post the listing in an effort to find lenders). —DJ

Even if the economy doesn’t continue to improve, or if it improves at an anemic rate, Travis York, business line manager of the veterinary division of Live Oak Bank in Wilmington, N.C., sees a brisk lending environment for the veterinary business this year.

York has seen a lull in practice sales in the last two years thanks to the economy, which hammered 401(k)s and forced veterinarians who were looking to retire to hold on to their practices longer than planned to try to recoup some of that retirement savings–also hoping  to see the value of their practices rise again.

Like Murray, York believes those practitioners will either see signs of an economic rebound and put up their clinics for sale, or they’ll see that a rebound isn’t on the horizon, they’ll get tired of holding on and get out now before their practices lose even more value.

Either way, York added, practice values may be buoyed by associates looking to step up and be their own boss.

“There are a lot of associates looking to buy,” York said. “When a good practice hits the market, there are five, six or more qualified buyers looking for a practice.”

The number of practices seeking loans for expansion may also be on the rise this year—for example, veterinary clinics looking to expand from 2,000-square-feet to 4,000-square-feet to add ancillary services like boarding, grooming or additional medical services, York said.

“We are seeing a great opportunity for people who own a business and they managed their business through the economic downturn and they now are looking to expand,” York said.

York said he’s seen roughly a 20 percent increase in construction loan volume for veterinary practices in 2012 over 2011.

Len Jones, DVM, handles sales for the Southeast Region and national marketing for Total Practice Solutions Group, based in St. Simons, Ga.

Jones, who had small and large animal practices for 20 years in Alabama, is a broker who works on hooking up practices with lenders.

Like Murray and York, Jones believes that this year and beyond there will be an influx of practices coming to market.

Adding to the practice owners who held on in hopes of an economic rebound are a plethora of owners who hesitated to enter into a selling phase because 2012 was an election year, and one of great uncertainty, Jones said.

“A lot of people seemed to be not sure what they wanted to do,” Jones said. “But after the election we saw an increase in buyer calls.”

Jones believes that practice owners who were waiting to see if tax rates would hold steady have gotten a definitive answer from the Obama administration, which is pushing to let certain tax breaks expire while preserving others. Now, he said, the prospect of spending the next four years with an administration less interested in tax breaks may encourage those practice owners to finally get out.

“I think for this year, the first quarter, if these tax laws go through, sellers who are on the fence will want to come in and sell their practice,” Jones said, referring to the Obama Administration’s desire to let lapse Bush-era tax cuts for the wealthiest Americans. “I think sellers are going to think it’s only going to get worse in the next four years.”
Despite the good tidings some lenders are reporting, Jones doesn’t foresee such a cheery environment for veterinary practice lending.

“Personally, I think there is going to be a glut of practices on the market,” he said.

Many practices waiting to come to market are what he termed “no-lo practices,” in reference to practices having no value to low value.

Such a practice may gross $300,000 or $400,000 yearly, for example, but may be earning only $100,000. Not only is there a diminished promise of earning a good living from such a practice, a potential buyer may find it difficult to obtain a loan, Jones said.

“A lot of practices, I feel, will just wind up closing,” he added.

When Jones got into the brokerage business 11 years ago, he said, it was not uncommon for a practice to sell for 90 to 100 percent of its revenue. Now it’s closer to 60 percent, he said.

Earlier in this millennium, a practice that garnered $1 million in revenue could have a market value of $800,000 to $900,000, while such a practice today might be worth $600,000, Jones said.

That is because when Jones started, requirements for loans, like a good cash flow and strong revenue, were far less strict.
“Lenders are a a lot more critical of these practices now,” he said. “We’re seeing a lot more declines.”

With a note of optimism, Jones added, “A good practice will still be in demand, but a rural practice doing $500,000 in rural America—those are going to be hard to get rid of.”

Indeed, Jones makes a dire prediction for the rural veterinary market: 30 percent of all practices in the United States will end up closing their doors in the next 10 years, thanks to a demographic trend that is pushing aspiring veterinary clinic owners out of small towns and into large cities.

“There’s just no demand for the small-town practice where the doctor works 80 hours a week,” he said.  “If you’re in rural Alabama, your chances of selling a practice are not very good.”

In fact, most of the buyer calls Jones fields are for practices grossing above $700,000 and located in metropolitan areas.

Whether it will be a good, bad or downright ugly year for practice lending, interest rates are holding steady thanks to the Federal Reserve’s and its persistence in holding down the prime lending rate.

Loan rates for commercial real estate transactions, such as expansions or purchases of medical office space, remain favorable, as do loans for startup operating expenses, Bank of America’s Murray said.

“You’re seeing rates on the commercial side in the 4.5 to 5.5 percent range,” he said. “We expect those to sit there for the next six to nine months.”

In addition to real estate loans, Bank of America offers conventional business loans. The business loan is for construction, equipment, working capital and medicines, including an opening supply order. Business loans are offered on a 10- to 15-year term at between 5 and 6.5 percent.

“Historically these rates are low, and they are the lowest we’ve ever had,” said Murray, who’s been with Bank of America for 15 years. “If you are considering a project or are considering some type of purchase, you will never find cheaper money than you will today.”

Live Oak’s York agreed money is cheap, but he noted that clinics seeking to expand should have good cash flow to qualify for a loan, because rates are closely tied to risk.

“When we’re evaluating, we’re really looking to the cash flow,” York said. “Does the business have the ability to support those additional services? We generally like to see at least the ability to cover the proposed debt services.”

According to York, 1.1 times debt service is an ideal ratio. That means for every dollar a month clinics must pay in debt, they should have $1.10 per month in cash flow.

Live Oak offers loans for an entire transaction—an all-inclusive real estate and a business loan together at around a 4.5-percent range, with riskier lending heading into the 7.5-percent range. Startup practices can expect an adjustable rate in the high 5-percent to low 7-percent range.

Murray said cash flow is important, but it is not necessarily king as a deciding factor in loans.

“We’re looking at the borrower and we’re looking at the business and we’re trying to see if they are a match together,” he said.

Murray looks for a strong borrower, with good earnings and a solid employment history as an associate.

“As you’re working, demonstrate the ability to save and make sound financial decisions,” Murray advises. “You don’t need the big house or the big car before you have the job.”

Also taken into consideration is the quality of  practice, he said. Borrowers looking at a practice that isn’t operating efficiently, or has too much staff overhead, may get denied. A clinic with solid profit margins, say in the 20 to 25 percent range, will keep interest rates low and improve the chances for loan approval, Murray said.

“You’re looking for a practice that you’re comfortable managing, and that will provide you with the cash flow that you’re living the life you’re living (now) and can make you comfortable,” he said, adding that associates sometimes get fixated on a certain geographic area. Instead, he advices, “Cast a wider net.”

His advice to sellers: Have your practice evaluated by a professional to find out what it is worth, and do it before you take your practice to market. 


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