Veterinary medicine can be a satisfying career, but there is a distinct difference between the experience of working as an employee vet and as an employer vet. For those considering the latter, an important question for self-reflection is, “Why am I considering it?”
“Practice ownership will provide thorough and ultimate decision-making authority,” said consultant Peter E. Gollub, DVM, JD, of Gollub Law Office in Natick, Mass. “For those that prefer or even insist on the ability to control the manner and administration of their business and medicine, employee status cannot match business ownership.”
An owner who runs a practice well will earn more money over the long run than an associate veterinarian, said Karen E. Felsted, CPA, MS, DVM, CVPM, CVA, the founder of PantheraT Veterinary Management Consulting in Dallas. Plus, she said, an owner will build equity in the business and real estate, which can be sold someday.
“The other aspect is you get to do things your own way,” Dr. Felsted said. “You have more freedom than if you work for a practice under someone else.”
Once the decision is made to own a practice, the big question is do you buy an existing hospital or start one from scratch? There is no right or wrong answer. Start-ups must locate office space, purchase equipment, build a customer base, establish a marketing plan and hire staff, all of which costs serious money. If one were to buy an existing clinic, the business already has established cash flow and there’s less of a need to build a clientele.
Making a Choice
Byron S. Farquer, DVM, CVA, a senior veterinary practice appraiser at Simmons & Associates Pacific Inc. in Oakdale, Calif., believes that in almost all cases it’s best to buy an established practice that is running smoothly.
“The growth rate required of a new practice to catch up with the pre-existing practice may not be feasible,” Dr. Farquer said. “The one exception to this is a start-up practice put in a community that desperately needs more veterinarians.
“Unfortunately we observe far too many veterinarians opening start-ups in communities that don’t need another new practice,” he said. “They do it because they like or already work in that community. Too many practices will stifle the growth of the new practice, and they may find that after five years they are burned out, overworked and still struggling to be profitable.”
Tiffany Margolin, DVM, Dipl. ABVP, who owns From The Heart, a mobile veterinary practice in Agoura Hills, Calif., noted some of the cons of starting a new practice:
- The build-out costs may be as expensive as buying an existing practice.
- There are no existing clients or cash flow.
- Establishing management protocols from the ground up, including hiring employees, can be very time-consuming.
“Still, there are lower entry costs generally, you have more time to put systems in place since it’s slower initially, and you can shape and build the practice exactly the way you want,” she said.
Acquiring an existing practice helps to ensure that vital income continues to flow in after the acquisition and through any transition.
“A purchase of an existing practice will provide the new owner with an increased, but not guaranteed, level of certainty, and the new, acquiring owner can expect to pay more for an existing practice for that reason,” Dr. Gollub said. “The amount of the purchase price not directly attributable to assets generally is referred to as the goodwill, or ongoing value of the practice.
“One of the largest challenges facing an aspiring practice acquirer is determining if the selling practice owner’s sale price—for assets, goodwill or other benefits—makes financial sense for the potential acquirer.”
Patrick Spach, general manager of veterinary lending at Live Oak Bank in Wilmington, N.C., noted that now is a good time to become an owner because of low-interest rates.
“The primary benefit in practice ownership, especially for veterinarians graduating after 2005—when the debt-to-income ratio for new veterinarians began to increase sharply—is the ability to earn more and see some real value in the investment in a veterinary degree,” he said. “Another benefit to ownership is the ability to remain independent.”
An associate veterinarian ready to make the jump into ownership needs to have a strong business plan, a good credit score and at least a year or two in practice.
“We always suggest getting the right people to help assist in the potential transaction, such as a banker, accountant and attorney,” Spach said. “The banker will inform you of the information they will need to assess whether or not they are willing to finance a transaction, such as tax returns, interim financials and a business plan. An accountant will help you initially analyze these numbers and discuss the value of the business based on the cash flow.”
Farquer agreed that improving and protecting one’s credit history is vital to any sort of ownership.
“Years ago we rarely saw a veterinarian with a bad credit score, but it’s no longer uncommon,” he said.
“Minimize consumer debt,” he advised. “Usually the buyer will need a couple of years’ experience under his or her belt in order to secure financing. Try to accumulate at least some cash, perhaps $10,000 to $30,000, or a commitment from family and friends. This will help with securing financing as well.”
A bank will look at the business plan and the veterinarian’s ability to be successful as a practice owner.
“Veterinarians have student debt, therefore a lot of first-time owners or recent owners are not sitting on a pile of cash,” Spach said. “There is a high barrier to entry to become a veterinarian, and by purchasing or starting a practice, this will become their biggest asset if they are able to successfully operate a practice.
“We do look at credit scores and the household financial stability,” he added, “but if someone has $10,000 in savings or $50,000 in savings, their plan and ability to execute their plan is the most important piece to ownership.”
Elizabeth Colleran, DVM, MS, Dipl. ABVP, who owns Chico Hospital for Cats in Chico, Calif., said every business opportunity should be looked at through the lens of a comprehensive business plan.
“Once you are confident your business plan is a strong one, become the business manager you never planned upon being when you went to veterinary school,” she said. “You won’t be able to hire a practice manager until you gross at least $1 million, so you will need to be self-reliant about human resources, inventory management, staff costs and facilities management.
“You must know what benchmarks are appropriate for your practice type and how to find out if you meet them.”
A number of years after finding success, Dr. Colleran started a second practice in Portland, Ore., 500 miles from her first. The distance left her vulnerable to hiring mistakes, mismatches and bad habits.
“Once I had a vacation planned after waiting years to do so,” she said. “One of my doctors at the second practice had a meltdown. I had to drop everything and go there to work.
“If you aren’t there every day, the protocols you put in place, the quality you demand, the discipline you desire, can erode,” Colleran said. “There is no substitute for being present in the practice every minute for the first several years. I now have a wonderful staff there, but it took longer than it would have had I been present all the time.”
Late to the Game
A common concern among older veterinarians is whether they will be able to sell their clinic at retirement age given the starting wages and student debt of the newer generation of practitioners.
“We suggest identifying a successor in advance,” Live Oak’s Spach said. “This allows the seller to identify who they believe is best to carry on their legacy, per se, as well as monetize a large asset they have built over a period of time.
“An advantage is the bank can prequalify the successor, and the seller will know in advance,” he said. “Assuming the practice continues to perform and the successor’s personal financial situation does not negatively change, the successor will be able to obtain financing at the target sale date.”
For that reason, Farquer, of Simmons & Associates, recommends a veterinarian think like a seller before buying and ask herself, “Who will buy this practice in 20 years?”
“Recognize the limitations that might be in play and be OK with it,” Farquer said. “For example, if you love skiing and operate a solo practice in a rural mountain community that provides a living but not much beyond that, you may have to accept that it might not be sell-able down the road.
“One strategy some are using in this situation is to merge two small practices into one with the goal that its size will help both individual solo practitioners to successfully complete a sale.”
Originally published in the July 2016 issue of Veterinary Practice News. Did you enjoy this article? Then subscribe today!