Business ownership is not considered second nature for most. We know how to intuitively feed ourselves, tie our shoes, wash our hands, and most everyday tasks that have become engrained into us.
Veterinarians become owners because they are tired of working for someone else and desire to practice medicine their way. Maybe they want a better lifestyle and ownership of something. Each person has their reason, and making sound financial decisions within your practice can be a huge factor on what value you will receive when selling in the future.
A common question brought up is, “How do I expand and improve operations when it relates to purchasing expensive equipment?”
There are three ways to handle this. You can lease, finance, or use cash the practice has accumulated. Let’s take a deeper dive into how each one can impact your practice and to help you decide what the best action is for you when looking to update expired equipment or expand your current operations.
The upsides to leasing equipment:
- The equipment is new. Like, brand new. You do not have to worry about how it was handled or treated.
- There are warranties covering malfunctions. Whenever the machine or equipment stops working, you can easily contact the manufacturer to get repairs or replacements.
- The price for leasing the equipment could be less than financing. Since the payment is based on what the cost of the equipment will be in the future, the difference between the cost today and in the future is what you pay.
- The equipment can be returned at the end with no strings attached. At the end of the lease, you can decide to purchase the equipment outright or return it. Depending on how the numbers work out, you can determine what makes the most sense. There are occasions when the purchase price is so small that purchasing the equipment and selling afterward is a better decision.
- The overall price for leasing and purchasing at the end could be less than financing today.
The downsides to leasing equipment:
- There is the possibility for a never-ending payment. This is something not to be deterred about. You might enjoy having new equipment every so many years because there are updates and improvements. Make sure to consider the impact to the practice value and growth the payments are not negatively impacting them.
- You will need to replace the equipment and negotiate new prices when the lease is complete.
The upside to financing equipment:
- If you are looking for a deal, then you have the option to choose between new or used (if there is anything available).
- You own the equipment after the loan is paid. The payment will go away, and there is a possibility to resell in the future.
- When the equipment is new, repairs and replacement are potentially covered.
- You are using new cash flow generated by your practice to pay for the equipment.
The downside to financing equipment:
- Unfavorable financing terms. The monthly payment could be significantly higher based on the length of the loan, the cost of the equipment, and the interest charged for borrowing money.
- The equipment loses value by the end with little to no resale value.
- New equipment is released and the desire to change could cause you to lose money by switching before the end of the finance terms, or you are stuck until the loan is paid.
- The amount of interest could be expensive over the lifetime of the loan.
- The lifespan of the equipment could be the length of the financing terms. Look at this closely because the last thing you want to do is purchase something that will be obsolete in the end.
The upside to using cash:
- You own the equipment starting from day one.
- There are no monthly payments.
- There are no finance charges.
- You might get a better deal on the equipment.
The downside to using cash:
- The cash could have been used somewhere else in the practice to generate more profits.
- The cash could be transferred to your personal assets. Many practice owners will rely heavily on the sale of their practice for retirement income.
- There might not be enough cash available for day-to-day operations in the event there are nonproductive months.
- The cash is no longer available for your practice and the time to recover can be lengthy.
- The cash could have been used to provide meaningful benefits and rewards for your team.
How to make the process simple to choose what is best for you
- Lease if you are someone who genuinely wants to have the most up-to-date equipment.
- Finance if you are someone who will keep the equipment until it stops working. (Consider leasing to purchase at the end because you might pay less.)
- Purchase outright if you are someone who will not rely on the practice sale in the future for your retirement income and there is enough in the business accounts to keep the practice operating in the event there are nonproductive months.
There are many ways to approach purchasing expensive equipment. The best way to buy anything is to use new cash flow when available. The key words are cash flow, not cash. As the practice generates revenue and profits, the money is paid to purchase or lease that equipment.
Cash should rarely be used unless there is an adequate amount in the practice and the overall long-term practice goals and your personal goals are aligned beforehand. The key takeaway is to think wisely about the decisions you make so there is no lost time of money in the process.
Since your practice has many moving parts, make sure to budget time for yourself to plan and understand why you are in business. Are you looking to build personal wealth? Create a thriving environment for your employees? Practice the highest quality medicine? All the above? This will help guide you on what makes the most sense. Make sure to work with people who know the ins and outs of veterinary practices to help maximize your profits and practice value.
Tom Seeko has worked with practice owners and veterinarians since 2014. He is the cofounder of Florida Veterinary Advisors that work with veterinarians throughout the United States, Certified Exit Planner (CExP), business and personal financial advisor, and cohost of the Smarter Vet Financial podcast.
Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. This material contains the opinions of the author but not necessarily those of PAS or Guardian. Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial representative of The Guardian Life Insurance Company of America (Guardian), New York, N.Y. PAS is a wholly owned subsidiary of Guardian. Florida Veterinary Advisors is not an affiliate or subsidiary of PAS or Guardian. Florida Veterinary Advisors is not registered in any state or with the U.S. Securities and Exchange Commission as a Registered Investment Advisor. The individuals associated with Florida Veterinary Advisors do not maintain specialized licenses or qualifications for the financial services provided to veterinary professionals. CA Insurance License #0K80141. 2022-133618 (Exp. 2/24)