Buying or Selling a Practice

By Jon Dittrich, Profit Profile

Buying or selling a practice is usually a new experience for all parties. Without the right guidance, it can end up like my high school dance – with Buyers lined up on one wall, Sellers lined up on the opposite wall, staring at each other. Both parties know they should be “dancing” in the middle, but neither knows how to go about it.

You want to avoid this kind of scenario when you are buying or selling a practice.

Profit Profile has a process to make this a positive endeavor for all parties so that ownership can change hands in an equitable fashion.

There are four key elements in transferring practice ownership. They are:

That’s it. Let’s look at each element in detail.

Seller– The Seller – the current full or part owner of the practice — must have the legal standing to sell their part (or all) of the practice. Practices go on the market for many reasons or combinations of reasons — retirement, health issues, a career change, moving or – let’s face it — burnout. In our experience, it is important for the Buyer to understand why the practice is being sold. That is especially true of the practice is losing money. A Seller may be selling the practice themselves or using a broker. The Buyer should know which. Such information establishes trust.

A Buyer– The Buyer is a qualified person or group considering purchasing a veterinary practice. With the legal challenges from corporations, many states now allow non-veterinarians to own veterinary practices. This is determined by state law. If the Buyer is NOT a veterinarian, check with the local state veterinary association to make sure purchasing a practice is legal.

Typically, a Buyer is an associate veterinarian who wants to settle down.

There are four major reasons an associate should eventually become a practice owner.

  1. Job Security – Initially, young, new associates seldom worry about how staying with the same practice for the next 20 years might affect their careers. Usually, they are more concerned with issues such as pay, the type of veterinary medicine being practiced and whether or not the practice has adequate staffing. However, as an associate ages, issues such as job security and taking control over one’s career tend to move up the priority list.
  2. Increasing your income – Industry wide, associates currently make about 70% of what an owner makes. Over a 30-year career, the difference in take home pay should be more than $1,000,000. Clearly, receiving more income can become an issue.
  3. Controlling your career – As long as you work for someone else, you don’t completely control your career. No one expects to be dismissed, but it happens all the time for any or no reason. Being terminated when you are 30 years old hurts. Being terminated when you are 50 is devastating. That is why you need to control your career. The sooner the better.
  4. Retirement – Take home pay is only part of your total income. Other considerations are (a) paying off practice debt and (b) the appreciation of your Practice Value (assuming you run a profitable veterinary practice). If you stay as an Associate, your retirement will be whatever you have saved, plus Social Security – and I wouldn’t count on the last one a whole lot! But if you own a practice, you might have a $1 million dollar-plus asset to sell and add to your retirement. Thinking ahead, when you hit your 60s, that could look very sweet!

Meeting of the Minds – For the truly successful transfer of ownership, both parties need to have mutually beneficial outcomes. That is not to say the Seller or Buyer always get 100% of what they want. But when both parties are involved in the process and are willing to compromise for the good of the sale, everyone wins. That is the sign of a successful practice purchase.

Consideration – I don’t mean being just nice to each other. Consideration means money. This is where the rubber hits the road. Yes, the Seller wants money and the Buyer will need to come up with it. Financing is an issue we’ll discuss later.

Steps for Closing the Sale

Assume that we have a qualified Buyer and a Seller, both of whom are willing to work together to close the deal.

Now what?

At Profit Profile, we recommend certain steps that represent due diligence on the Buyer’s behalf. (After all, the Seller is just waiting for a check.)

  1. Have the practice valued. – Long gone are the days when practices sold for a percentage of annual revenue. I call that “voodoo” valuation. Just as you would use a professional to appraise any residential or commercial property, the same holds true in selling or buying a veterinary practice. Have the practice valued! Even if the Seller has already had an appraisal, Buyers should have that valuation “reviewed” to make sure it accurately reflects the current market price. If the Seller has not had the practice appraised recently — say, within the last year — consider having both parties agree on an appraiser, with each party paying half the cost. Many potential Buyers and Sellers feel if they pay for part of the valuation, it will not be biased to either party.
  2. Perform a Feasibility Analysis. – This provides the Buyer with a Pro Forma (i.e., a forecast) of cash flow for the next ten years if they buy the practice. A Feasibility Analysis establishes a projection of the Buyer’s after-tax take home pay as an Associate. It compares this figure to the total compensation (from after-tax salary and paying off practice purchase debt) from owning part or all of the practice.

Two different numbers are shown in the Owner scenario.

i. First is an after-tax take home pay as an Owner for the next ten years.

ii. Second is the Wealth Accumulation. Though “eating after buying the practice” is very important (!!), your total net worth should skyrocket after purchasing a practice. The Wealth Accumulation number shows the increasing value of the practice minus the decreasing debt load. Adding that number to your take home pay will show the Total Economic Benefit of buying a practice instead of remaining an associate. This will show the Buyer the economic rewards of ownership compared to the added risks of ownership. This important information should be considered when deciding whether or not to proceed.

  1. Proceed with Negotiations. – Assuming a favorable outcome in the Feasibility Analysis, negotiations are next. This is where a “meeting of the minds” by both parties should occur. We recommend waiting until the end of the negotiation process before involving attorneys. First, working together, the Buyer(s) and Seller(s) should complete a highly detailed questionnaire covering all the major issues in a Buy or Sell Agreement. This way, both parties usually end up with realistic, workable solutions for the specific situation. In Profit Profile’s experience, this collaborative process is infinitely better than using “boiler plate” or “cut and paste” generic legal agreements or having one party make draw up an agreement for the other party to sign – something that best be described as a “take it or leave it” strategy. We recommend you “leave it” if this happens.

Examples of a few of the questions to clarify during negotiations are:

  • What is being sold? 
  • How much is it being sold for? 
  • Does it include real estate? 
  • Is there anything not included in the sale? 
  • How is the transaction being financed?

If the Seller is only selling part of the practice and continues ownership, then clarify these questions:

  • What happens if an owner dies, gets divorced, become disabled or loses his or her veterinary license?
  • Under what conditions can a part owner be terminated? 
  • How are deadlocked issues resolved?