Growing Practice Value
Growing Practice Value
Someone, someday is going to buy your practice. Preparing for that day can be one of the best things you ever do for your clients, your patients, your employees and your bank account. That’s not just hyperbole talking. That’s the advice of of every seasoned practice valuator, practice manager, and former practice owner. The best veterinary practice for sale is one that represents years of attention to strong business management principles.
Buyers and Sellers…not so different
The future buyer of your practice has the same, general aspirations for your small business that you do, the same concern about employees, clients, patients. Their investment in your company would soon be wasted if they were not. But between the hand-off of these two well-intended entities is a gatekeeper wearing an accounting visor. Practices that can’t demonstrate a reliable, sufficiently profitable stream of revenue will never sneak moneyed investors past the reportage of this guy. Other potential investors who are short on money but big on optimism will too be turned away once they allow their lending institution to review the practice’s accounting reports. Though practice ownership is book ended by wonderful acts of animal kindness, client service, and employee satisfaction, the middle transition is the brittle spine of an accounting ledger.
The Real Practice Owner? The Accounting Ledger!
One of the big benefits of small business ownership is freedom. Up to this point you’ve been able to back-burner many difficult decisions about employees, their wages, practice competitiveness, hospital-wide standards of care, service consistency and so forth. You’ve skipped over these decisions because they were hard decisions; because they were expensive decisions; because you were/are pulled in 9 different directions; and because you were the owner and you had the freedom to say to yourself, ‘I’m not going to/can’t deal with that today’. But the gate keeper that’s sitting at the accounting desk between you and the next owner of your practice makes an adamant case for why you must.
Sooner or Later, Sensible Business Decisions Will be Made
Sensible, business decisions about your business simply have to be made. You can make them now, while your clients and employees can benefit from your leadership and empathy and be substantially rewarded at sale time, or you can continue to avoid these decisions and have them made for you by the gatekeeper and the next gal in line who’ll buy your practice. In this section of VP21C, we’ll give you 11 criteria to think about when trying to improve your practice value, but most importantly we’ll make a case for why strong financial management decisions are really integral to your practice’s Mission, your happiness and your stress levels, your employees’ growth, your clients’ trust and satisfaction, and your patients’ well being.
Are the reported earnings accurate?
If the owner is taking cash out of the business without recording it, she is seriously diminishing the value of her practice by multiples of the amount of money she is taking. Let’s assume that the capitalization rate for this practice is deemed to be 21%. As a reminder this percentage is a business’s projected future earnings divided by the value (price paid) for the business. If you divide net earnings by the capitalization rate, you get price. At a 21% cap rate, every dollar she removes from the practice (an unrecorded earning) is $4.76 less in practice value ($1 in earnings/ 0.21).
Are the recorded expenses clear?
One of the perks of ownership is the opportunity to run expenses through the practice that aren’t exactly vital to operations (take auto expenses, for example). In the valuation process, these expenses are adjusted back into cash flow, so they are not deleterious to practice value; however, it’s important that these outside expenses are clearly defined in the accounting software. Otherwise, the buyer may be circumspect of your assertions that certain account expenses are not as high as they appear.
Are the financial records clear?
All practice managers should take time to review the recommended accounting practices and Chart of Accounts of the American Animal Hospital Association. They should also take the time to link their software reportage to their computer accounting software, then meet with everyone who’s involved in the accounting process (including those involved in inventory management) to agree on how things should be entered into either system. Additionally, the managers should be able to demonstrate that they have been watching trends over a period of years. Some software reports have three- year comparison analyses already built in and certainly a valuator will have a list of reportage that they would like to see, but it’s helpful if the practice manager has their own set of data that they can refer to as a way of clearing up any questions about growth. As a rule , keep a rolling five-year comparative history.
What are the growth trends of the practice?
Never mind about revenue, which can be manipulated with price increases, what does this practice look like with respect to new client numbers and number of transactions? Is the practice employing an effective way of marketing to both existing and new clients? Is it making use of modern communication tools to remain visible? Is its online presence strong? A practice that is current on technology and marketing is demonstrative of a practice that is staying ahead of the times, not trying to catch up to them.
Are the staff numbers appropriate for the amount of business you are doing?
Ownership transitions can be very disruptive to cash flow. If clients (or employees) see changes to the size of a team or who is on the team during the transition period, it may cause them to lose confidence in the business and walk. If you are planning on selling your practice, start working on your team years in advance with goals to decrease turnover and to keep the wage to gross earnings ratio appealing to an outside investor. Bullish investors may want to see wage to gross ratios topping out at 32%, but buyers who appreciate the value of quality care may view a total payroll to gross ratio (including all associates and owners) of 38-40% as acceptable.
Is production evenly distributed through the ranks of all the associates?
Think about it, do you want to buy a practice where the lion’s share of the revenue is generated by the 65 year old senior owner-doctor? What will happen to revenue when he or she retires or, god-for-bid, expires? Consistency of care and caseload evenness telegraph to the new owner more of a turnkey business and that it can weather personnel changes without the disruption of cash flow.
Will the current owner remain on staff to ease the practice through the transition?
For the same reasons cited above, a practice buyer may want the previous owner to remain visible in the practice against the risk of any revenue interruptions due to her departure. Typically buyers want clients to perceive that everything is business as usual.
Is the management of the practice autonomous and high functioning?
As a new owner, you want a turnkey operation. You want a manager that arrives on time and sets the practice in motion for a profitable day of excellent care. You want this individual to review the team members with the same careful consideration as an owner. Are we about to lose someone? Do we need to take corrective action before a problem arises? You want the individual to regularly review the facility, identify problems, and fix them. You want someone who has their eye focused on practice trends and who is organizing team members as part of a response plan. Along similar lines, you want a team who is responsive to leadership and eager to work with it to solve problems. No one wants to buy a business and then feel as though they are tiptoeing around the idiosyncratic needs of a dysfunctional team.
How do clients and members of the community perceive the practice?
Has this hospital established itself as one with high medical standards? Have they trained their clients to be compliant with their recommendations and to understand certain absolutes of care (regular wellness testing, pre-anesthetic testing, regular parasite screening)? Practices that are considered to be prestigious care providers have a more competitive edge over bargain-basement type practices and are more likely to have loyal clients and more consistent earnings.
Has there been a consistent history of capital improvement expenditure?
Are you walking into a practice that has been drained of its last penny of resources or is this a practice that has been regularly upgraded over the years and made to look like a vibrant member of today’s community?
Is the revenue of the practice inventory or service based?
A prospective buyer will eyeball high FTHW, pharmacy, and OTC product sales with circumspection. They may rightfully believe that these sales, given the aggressive marketing of online stores, will wane in the very near future.
Please take time to review the blogs in this section by our many gifted contributors. They’ll provide you with more specifics on each of the above talking points and walk you through the process of implementing them at your practice. Thank you for taking the initiative to help your practice grow its value. Your actions not only increase sale value, but ultimately improve service, care and work environment since it’s impossible to do one without the other emerging as a great consequence of your actions.