December 29, 2010
Practice values have been trending down for the past decade because of the economy and management mistakes, according to consultants. But, they say, an owner can maximize practice value by increasing net profit. Those steps aren’t new or mysterious but take work and a willingness to change.
Seasoned owners are shocked when the appraised value of their practice is less than anticipated, so they may postpone retirement in hope of recouping some value.
“Veterinarians frequently rely on the sale of their practice for retirement funds,” says Paul Camilo, CVPM, of Veterinary Consulting Services. “This is a bad idea. If the practice doesn’t sell at the rate necessary for a comfortable retirement, there’s no Plan B and veterinarians end up holding onto the practice, working past their planned retirement date.”
A better idea is to make the practice as profitable as possible during the practicing years and save money during that time, says Jessica Lee, CVPM, of Pinnacle Integrated Veterinary Solutions.
“Building practice value can be simple,” Lee says. “Having good customer service, making your practice stand apart from others and adding new services can bring in new clients and retain existing ones. Having a good staff that greets clients can make a big difference. Adding a coffee pot to the waiting room or having staff offer something free to clients would cost little but mean a lot to clients.”
Veterinarians can evaluate their practices’ profitability by using the profitability estimator created by the National Commission on Veterinary Economic Issues (NCVEI) and VetPartners, which also offers profit solutions.
“The practice value range is vast,” says Karen Felsted, DVM, MS, CPA, CVPM, the CEO of NCVEI. “The average practice is sold for 70 to 80 percent of annual gross revenue, with few selling above 80 percent and many selling in the 30 percent range.
“The practice sale typically includes concrete valued items such as equipment and inventory, along with the assumption that skilled staff stay at the practice, clients remain loyal to the location, the management plan is profitable, as is the potential for growth,” Dr. Felsted says. “The potential lender doesn’t determine the value of the practice; a practice appraiser will. The bank looks at financial statements to make sure it is logical to lend the amount requested.”
A practice’s specialty or focus plays a big role in its value.
“Too many practices are trying to be high tech,” Felsted says. “There’s a whole group of pet owners who aren’t looking for that.They want the basics but will never drop $3,000 on a pet’s surgery. There’s a trend for vets to have gorgeous buildings filled with technology, and practices are missing out on serving more than 50 percent of the pet-owning population.”
Simply hoping that the business climate improves is a bad plan, says Mark Crootof, DVM, of Crootof Veterinary Consulting.
“Veterinarians need to address long-term shortcomings,” Dr. Crootof says. “Address ways to make a quick profit, like reducing inventory. Most of all, veterinarians need to realize that changes recommended by consultants need to be implemented and that there are no quick fixes to repair practice value.”
Practice managers hired to boost revenue before the clinic’s sale say they often are called in too late.
“Veterinarians need to have their practice appraised and prepare for change three to five years prior to selling,” Felsted says. “More often than not I’m called less than a year before the original sell date.”
Another obstacle is a veterinarian’s resistance to make changes. For instance, consultants suggest handing off a patient for routine vaccines and technical services, freeing up the veterinarian to see more patients.
“If a practice allots for 20 minutes per patient, I suggest they reduce that to 15 and actually stay for 12,” Camilo says. “The number of appointments being seen per day, per doctor is a good indicator of profit value. Each veterinarian at a practice should see about 3,200 patients per year. Even if the per transaction fee is less, seeing more patients will result in an overall greater income.”
Camilo uses surveillance equipment in practices he’s working with so he can monitor the time veterinarians spend in exam rooms. He meets with a team leader to discuss compliance with his recommendations. Focusing on what can be changed and moving on from what cannot is essential, he says.
“Many veterinarians are still blaming online sales and 1-800-PETMEDS for their losses in practice,” Camilo says. “These outside companies are taking sales away from veterinarians who previously had a corner on the market. Instead of dwelling on things that can’t be changed, veterinarians need to look more at wellness and ways to market that to clients and earn revenue in new ways. Veterinarians who thrived in the past by selling products are, quite frankly, dying out.”
Getting rid of old inventory and supplies frees up space and helps with organization. Consultants say veterinarians do not shine in this area.
“Veterinarians can be hoarders of stuff they ‘might’ use,” Camilo says. “This tendency makes them No. 1 in state inspection citations for having expired products on the shelf.”
Reducing unnecessary staff is another step to profitability.
“Veterinarians struggle with cutting back on employees especially when people have been with them for a long time,” Felsted says. “It’s a lot easier to reorganize an inventory method than to tell someone they’re losing their job.”
Having staff members call clients to remind them of scheduled visits or the need to schedule an exam can increase client flow, consultants say. Again, altering the routine may require a persistent manager.
Consultants are divided about lowering fees to attract clients. While in theory it means clients are more willing to come to the practice, the counterargument is that the services hold less value.
“Fees at many practices are tapped out,” Felsted says. “We’ve seen a reduced number of visits and less amount of money per transaction. There’s no definitive study to prove the correlation, but you’d have to be a fool not to see a connection.”
Reducing rates might be necessary, but the change needs to be communicated to the client or they might not know.
Craig Woloshyn, DVM, of Sundog Veterinary Consulting Services, warns veterinarians about spend too much on expensive equipment that never makes a profit.
“Evaluate major purchases based on their usefulness as medical devices and their ability to make a profit,” Dr. Woloshyn says. “Generally, practices buy something because the doctor wants it rather than demonstrating a real use. Put bluntly, we buy too much and don’t use it enough. We just have to do without digital everything, ultrasounds in every room and now, cold lasers on every table.”
Cindy Bahr, hospital administrator at Warner Center Pet Clinic in Woodland Hills, Calif., says she and an associate veterinarian tried to buy out the current owner, but an agreement couldn’t be made when the practice was appraised at two different prices.
“One appraisal said it was valued at $1.2 million and another said it was worth $1.8 million,” Bahr says. “We have $2.3 million in annual revenue, but we’ve outgrown the rented building, which needs to be addressed along with other needed changes. We ended up thinking the practice was worth X and the owner thinks Y, so no agreement could be made.”
Because of this variance, some in the industry say they’d like a more concrete and legitimized way to determine a practice’s value.
“Few doctors know how to calculate their net profit and no journal has ever published a good article helping them,” Woloshyn says. “It’s not magic. Any accountant can do it for you.
“For a couple hundred dollars, an accountant can tell you your net profit and do a mini-appraisal. I don’t recommend it, though. The results will be too depressing.”
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