Owning a Marketable Practice
In this article, we are highlighting the most critical factors that make a practice stand out from all the rest.
Undoubtedly, the number one factor that drives the sale of your practice is the location. A practice sale, like any real estate sale, is primarily driven by location. Will a buyer want to work and raise a family in the area? A buyer’s number one factor is the location. They want low crime, excellent schools, recreational opportunities, local entertainment, and shopping.
The selling point that is in a close second is practice profitability. The business’ income must not only pay the mortgage for the real estate and practice but also support the lifestyle of the new owner. Buyers must see a positive return on investment and be able to have more income as a practice owner then they ever could as an associate.
A growing practice is a marketable practice. A practice with an annual growth rate of 5-10% is very attractive not only to buyers, but also to lenders. Lenders like to finance growth. They often will decline loans for practices with decreasing revenue. The main reason for rejecting the practice loan is the uncertainty of the new buyer being able to stabilize the practice cash flow and pay off their debt. Banks do not finance potential.
There are a few financial parameters we try always to follow. Cost of Goods Sold ( COGS) is the amount of money spent annually on drugs and sale-able supplies. COGS should range between 20-25% of practice gross revenue. If it is closer to 30%, it reflects a dependency on product sales for income. In today’s market, practice revenue should come from veterinary services, not product sales that compete with e-commerce.
Non-veterinary wages or lay-help expenses should not be excessive. Lay-help compensation should cost the practice 15-18% of gross income. The practice may be overstaffed if lay-help costs are above 18%. Overstaffing will unnecessarily reduce practice profitability for the new owner. Alternatively, if lay-help wages are less than 15%, the veterinarian may be losing money due to using office time to do non-veterinary tasks.
Associate veterinary wages can also affect practice profitability. Total veterinary compensation, including salaries and benefits, in a general practice, should be 18-22% of gross income. Having too many associates or overcompensating poor producers will decrease income drastically.
One last critical profitability factor is the building lease. If the new owner is leasing the facility, the cost should not exceed 6% of practice gross revenue. The new owner must be able to negotiate a 10-year lease to satisfy lender requirements.
Bill R. Crank, DVM
Office Phone: 419-945-2408