How to buy the practice of your dreams

How to buy the practice of your dreams

Apr 01, 1998
By staff

By Don Dooley

Many associates dream of a fixer-upper they can buy for nothing down and low payments, then turn it into a $1 million practice overnight. I hear an occasional success story, but most new owners experience something different.

In doctors' minds, a "little old veterinarian" who only worked three half-days a week owned the struggling practice. Success simply requires a practitioner who will offer clients veterinary medicine six days a week.

That may be true, but there are other considerations. Like a fixer-upper home, it's nice to live someplace else while you're remodeling. If the practice will be your only income source, assume you're enrolling in a three-year weight-loss program. Most practices can be transformed in three to five years. In every hospital, perhaps 30 percent of clients want expanded services. Others like existing services or low charges. If all goes well, your top 30 percent who buy more will offset the bottom 30 percent's loss. Then income will remain constant until client numbers grow.

Initially, the effort of changing and educating provides excitement and challenge. But some veterinarians get depressed after a few months or years. Although I wouldn't discourage anyone from buying a fixer-upper, realize the work ahead to achieve your dream and keep it from turning into a nightmare. Hard and sometimes frustrating work can lead to a healthy, satisfying practice.

Fixer-uppers appeal to young veterinarians because they believe they can't buy a more successful practice. That's not true. In fact, it may be easier to buy a successful practice than a struggling one.

Assume a doctor has a $50,000 down payment and finds two practices, each with 40 percent profit, that cost one year's income production and $50,000 down. How do the hospitals stack up?

Say practice A costs $200,000 and makes $80,000 profit. Payments on the $150,000 balance will be about $24,000, leaving the buyer $56,000 to cover relief help for time off and living expenses.

Practice B costs $500,000 and makes $200,000 profit. Payments on the $450,000 balance will be about $72,000, leaving the buyer $128,000 to hire an associate and pay living expenses. Hiring an associate for $48,000 would still leave $80,000 for the buyer.

The distinction between hospitals A and B are down payments--25 percent for one and 10 percent for the other. Down payments are negotiable. But don't forget the importance of maximizing your down payment. An extra $30,000 down will greatly impact your interest payments over 10 years.

When negotiating, remember that a practice purchase is like a high-stakes poker game--the deck has many cards. Selling price is just one card. Others include the down payment, terms (number of payments), and interest rate. And don't forget the practice's lease or real-estate payment and acceleration of a lease payment.

But the critical number is how much the buyer has to live on after paying the seller, lease amount, and taxes. Sometimes buyers or sellers become emotionally attached to a price, interest rate, or terms and let that attachment destroy negotiations.

Finally, remember that half of the practices listed aren't really for sale. Many young veterinarians waste $5,000 to $15,000 trying to buy a practice that wasn't for sale. The owner was sincere when advertising the hospital but wasn't emotionally prepared to part with it. Unless the practice owner is deceased, there's no guarantee the seller will sign the closing papers. Trust your gut feelings or a broker or consultant who's assisting you with the purchase. If you feel the sale won't be completed, you're probably right.

Recently, I asked a doctor who listed his practice for sale two years ago whether he'd sold it. His answer was similar to many colleagues': "No, but it sure was scary. A young veterinarian offered my asking price and had the down payment. Fortunately, I got out at the last minute," he said. This honest veterinarian wanted to know his clinic's marketability but wasn't emotionally ready to sell.

So before you buy any practice, consider the result--you're purchasing your financial future. Don't shortchange yourself with a practice that can't support your dreams. And don't assume a deal is final until you get the keys.

The author, a Veterinary Economics' Editorial Advisory Board member, is a practice-management consultant and speaker in Los Gatos, Calif.

April 1998 Veterinary Economics