Lessons from an unsellable practice
Ahard-working solo veterinarian reaches 67 years of age and wants to sell his practice and retire after 25 years of building it up. It's a no-brainer — or is it?
He has been bringing in $500,000 in gross revenues for the last three years and has $900,000 in his 401k. There could have been $2 million there, were it not for three kids to send through college and two weddings to engineer.
With the $900,000 earning a reasonable 5 percent return, he is guaranteed (well, almost guaranteed) an income of $50,000 per year for retirement. The good ol' USA's Social Security will put almost $30,000 more into the pot for an income of $80,000. That amount will meet his expenses, but provide little or no money for recreation in his remaining years.His ace in the hole is his practice.
Now is the time to sell his leased facility for the practice and reap the profits. The problem is that there are few buyers, and those few don't want to pay much because he lives in a western Pennsylvania town just outside Pittsburgh, which has the nation's most declining demographics, second only to post-Katrina New Orleans.
The practice also has profits, but not that much.
Oh, yes, the doctor took an annual salary of some $165,000 in those final years, accounting for 33 percent of his gross revenue, but is that profitable enough for a buyer?
Any prospective buyer would expect to be paid as an associate about 22 percent of production and 3 percent of production for benefits. After deducting 25 percent from his 33 percent take-home before taxes, he shows a profit of 8 percent, or $40,000.
How much would you pay for a business generating $40,000 income at the onset of the "Great Recession?"
It's a risk, and risky investments need a 20 percent to 25 percent return to be worth the heavy capital investment, when a buyer could just work in a large practice and get about 25 percent of his/her production with no gambling involved.
Do the math: $40,000 divided by 0.25 return = $160,000, or just 33 percent of one year's gross.
Did I mention that the new buyer, emulating the seller, would have to spend a minimum of 300 hours a year in managing the new practice without pay?
How could this scenario have been avoided?
The owner could have chosen a more affluent area to open his practice a quarter-century ago, but that would require psychic powers not common in our profession. The much easier solution would have been to charge more for his services.
In our not-so-hypothetical practice, another $100,000 per year would have assured a higher selling price because 80 percent of the increment would have fallen to the bottom line.
Add $80,000 to the $40,000 discussion and you have $120,000 divided by 0.25 = $480,000. That's a much more sellable practice.
How would he have achieved that additional $100,000? By practicing better medicine, that's how. Take a look at the following production report:
• Dentistry was $11,982, or 2.03 percent of gross. That's less than a third of the achievable. Surely, more than 1.2 patients a week needed dentistry.
What was missing was the client's realization that proper dentistry should add about four years to a pet's healthy life. Was the veterinarian using disclosing solution as part of each pet's exam? I doubt it. Was he sending home a dental report card ( http://www.philwinter.com/) showing actual normal and abnormal pictures of teeth to wake up his clients? I'm sure he threw away $20,000 or more a year there.