Low practice values signal a need to look at profitability, AVPMCA reports

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Aug 01, 2007


Profit equals
NATIONAL REPORT — An increasing number of practices are appraising lower than expected, management experts report. If that trend holds true, it signals a need to closely scrutinize profitability, according to the Valuation Issues Committee of the Association of Veterinary Practice Management Consultants and Advisors (AVPMCA).

In a discussion with DVM Newsmagazine, AVPMCA committee members and management experts talked about the perceived trend in valuation. Panelists included:

  • Larry McCormick, (valuation committee chair) Simmons and Associates Midatlantic.
  • Denise Tumblin, of Wutchiett Tumblin and Associates in Columbus, Ohio.
  • David Gerber, Simmons and Associates Northwest.
  • Tom A. McFerson, Gatto McFerson CPA, Santa Monica, Calif.

While the extent of the problem is observational, McCormick adds, "The more we looked at it, the more we realized it was a phenomenon going on. And it wasn't just one area; it was every area" — from smaller practices to award-winning 'trophy' practices.

The committee coined a term and campaign, No-Lo, describing practices that are coming up short in profitability.

"I think part of the main problem is that veterinarians ready to sell aren't educated about the valuation process and what constitutes value. They need to understand the definition of profit and how it impacts the practice's value," McCormick says. Profitability may be too low to support the practice's value. The yardstick is no longer one year's gross.

The problem extends to owners who often are unaware of true profitability in the practice, Gerber explains. Low profitability can exist despite a healthy stream of clients and a decent enough draw for salaries.

When it is time to put the practice up for sale, a very different reality can emerge, consultants say.

"What really strikes me is a real opportunity to help the profession," McCormick says. "If we can bring awareness, we can help make change."

"One thing that shocked me," Gerber adds, " in the Northwest, with our rapidly rising real estate market, is that we expect mom-and-pop practices to have low profitability but even these large, award-winning practices were showing very low profitability, in part because of cost of the facility; it just ate up the profits."

These owners had no concept or awareness of the low profitability.

Tumblin advises practitioners to be vigilant on the expense side of the practice, including inventory, staff and facility costs. Is the practice generating enough revenue to support the facility? Is the practice staffed efficiently? Are fee schedules current?

"It is not necessarily they are not charging appropriately, but many practices are not charging for everything they are doing," Tumblin says.

Every dollar that drops to the bottom line increases the practice value three to six times that amount, Gerber adds.

With the boom in technologically driven diagnostic equipment, Tumblin says practices aren't necessarily over-indulging in new gadgets, but the practice needs to make the equipment financially productive. Use it, and charge for it.

"If you tried to plot out (profitable vs. non-profitable practices), I don't think it would come out to a bell curve," McCormick says. "I think it is very polarized. Either you are doing very well, or you not doing very well. There are not a lot in the middle."

If many practices stopped or reduced the number of missed charges, owners wouldn't feel so pressured to raise fees, McFerson adds.

For tools to help in the valuation process, log onto http://www.avpmca.org/.