Practice succession requires continuous effort

Practice succession requires continuous effort

Success is as much about emotions and beliefs as it is about price and cash flow
Sep 01, 2004

Marsha L. Heinke
Veterinary practice succession planning is a career-long endeavor, not a five-year plan. Your succession plan evolves from the entire history of the practice, its culture, its clients and patients and its employees. The economics of such a succession plan, though numbers-driven, derives from a unique mix of philosophy, policies, procedures and protocols. The first two articles of this three-part series described valuation concepts, appraisal standards, cultural attributes, assets and liabilities, plus the intangible factors lending to a practice's good will value.

The ultimate value of a practice entity theoretically resides in the net effect of total assets less total liabilities; however, the succession of a veterinary practice to new ownership rests in much more than the opinion of an appraiser. A successful transition is as much about emotions and beliefs as it is about price and cash flow.

Key attitudes, relationships, business processes, practice systems and leadership vision result in personally rewarding and financially satisfying experiences in veterinary practice buying, ownership and selling.

The parties to a practice's succession have as much to do with a successful transition as does a theoretically objective measurement of excess earnings value.

Recognizing and appreciating the following revelations can strengthen your practice and succession plan:

  • You don't get something for nothing. Veterinary practices have value. A significant portion might be intangible value, such as a measure of anticipated future earnings. Yes, an associate veterinarian might have worked diligently; but the associate doesn't assume the risk of making payroll, dealing with a recession, taking a paycheck last in line, using his or her hard-earned money (after taxes) to invest in more equipment, more facility, more people or more inventory. Don't expect to acquire good will for nothing!
  • On the other hand, don't expect to sell nothing for something. If you have worked on a theory of maximizing the practice current income stream, then there might be nothing left to pass to a successor, or at least nothing a successor would ever want to own.

Maximizing profit means stripping the practice of capital by a variety of means: avoiding raises and implementation of benefit plans; nixing computer systems, technology, and medical equipment upgrades; deferring repairs and maintenance, or short-cutting patient care while maintaining high fees. The maximization philosophy might be attractive to practitioners who plan on locking the practice door behind themselves on retirement. However, it is not a good plan if you hope to sell your practice to another practitioner.

  • Cheating your partner—the government—represents another scheme for maximizing profit, but it can lead to expensive outcomes.

This strategy might be entertained as an attractive alternative when hearing about underground economy schemes in casual conversations. To the contrary, it is possible, even working within the letter of the current burdensome tax code, to make an attractive living as a veterinarian and through investment as a practice owner.

Cheating leads to diminished value through unverifiable expense adjustments, understated income and a practice culture that scares away knowledgeable buyers. The potential costs of defense—which includes legal and accounting fees plus penalties, tax and interest after the fact of audit or investigation—become contingent liabilities that are hard to measure until event occurs and concludes.

Talk about it Communicate, communicate, communicate.

If you avoid talking with key personnel such as partners and fellow shareholders, especially regarding practice operation decisions and succession issues, then expect intense internalized resentment based on fear resulting in big negotiation problems later.

Offering a carrot and jerking it away might cause more than a sulky disposition in the harness. Don't make the succession plan faux pas of perpetually promising what you can't or don't plan to deliver. This is a sure plan to lose good associates.

Carrot corollary: You can suffer from communication overload and too much disclosure. It's lonely being an owner. But be wary of what, when, and to whom you reveal feelings, thoughts, hopes and prayers. Too much indiscriminate communication can be a bad thing. Find balance in all things.