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Buying A Veterinary Practice

Why Veterinary Practice Buyers Aren’t Discouraged By “No-Lo Practices”

Feb 18, 2014 1:42:00 AM

Veterinary Practice Buyers Aren't Discouraged By "No-Lo Practices"Numerous authors have spoken to the dilemma faced by the seller of a “No-Lo Practice”. This is a practice where the profit being derived, after all expenses, renders such an unacceptably low number that, in many appraisers’ opinions, the practice has no, or low, value. Contrarily, we believe that although a “No-Lo Practice” may not have the prototypical profit yield, most veterinary practice buyers would increase their income in a “No-Lo Practice”.

For example, let’s assume a practice is collecting $600,000 per year and the profit is 9.5%. The owner may think the practice should be worth around $450,000 but some appraisers would believe that the practice value should be closer to $285,000. That number would be very disappointing for the owner who has been taking home approximately $200,000 per year. The difference in value is a very substantial $165,000.

Let’s assume that the veterinary practice buyer is an associate earning $75,000 per year. Would he/she consider the purchase of this practice? If the current owner is taking home $200,000 and the prospective buyer is making $75,000, the acquisition of this practice would result in a substantial gain in income for the veterinary practice buyer.

However, the veterinary practice buyer will have an expense that the seller does not – the cost of acquiring the practice. If the buyer requires a loan of  $450,000 amortized over 15 years at an interest rate of 4%, the payments will be approximately $40,000 per year. If one deducts the $40,000 in note payments from the $200,000 that will be collected, the buyer will still be taking home approximately $160,000. This is more than double what the buyer earned as an associate – even after paying for the practice. Therefore, the buyer will be building equity in something he/she can sell in the future and more than doubling their income while that equity grows.

Another factor is the actual percentage of practice revenue currently being paid to the associate. If the associate is producing $500,000 of revenue but is being paid $75,000, the associate is earning 15% of their production. By acquiring their own practice, even after debt service, their earnings increase to 26.4% of revenue. The prospective buyer is likely to find value in this $600,000 practice even at a price of $450,000.

Therefore, when we speak to a seller about whether or not their practice holds a certain value, it has to be understood that some things are worth more to one person than they are to another. If a prospective buyer would earn approximately the same amount after the purchase as they do before the acquisition, while undertaking both a financial risk and management responsibility, the chances are not particularly good. However, if that same prospective buyer was able to substantially change their financial position by acquiring a practice, the financial risk and management responsibilities would be much less burdensome.

Not all buyers come from the same financial place. Some are earning $75,000 a year and would consider it a definite step up to earn $160,000 a year.  However, a potential buyer earning $115,000, might have a different perspective. Although your practice may not have the prototypical profit yield for some potential purchasers, it might be perfect for many others.

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