If you are in the market to purchase a veterinary practice, there are several key considerations to keep in mind during your search. Whether you are new to buying a practice or an experienced professional, preparation is crucial. By understanding the red flags and legal pitfalls outlined below and recognizing their significance, you'll be well-equipped to move forward with the purchase process.
Review of Financial Statements
When acquiring a veterinary practice, thoroughly reviewing financial statements is essential. Ensure you receive complete statements, as sometimes you may be presented with projections that do not guarantee future income or earnings. Additionally, seek comprehensive statistics about the practice. Sellers should provide this information transparently, so you shouldn't have to speculate about the financial health of the practice.
Pay close attention to how promptly the seller provides financial information or other critical documents. A reputable broker will typically have these documents ready before listing the practice for sale. While occasional delays can be reasonable, persistent delays might indicate the seller or broker is avoiding transparency. Approach the situation with caution and ask the right questions.
Sometimes, you may have immediate access to financial information and other important documents. However, these documents might be prepared in a way that obscures inaccuracies or inconsistencies. For example, consider the number of active clients in the veterinary practice. A register might show a large number of clients, but the actual number of active, maintained records in the office could be much smaller. Some of the listed clients may be inactive, which affects the practice’s true value. Accurate client counts are crucial for determining the genuine value of a veterinary practice for sale.
Patient Retention
Other red flags to watch for include clients leaving the practice or not returning. If you are considering purchasing a veterinary practice with poor client retention or recall, it's crucial to understand the underlying reasons. Investigate client records and charts to identify potential issues. Additionally, the existing staff might provide valuable insights into why clients aren't returning.
Staff Turnover
High staff turnover is another red flag. Determine why staff retention is low and explore potential solutions. Understanding the reasons behind high turnover and addressing these issues will be vital for the successful acquisition and ongoing operation of the practice.
Accuracy of Accounts Receivable Report
Another critical area to verify is the accounts receivable report. This report shows how much money is owed to the veterinary practice by clients and insurance companies. A high balance or substantial patient credits might indicate long-term errors in the practice's software. Such issues could require the seller to issue refund checks to clients or send accounts to collection to clear them from the system before the sale. Ensuring the accuracy of accounts receivable can prevent complications for both the seller and buyer before closing the deal.
Non-Disclosure Agreement (NDA)
An additional consideration for buyers is the non-disclosure agreement (NDA). The primary purpose of an NDA is to protect the seller's private financial information. These documents are legally binding, so it's crucial to fully understand what you're signing. Some NDAs may attempt to prevent you from seeking legal representation, which is a significant red flag. Never sign an agreement that restricts you from hiring an advisor. Ensuring you have the freedom to consult with legal and financial experts is essential for a successful acquisition.
Pressure to Sell
Be cautious of a seller who pressures you to close the sale of their practice quickly. Such urgency may indicate the seller has ulterior motives and does not have your best interests in mind. If you encounter this situation, scrutinize all documents related to the practice thoroughly. This diligence will help you uncover any specific reasons behind the seller's rush to sell.
Additional Red Flags to Watch Out For:
Outdated Equipment and Facilities: Outdated medical equipment, dilapidated facilities, or a lack of investment in technology can signal financial struggles or a lack of commitment to providing quality care. Evaluate the condition of the practice and potential renovation costs.
Poor Record-Keeping: Disorganized or incomplete medical records can be a red flag for substandard medical practices and potential legal liabilities. Review a sample of patient records to assess their quality and completeness.
Declining Revenue or Client Base: A practice with declining revenue or a shrinking client base may indicate deeper problems, such as poor management, competition, or a negative reputation in the community. Analyze financial statements and client data to identify trends.
Unresolved Legal Issues: Pending lawsuits, regulatory violations, or other legal issues can pose significant risks and financial burdens. Conduct a thorough legal review and consult with an attorney to understand potential liabilities.
Lack of Transparency: If the seller is reluctant to provide financial records, client data, or other essential information, it could be a sign of concealment or misrepresentation. Insist on complete transparency and access to all relevant documents.
Incompatible Practice Philosophy: Ensure that the practice's approach to patient care, client service, and ethical standards aligns with your own. Misalignment in these areas can lead to conflicts and dissatisfaction down the line.
While the process of purchasing a veterinary practice can be overwhelming, being prepared for potential red flags will help alleviate some of your anxiety. Knowing what to look for, what to ask, and how to leverage negotiation to your advantage will equip you well as you embark on your search. By being vigilant and addressing these potential red flags during the due diligence process, you can make an informed decision and mitigate risks when purchasing a veterinary practice.
Frequently Asked Questions
Q: What are the first steps I should take when considering the purchase of a veterinary practice?
A: Start by thoroughly reviewing financial statements and obtaining a comprehensive set of statistics about the practice. Ensure the seller provides complete and transparent information, including past performance and future projections.
Q: Why is it important to examine financial statements closely?
A: Reviewing financial statements is essential to understand the practice's financial health. Look for complete statements rather than just projections, as projections do not guarantee future income. Pay attention to how quickly the seller provides these documents, as delays may indicate a lack of transparency.
Q: How can I verify the accuracy of client records?
A: Examine the number of active clients in the practice. Ensure the client register aligns with the actual number of active, maintained records. Some clients may be listed as active but are actually inactive, which can affect the practice’s true value.
Q: What should I do if I notice poor client retention in the practice I am considering?
A: Investigate the underlying reasons for poor client retention by reviewing client records and charts. Speak with the existing staff to gain insights into why clients might not be returning.
Q: How can high staff turnover impact my decision to buy a practice?
A: High staff turnover is a red flag that might indicate underlying issues within the practice. Determine the reasons for the turnover and consider potential solutions. Addressing these issues is crucial for the successful operation of the practice.
Q: What should I look for in the accounts receivable report?
A: Ensure the accounts receivable report accurately reflects the money owed to the practice by clients and insurance companies. A high balance or substantial patient credits could indicate long-term errors in the practice's software. Resolving these issues before the sale can prevent complications.
Q: Why is it important to carefully review the non-disclosure agreement (NDA)?
A: An NDA protects the seller's private financial information and is legally binding. Ensure you fully understand the terms and avoid signing an NDA that restricts you from seeking legal or financial representation. Consulting with experts is crucial for a successful acquisition.
Q: What should I do if the seller is pressuring me to close the sale quickly?
A: Be cautious and scrutinize all documents related to the practice thoroughly. The seller's urgency might indicate ulterior motives. Using extra diligence will help you uncover any specific reasons for the rush to sell.
Q: What other red flags should I watch out for?
A: Additional red flags include outdated equipment and facilities, poor record-keeping, declining revenue or client base, unresolved legal issues, lack of transparency, and an incompatible practice philosophy. Addressing these issues during due diligence is essential.
Q: How can I ensure the practice philosophy aligns with mine?
A: Assess the practice's approach to patient care, client service, and ethical standards. Ensure these align with your own values to prevent conflicts and dissatisfaction after the purchase.
Q: What are the benefits of being prepared for potential red flags when buying a veterinary practice?
A: Being prepared helps alleviate anxiety and ensures you make an informed decision. By knowing what to look for, what to ask, and how to leverage negotiation, you can mitigate risks and increase your chances of a successful acquisition.
At Dental & Medical Counsel, we've been instrumental in realizing the practice goals of countless veterinarians. Whether you're looking to purchase, launch, or sell a veterinary practice, our expertise is your guide. Beyond the initial stages, we're committed to ensuring your veterinary practice remains legally compliant.
We provide comprehensive support, including employment law protections, veterinary contract reviews, and assistance with veterinary employment agreements. Additionally, we specialize in incorporating veterinary practices and securing trademarks. And for long-term planning, our services extend to helping veterinarians with succession and estate planning. Trust us to be your partner in every step of your veterinary practice journey.
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About Ali Oromchian, Esq.
Your Veterinary Lawyer
Ali Oromchian, JD, LL.M., is a leading legal authority in dental law and the founding attorney of Dental & Medical Counsel, PC, with over two decades of experience. His deep connection to dentistry comes from his wife's nearly two-decade-long career as a pediatric dentist.
This personal insight fuels his dedication to empowering dentists to navigate their legal challenges and achieve their practice goals. In doing so, Ali has helped thousands of doctors open their practices while maintaining legal compliance.
Ali is frequently quoted and contributes articles to dental publications, including the California Dental Society, Progressive Dentist, Progressive Orthodontists, Dentistry Today, Dentaltown, and The New Dentist magazines, further showcasing his commitment to the dental community.
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