Dental and Medical Counsel Blog

What to Consider When Purchasing a Veterinary Practice, Part II

November 18, 2020
Buying a veterinary practice

Buying a veterinary practice may be the most important decision you make in your professional career. We have developed a guide to help you in this endeavor so at the end of the purchase, when you see your first patient in your new office, the experience is everything you expect it to be.

In Part I of Buying a Veterinary Practice, we discussed:

  • How to choose a location and the type of practice.
  • The importance of exercising due diligence.
  • How to value the practice.

In Part II, we let you know that although these tasks may seem overwhelming, you do not have to do this alone. We provide information on:

  • The Importance of an Advisory Team.
  • The Role of an Accountant.
  • The Role of an Attorney.

Having a team eases the process and assists you in analyzing the financial documents of the practice, evaluating the legal documents, and looking out for any red flags.

When choosing your advisory team, consider consulting with professionals who have experience in the sales and purchase of healthcare related practices. There are nuances for these types of businesses that are different than businesses that do not have patients, whether human or non-human.

The Role of an Accountant

A Certified Public Accountant (CPA) can assist you from the very start of your buying process by reviewing your own financial situation to be sure you can qualify for a loan and manage the practice after the purchase. A CPA will help you with the following tasks.

Determine a workable budget for your purchase. You will work together to determine a budget and the amount of debt you are able and willing to incur to make this purchase.

Evaluate the type of financing you need. Do you have at least 15 to 20 percent of the loan for a down payment? The Small Business Association (SBA) may be able to help. The SBA offers loans for veterinary practices that are easier to obtain than traditional bank loans and they often have lower interest rates. They may also offer a longer repayment plan than a traditional bank loan. In addition, you can generally use your business and personal assets as collateral for the business loan.

Review all financial documents provided by the seller. This includes all the documents mentioned in Part I that the seller is expected to provide you. For example:

  • All financial statements.
  • Tax returns for the past three to five years.
  • Bank statements for the past three to five years.

The documents should be readily available and are generally prepared by the seller and ready to be produced to potential buyers at the time the practice owner lists it for sale. If the seller says it will take some time to produce them, or seems reluctant to produce them at all, or uses any stalling tactic, that is a red flag. You should not pursue making an offer without your CPA receiving and evaluating these documents.

Evaluate the cash flow. This requires a detailed analysis of income that is generated by the practice and the practice overhead. You need to be sure there is enough income generated to pay the bills of the practice and provide you a personal income that will meet your personal needs. This evaluation will consider:

  • Are customers required to pay at the time of the visit, or are they billed later for services rendered?
  • What is the percentage of customers who have pet insurance? Does the insurance pay promptly and at the rate that is billed, or does the insurance discount the bill? Are payments delayed for any reason?
  • What are routine expenses? Are they more than they should be? Less? Do you anticipate these expenses continuing as they are or are there ways you can cut back, or do you anticipate needing to buy more or different supplies, or that the expenses will increase for any reason.
  • Is the veterinarian charging for the same services you anticipate performing? Or do you anticipate cutting back on services or adding new ones to the practice?
  • Is the fee schedule reasonable and one you agree with?

The accountant will answer your financial questions and provide you an assessment of the risks and benefits of the purchase.

The Role of an Attorney

There are many roles for an attorney to play, ranging from real estate attorney to advisor about all your transactions. Some specific expectations to have of your attorney include the following.

Carefully review the purchase agreement. You do not want any surprises at the end of the sale. Specific considerations should be given to the following items.

  • What specifically is included in the sale. Imagine showing up for your first day of your new practice with high expectations and a full patient schedule only to discover there are no examining tables, no supplies, no pens or paper, etc. To avoid this kind of disaster, your attorney will review the purchase agreement in depth to be sure here is an itemized list of everything included in the sale such as: examining tables, laboratory equipment, refrigerator, inventory on hand, and everything you need to run the practice.
  • Are there any restrictive covenants? This type of contract clause will prevent the seller from opening an identical veterinary practice for a certain period of time within a certain geographical distance. Your attorney can tell you what the state laws are that cover these types of covenants and whether it is recommended for you to try and have this type of clause included.
  • Are there existing employment contracts? Are there contracts in place for all team members of the practice, including associating veterinarians and other staff members? Is there a procedural manual? Is there a policy handbook establishing benefit plans, work hours, overtime pay, vacation policies, and more for employees?

Review all contracts with vendors and the practice location lease with the landlord. The need for an attorney to review all leases, including the lease with the building owner and all leases with all vendors, cannot be overrated. Some important considerations that must be looked at include:

  • Can the owner force you to relocate your practice if he or she chooses to sell the building, or for any other reasons? This could cost you thousands of dollars in unexpected costs.
  • Does the lease allow the sale of the practice? If you decide to sell down the road, will the landlord be entitled to any of the sale proceeds?
  • Does the lease allow you to bring in associates?
  • Is there a provision that allows you to add examining rooms, or extra services, such as grooming or boarding, that may also require extra space?
  • Are you allowed to renovate or upgrade the space without requiring landlord permission?
  • Is there an option to renew?
  • Is there an exclusivity clause that prevents the landlord from leasing to a competing veterinary practice in the same building?
  • Is there a relocation clause that allows the landlord to require you to relocate you practice to another location within the building?
  • Review vendor contracts for payment terms, delivery expectations, and to see if there are other vendors or contracts you may need.

The sale should be contingent upon a smooth transfer of the lease agreement according to the terms agreed upon by the seller and buyer.

Choosing a business structure. You may be so focused on beginning your career treating your patients that you do not pay attention to the business part of the practice. You need to determine if you want to be:

  • A sole practitioner.
  • A partnership, in business with one or more other veterinarians.
  • A type of corporation.

We can discuss your plans with you and make a recommendation of how you should structure your business. Then, our team will prepare the proper documentation and make sure any filings of documents comply with your state laws.

Real estate purchase advice. If you are purchasing the building in addition to the practice itself, you need an attorney to review all documents as would be required of any real estate attorney for any real estate purchase. It is more common for the seller to have a lease with a building owner.

Takeaways

At Dental & Medical Counsel, Ali Oromchian and our team of attorneys help veterinarians purchase or open their veterinary practice strategically. Contact us for a free consultation. We will answer your questions, discuss your needs, and explain how we can help.

Need Help with Your Practice Purchase? Contact Us Today for a Complimentary  Consultation!

Img

Subscribe to Our Blog

Stay updated with industry news!