Build it, but will they come?
My group owns a practice that grosses about $1 million in revenue. The mortgage payment for this 9,000-square-foot facility is $10,500 per month. I love the building—until I compare it to another $1 million practice in our group, an older but well-maintained 2,500-square-foot facility. That mortgage is $2,300 a month. The lesson here is that many practice owners may be forfeiting a chunk of potential profit because they want a beautiful facility. So should we pinch our pennies and refuse to build new clinics? Not always. There are many legitimate reasons to build, including these:
Robust growth. If your practice is growing 15 percent to 20 percent a year and you believe this growth will continue, then you're not building because you think new clients will flock to you—they already are.Adequate revenue. If your current practice is grossing roughly twice the cost of the real estate you plan to build on, you have a general all-clear that you can afford the project.
Veterinarians who actively engage in strategic planning often buy what they think will be choice property in their communities years before a new facility is in the cards. Then, when they meet the criteria above and interest rates are favorable, they're ready to build. Smart.
Keep in mind that mature hospitals can expect 5 percent to 8 percent of their revenue to go toward paying the rent or mortgage. A new facility can cost up to 15 percent of revenue. That should drop to 8 percent to 10 percent after a few years. Are you willing to forego that amount of profit over the next five years or more?
The housing market is a mess because folks bought more house than they could afford. Don't let the same thing happen with your practice. Remember that "if you build it, they will come" may work in the movies, but it's no guarantee for you.
Veterinary Economics Editorial Advisory Board member Dr. Jeff Rothstein, MBA, is president of The Progressive Pet Animal Hospitals and Management Group in Michigan.