Associates: If you're like nearly half of the non-owner doctors who participated in the Benchmarks 2010 study of Well-Managed Practices, you want to own a practice someday but you're not sure it will be financially feasible. And that could be making your boss nervous, because 65 percent of the owners who responded to the same survey said they're planning to sell their practice to an associate. Add in factors like the rocky economy and monumental veterinary student debt, and many in the veterinary profession are asking, "How can anyone afford to buy a practice today?"
To begin to answer that question, let's first take a look at what "affordability" actually means. When it comes to a veterinary practice, affordability depends on three things:
> the total earnings available to the owner after all practice expenses have been paid
> the cost, after taxes, of the annual loan payments
> the personal financial resources of the buyer.
Bottom line? If the practice you're considering is valued fairly, the loan terms are reasonable, you have a sufficient down payment (10 percent to 20 percent), and you're conservative with your personal spending, then the earnings after purchase should be sufficient to cover your loan payments and any additional tax liability resulting from ownership. Here's how it works.
DR. SELLER, MEET DR. BUYER
Dr. Seller's practice generates $1.5 million of revenue and is valued at $1.1 million: $200,000 in net asset value and $900,000 in goodwill value. The earnings available to the owner—or the return on investment—are $208,000 after paying the operating expenses, fair-market compensation for all the veterinarians, and management compensation (3 percent of revenue) for the owner.
Dr. Buyer is purchasing 100 percent of the practice, has a 10 percent down payment ($110,000), and will finance the balance ($990,000) over seven years at an interest rate of 6.25 percent (prime plus 3 percent). Dr. Buyer's annual loan payments come to $175,000 for both principal and interest.
In order to answer the affordability question, Dr. Buyer's advisor completes an affordability analysis that shows how her income and expenses will change over the loan term assuming a conservative 3 percent growth rate in revenue, owner earnings, and asset value (see "Cash flow from buying").
Cash flow from buying
The analysis assumes that Dr. Buyer's veterinary salary covers her normal living expenses and that she'll continue her current levels of personal spending—in other words, she can't go buy a Maserati or take an extended European vacation anytime soon.
The increased income from her management compensation and ROI will go toward her loan payments and paying the taxes on her increased income from ownership.
With this purchase, Dr. Buyer is ensuring her future financial security by building equity in an asset that she'll sell down the road. The analysis also shows that the value of the practice is projected to grow to approximately $1.36 million by the end of the loan term of seven years (see "Equity from buying").
Equity from buying
The report also clearly shows that this purchase is affordable. Dr. Buyer's financial position improves dramatically when she becomes an owner and will improve further when she sells the practice—a win on both fronts.