13 Sep How To Buy A Fixer-Upper Pracitce
By: Doyle Watson, DVM, President & Owner, Simmons & Associates Southeast, Inc. &
Joe Stephenson, MA, VP of Simmons & Associates, Inc. Business Development
Life’s tough, and especially so for a veterinarian buying a practice today. New corporate consolidators are constantly entering the market snapping up the high quality, high grossing practices that all private buyers are seeking as well. So how can you, the young, ambitious associate, compete for 2+ doctor practices? You can’t, unless you get lucky enough to find a seller who is willing to forego the six to seven figure difference between what the corporations are able and willing to pay and what you are able and willing to pay. Thankfully, there’s another way. If you are willing to live in a smaller town, perhaps relocate, and accept a lower grossing (and perhaps poorly performing) practice as a starter, you can find your practice with little competition from other buyers. The marketplace is flooded with these practices. So let ’s focus on buying the under-performing practice and give you some tools to spot and fix the most common drains on practice profit to help you purchase a fixer-upper with real upside potential——You may end up with a “silk purse” from the “sow’s ear”.
There are typically several causes for a poorly performing practice, most of which can be corrected. It all boils down to low revenue, low profit, or both.
Other than the practice located in an obviously depressed area, most revenue can be enhanced simply by improved marketing procedures, a bit of redecorating and appearance refreshment, and new owner re-vitalization. There is nothing like the fear of debt to spark new owner energy and enthusiasm.
Another way for very quick revenue increase is purchasing a neighboring practice and merging into yours. Although this is a totally different subject with its own set of details, nuances, and considerations, it is a tremendous but greatly ignored means of revenue growth.
Although there is a certain level of expense inherent in any business operation, in a general small animal practice, it typically requires revenue exceeding $400K before one begins to enjoy any degree of profit. So in a well-managed practice, profit should begin to come along as revenue increases.
Assuming the number of client transactions is adequate, a second reason for low revenue and low profit is a low average transaction charge. This can be caused by either low fees, not charging for services rendered, not offering and performing the services, or a combination thereof.
The two major expense categories in a veterinary practice are supplies and lay staff. In a general small animal practice, both of these should range in the high teens to low twenties as a percentage of gross. So check out the Profit/ Loss statement (P&L) and see if that is an issue.
Buying a Fixer-Upper
Practices with low gross/profitability hold a plethora of opportunity if you know what to look for and are willing to invest in the effort to correct the practice’s course. You can get a great practice for relatively little cost and realize a greater return more quickly than if you bought a slightly larger practice.
Procedures: The Root Opportunity
Most growth opportunities stem from poorly laid out procedures. Look for an employee manual and a written protocol for all aspects of the business for each staff member. If there isn’t a manual or aren’t procedures, the practice could hold untold opportunities. Keys to look for:
- Clear mission statement
- Regular, focused team meetings
- Detailed process for each job description
- Openness to feedback from the staff on how to do their job better, more efficiently
- Appropriate investment in continuing education
Whether or not there is a procedures manual, interview the owner about how they operate the practice and train the staff. If there is a manual, try to get some information on how well the owner follows through to ensure the staff follows those procedures. Examining procedures is the best way to begin to assess the likelihood a practice suffers from common profit – killing mistakes.
Cost of Goods Sold
Again review the P & L to determine the supply expense. Once you have a clear picture of the expense figure, if it exceeds 25 percent of gross revenue, there is room for improvement. A caveat to this percentage is the practice with an abnormally high over-the-counter (OTC) revenue component. Ideally a general practice should see about 85% doctor-produced revenue with the balance divided amongst boarding, grooming (maybe) and OTC, holding at approximately 5% OTC. The greatest issues include the procedures around ordering and negotiating the price of supplies, procedures for consistent price increases, and procedures around protecting against embezzlement, theft and walk, discounting and gifting (WDG).
Suppliers offer deals to convince veterinarians to stockpile items. However a well-run practice strives to have only what it needs on hand at any given time. Luckily, this problem is easy to diagnose and fix.
When you visit a practice, look carefully at the drug, supply and food inventory. If it has extra storage just for food, they’re probably over-ordering. You can also ask the owner about their ordering policy. If the owner delegates the responsibility, you may not be able to talk to the staffer early in the buying process, but you can consult the ordering procedures (if they have any) and gauge the owner’s level of supervision. Owners will often gladly tell you about how much money their office manager “saved” by stockpiling a year’s worth of something. Although there are precise ways to calculate inventory turnover, if a practice is struggling, the owner probably isn’t tracking expenses precisely enough for inventory turnover calculations to be useful in your assessment.
Vendor Price Negotiation
The other easily fixed supply mistake is not negotiating with and/or price shopping among vendors. Remember, most things in business are negotiable, including the price of practice drugs and supplies. Competing companies are always looking for a competitive advantage and will have varying price structures. This is another easy problem to uncover in conversation with the owner and an easy one to fix when you buy a practice.
The last of the somewhat easy to diagnose and fix supply problems is price increases. This isn’t as straightforward as the opportunities above since veterinarians have had to face online pharmacies driving prices down which necessarily limits price increases. When evaluating a practice, ask the owner about their procedures around increasing drug and supply prices. Although they have to be cautious about competing with online pharmacies, if they don’t have procedures to generally increase prices regularly with vendor price increases, you’ve found another opportunity for practice growth.
Embezzlement affects drug supplies when a bookkeeper removes entries from inventory sales reports and pockets that income. This is more difficult to pinpoint than many other business opportunities, but you can determine if the practice is at a higher risk by examining procedures and interviewing the owner.
To determine if the practice is at risk for embezzlement, look for procedures that decentralize balancing the books, closing out invoices at the end of the day, and taking cash to the bank. Many practices have only one person responsible for this entire procedure, maybe two. Without a dedicated procedure to check and balance this system among multiple people, the practice has an elevated risk for embezzlement.
Similar to embezzlement, if this is an issue in the practice, you’re not going to be able to pinpoint it, but you can assess whether or not the practice is a high risk for drugs and supplies theft.
To assess the practice’s susceptibility to theft, look for procedures around supply storage. Are drugs and food kept in places that are highly visible? If not, can the storage space be locked and only accessed by a few trusted people? Does the practice have cameras? Does the practice conduct random audits of items such as food and parasite preventatives to ensure the inventory and sales data match?
Another indicator of theft is an abnormally high supply expense coupled with less than expected OTC revenues.
Walk is essentially a euphemism for theft but it can also blend into discounts and gifting. The only major difference is the thief doesn’t really think of it as theft. Walk refers to inventory “walking” out the door, typically from employees thinking there is no harm in taking just one heartworm dose or a small bag of food here or there.
“Discounting” refers to one party (receptionist, manager or owner) dispensing an item for less than the practice generally charges. Again, these small dents in profit add up quickly.
WDG are similar to theft and embezzlement in that they are hard to pinpoint but different in that they’re easier to fix. Simple staff education and some follow through can correct this behavior. If there aren’t specific policies and dedicated education around informing staff how much these actions harm a practice, it’s very likely this is happening and driving up supply costs. To track down potential growth opportunity in WDG, like everything else, hunt for procedures.
Yes, life’s tough and full of challenges. Fortunately you now have the tools to create your own “silk purse.”
This article was featured in the Fall Edition of the “GA Vet.” GVMA members can access the digital edition here.