Introduction
When a recent graduate from veterinary school decides to purchase a veterinary hospital, plenty of steps must take place for that to happen. This may seem like a daunting task, so it is important to take things in a logical order. The following paper will help to provide the foundational knowledge one may need to start the process of purchasing a small animal hospital. These topics will include finding a practice; hiring an advisory team; managing finances and legal aspects; buying or leasing real estate; choosing a business structure; developing a business plan, negotiating the purchase; and closing the deal.
How To Find a Practice
The first step in purchasing a small animal hospital is finding the right practice. Two key factors to consider are the geographic location and the demographics present within the area.
When establishing where to locate a practice, you would most likely already have ideas. This could be based on where you live, where you would like to live, or where your family lives. Once a commitment has been made to a geographical area, it is important to pick an excellent location within it. Choosing the correct location will play a vital role in the success of purchasing or owning any business, especially when you are looking at it from a financial point of view. One way to maximize the earning potential of the business is by looking into areas that have great visibility with high foot traffic.11 It is also important to look at the growth within the community as well as the growth potential for the business if you have a goal of expansion or owning multiple practices.7 You should also consider the proximity to neighboring competitors.
Next up are the demographics in the area. An important part of those demographics includes estimating a trade area. Demographic experts suggest that most successful hospitals have a location that is anywhere between an eight to twelve-minute driving distance to another small animal practice.8 Although statistics show that 54 percent of households own pets, it is the trade areas that are the major factor to consider. A few other principle demographics to give thought to include the average income for residents, number of households nearby, size of the households, amount of disposable income, and demand for services.17
Hiring an Advisory Team
Once the location of the practice is determined, begin looking for an advisory team. These members will play a key role in how successful you may be in purchasing a practice, and acquiring a mentor within the veterinary profession who can guide you can be greatly beneficial when starting this journey. This mentor may be someone you have worked for or someone you share a mutual interest with in the veterinary field.
Next, there are three key members that should be included: an attorney, an accountant, and a financial analyst.18 The attorney can guide you on everything from a legal standpoint, including the laws in the state and the city you have chosen to purchase in. The accountant aids the business from a financial aspect such as debt of the practice being considered, current profits, and so forth. The financial analyst can guide you throughout the sale of the practice, including its appraisal. These members play a vital role in providing counsel from various aspects from the beginning of the sale and throughout ownership of the business.
Finances
Once the advisory team has been assembled, it is important to dive into the financial aspects of purchasing a practice. These aspects include assessing your own credit, performing due diligence, obtaining financing, having an evaluation performed, getting financing, structuring a sale, determining the type of purchase, and considering taxes and insurance.
Before a practice is purchased, it is paramount to assess your own financial health. This is done by considering personal assets, liabilities, and debt load as well as checking your credit report. According to Simmons, “a recent graduate needs two to three years of work experience and clean credit to obtain a loan . . . with some work experience and a clean credit, ideally a FICO score over 700–you can obtain 80-100% financing from commercial lenders in the veterinary market.”3
This is because of the cash flow potential of a veterinary practice and their track history to perform well. There has also been an increase in veterinary lending experts to aid in financing for practice acquisitions. These lending experts will typically need a financial plan and a credit history to assess financial standing.8 Assessing financial health also means that debt should be delineated between good debt vs. bad debt. Figuring out which debt falls under which category can help with lenders. Good debt is described as an asset, meaning something that can increase or appreciate over time. Examples of good debt may include one’s mortgage or student loans.10 Bad debt is something that decreases or depreciates over time. Credit card debt is a good example.10
Due diligence is performed early on to see if the asking price is reasonable and evaluate practice operations. There are several types of due diligence performed: financial, legal, operational, personnel, and environmental. Financial due diligence will explore revenue, expenses, and profitability while assessing debt and liabilities.4 Legal due diligence requires a specialized veterinary lawyer who can assess4 leases, licenses, and other legalities. Operational due diligence will look at everyday workflow and staff management. This is important in evaluating a hospital’s efficiency. Personnel due diligence will evaluate the culture of the clinic overall and look at the staff structure. Lastly, environmental due diligence will examine the clinic’s location and the risks associated with it.
The next step is having an evaluation performed to aid in determining the total value of the practice. A veterinary appraiser typically performs this. The appraiser will look at the tangible and intangible assets of the practice. Tangible assets are those that can be “carried or touched, such as accounts receivable, professional equipment, office and medical supplies.”8 The intangible ones focus on those that cannot be touched such as the practice’s goodwill. Goodwill includes things like the adjusted earnings of the practice, the business name, and its reputation. Other intangible assets include things like the practice’s characteristics, location, client list, and medical records.8 This will inform the buyer about whether there is an adequate cash flow to purchase the practice as well as help them decide if they can afford to purchase the practice. Other things usually assessed in an appraisal are “projected revenues, operating expenses, capital expenditures, tax liabilities, and debt payments.”14
Once it is determined that buying the practice makes financial sense, securing the proper financing is the next step. Some ways that financing can be secured are by self-funding, seller financing, a small business administration (SBA) loan, or a regular bank loan. Self-funding can be a good option if you have the capital to do so. Starting or buying into a small animal hospital can range anywhere from $250,000 to $1 million, though, so this may not always be feasible, depending on the value of the practice.20 Seller financing is also known as owner financing or seller carryback, which would involve the practice seller acting as the lender.21 The benefits to this option will include a lesser down payment when compared to a regular loan as well as less severe penalties if the borrower defaults. Seller financing can involve making a down payment and then requiring payments over a fixed period. There are two options at the end of the loan: the borrower can make a large payment of the remaining balance or obtain a mortgage refinance.19 A small business administration (SBA) loan can be offered to small businesses, typically providing more “flexible terms, longer repayment periods, lower down payments, and competitive interest rates.”20 The disadvantage to an SBA loan is that they have stricter criterion to qualify, more paperwork, and sometimes a longer approval time on the loan. Lastly, a regular bank loan can be used for financing. A bank loan may offer more flexible terms and may be more tailored to the individual.
There are several ways to structure the sale of a practice. If you were a current associate at a practice and given an opportunity to buy in, it can be structured so that funds would come out of the practice earnings and not directly from the associate.8 In this scenario, it makes it appear as if the owner is “giving” them the practice and can be beneficial since you would already be well versed in the day-to-day operations of the practice. Another way a practice can be structured would be if you were a current partner and wanted to buy the other side out. A few other examples include staying on as a long-term medical director to allow the seller to stay on longer.6 Corporations can also be included in a purchase where the seller may keep a percentage of the hospital. Finally, you may invest back into the practice to maintain a minority share. All the options are tailored and structured on an individual basis.
Structuring the sale can be done as an asset purchase or stock purchase. In an asset purchase, the buyer has the ability to exclude assets they do not want, which aids in avoiding liability.2 An asset purchase allows the buyer to receive a tax advantage, too, such as using assets that can “be depreciated against income.”2 This is typically works in favor of the buyer. However, in this scenario, this purchase tends to carry more complications, meaning there will likely be renegotiation of contracts, assets needing reassigned, and employment agreements needing to be re-written.15 In a stock purchase, the buyer will own the shares and not the hospital directly. This means they will also have the liability that the assets carry. A stock purchase tends to be less complicated because no contracts will need to be rewritten and it is typically in favor of the seller.15
It is important to touch upon the insurance aspect when discussing the financial part of a practice purchase. This includes general liability insurance, commercial property insurance, business income insurance, professional liability/malpractice insurance, and animal bailee coverage (such as if an animal gets lost while in the care of the hospital).9 The other business insurance policies to consider are backup of sewers and drains, workers compensation, commercial auto insurance, employment practices liability insurance, and employee dishonesty coverage. Real estate coverage will be highlighted in a separate section. The cost of insurance will vary based on the size of business, number of employees, size of building, services provided, claims against company, and the insurance company itself.9
The final financial aspect covered: tax considerations when owning a practice. It is important to establish who will be the one calculating the taxes. Consider how how long tax preparation may take, what software will be used, if you can afford the time or energy it may take, and if you already know how to calculate them.8 Think about your personal taxes, employee taxes, independent contractor (1099) forms, and practice taxes.8
Legal Aspects
There are a multitude of agreements and contracts that come with purchasing a veterinary hospital. Outlined below is the beginning paperwork required:8
– Practice and Real Estate Purchase Agreements
– Non-Compete Agreements
– Confidentiality Agreements
– Employee Agreements and Contracts
– Independent Contractor Agreements
– Real Estate Contracts
– Building and Equipment Contracts (lease agreements)
– Office Equipment and Supply Contracts
– Employee Manual
Real Estate
The next important topic is the real estate aspect of purchasing a hospital, including whether you would buy or rent the facility. Buying the real estate allows you to have a fixed cost, meaning the price paid will be the same each month. Owning also allows for tax advantages such as deductions for depreciation and interest expenses on loans.13 There is a potential for appreciation on the real estate as property value can increase over time. Buying the real estate also means that it is considered a business asset.13 However, leasing the real estate reduces upfront costs and will not tie up a large amount of capital.1 There is also less risk involved as many changes in the market will not affect you. Leasing the real estate also allows for less responsibility. The property manager can oversee things around the building instead of you. Finally, leasing a property can allow for more flexibility and the freedom to move locations.1
A separate appraisal will be performed on the real estate portion. This will be necessary to get approval from a lender. Having an appraiser who specializes in veterinary practices will be better as they can also provide more insight on financial statements, lease agreements, and so forth.12 Once the appraiser is hired, a property inspection and market analysis should be performed. A property inspection will provide information on the surrounding land, what state the property is in, and the state of the building.16 The market analysis will provide insights in the market in the surrounding area as well as information on the properties in the area.16
Business Structure
Deciding what the business structure will be is usually done earlier in the process. Diverse types that are available include sole proprietorships, corporations, partnerships, and LLCs. There are approximately $20 million companies currently in the world and, of those, 70 percent of them are sole proprietorships, 20 percent are corporations, and 10 percent are partnerships.22 However, corporations “account for 90% of the business receipts, as there are few large companies in America.”22
A sole proprietorship is the simplest way to own. This used to be the most popular type of practice until 2023 .8 A sole proprietorship is simple: there is only one owner. This means that he or she has the freedom to make all the decisions. It can have an unlimited number of employees but is taxed on the owner’s personal income.22 The drawback is that the owner is responsible for everything. The company is intertwined with the owner, so there is shelf life to the company. To continue the business after the owner leaves, a new business would need to be created. It is also important to mention that a sole proprietorship “does not produce a separate entity,” meaning assets and liabilities are not separate from the owner.5
A corporation is otherwise known as a joint stock company. It has its own set of “legal rights, privileges, and obligation of a person.”22 It is separate from the owner as it has its own legal rights, and the liability is only within the investment. The life of the practice can continue more easily as it acts as a separate entity. A corporation also has more ability to raise capital such as debt or equity financing.22 The drawback to owning a corporation is tax-related with a 34 to 40 percent tax on corporate profits of $155,000 or more.22 There are types of corporations like S Corp and C Corp. The differences between the two corporate types involve the way they are taxed. A C Corp has double tax, easier filing, and limited shareholders. An S Corp has a single tax, more deduction options, and ownership restrictions.22
Partnerships are the third type of business structure. The two common types are general partnerships and limited partnerships. General partnerships involve two or more people who are responsible for the debt22 with a benefit being the ability to have greater resources as they are shared among multiple people. Taxation is similar to sole proprietorship. Issues, though, can arise with a partnership because each person is responsible for one another’s business decisions, and challenges can occur if conflict arises.22 Limited partnerships allow investors to own small businesses, but limited partners do not have an active role in the company.22
An LLC can be comprised of one or multiple members. A single member LLC is taxed as a C Corp or sole proprietorship.22 A multi-member LLC is taxed as a C Corp or a general partnership, which is outlined above.22 LLCs are simpler entities as far as records and carry better liability coverage in comparison to general partnerships. The drawback to this business structure is that some states do not allow veterinarians to form LLCs.22
Developing a Business
With an already existing practice, there should be a business plan in place. A business plan for a new business would have been developed earlier in the process and would include:8
– Executive Summary: business goals, objectives, mission statement, and so forth
– Business Overview: vision, short- and long-term goals, and so on
– Market Overview: geographic location, target demographic, school system, and so forth
– Sales and Marketing: internal and external methods such as handouts, newspapers, and so on
– Management and HR: job titles, descriptions, numbers of employees, projected costs, and so forth
– Financial Projections: sources of funding
Negotiation
At this point in the process, you have found the right practice, assessed your purchase opportunity, found a lender, and confirmed financing. So, what comes next? The buyer will draft a formal offer, which is considered the letter of intent (LOI). This includes the description of the practice, the offering price, period of due diligence, financial terms, employment agreements, projected closing date, NDA, and more.14 An LOI usually has a clause that does not allow other buyers to approach the seller for a certain period. Once this is sent over and the terms are accepted—perhaps after significant negotiations—the asset purchase agreement, which is the legally binding portion, will be drafted.14 “The timeline between the letter of intent and closing is usually 2-4 months.”14
Closing the Deal
The final step is closing the deal. It is important that all the necessary documents such as purchase agreements, non-compete agreements, lease agreements, employment contracts, and others are in place.4 Once all the documents are signed, the deal is complete.
Conclusion
Overall, the steps outlined above provide the skeleton of what it entails to purchase a practice. Each hospital and purchase should be treated individually, and all come with separate stipulations and considerations. In summary, the high-level steps to purchase a practice include:
1. Finding the Practice: geographically and demographically
2. Financial Analysis: evaluation of P&Ls, balance sheets, and so forth
3. Finding a Lender: ensure financing
4. Negotiating the Deal: letters of intent, purchase documents, and so on
5. Closing the Sale
References
1. Allen, T. (2024, January 9). Real estate investment options for the Medical Professional. Practice Real Estate Group. https://practicerealestategroup.com/blog/real-estate-investment-options-for-the-medical-professional/
2. Asset purchase v. share purchase – mahan law, PLLC. Law Office of Anthony A. Mahan, PLLC. (2020, January 30). https://mahanlaw.com/practice-areas/buying-a-veterinary-practice/asset-purchase-v-share-purchase/
3. Associates, S. &. (2023, November 16). Buying a veterinary practice – what you need to know. Simmons. https://simmonsinc.com/buying-your-first-veterinary-practice-what-you-need-to-know/
4. Buying a veterinary clinic: A step-by-step guide. Weave. (2024, January 8). https://www.getweave.com/buying-veterinary-clinic-guide/
5. Choose a business structure. U.S. Small Business Administration. (n.d.). https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
6. Christopher J. Allen, D. (2021, March 29). Creative Veterinary Clinic sale terms: Risks VS benefits. DVM 360. https://www.dvm360.com/view/creative-veterinary-clinic-sale-terms-risks-vs-benefits
7. Demetriou, T. (2022, October 5). How to choose a business location. Epos Now. https://www.eposnow.com/us/resources/business-location/
8. Farquer, B., & Watson, D. (2014). Your veterinary practice: Buying, selling & merging. Simmons Educational Fund.
9. Get the veterinarian insurance you need to protect your practice. Tivly. (n.d.). https://tivly.com/veterinarian-insurance
10. Hockenberry, B. (2023, January 11). Prepare financially for practice ownership. Today’s Veterinary Business. https://todaysveterinarybusiness.com/prepare-financially-for-practice-ownership/
11. Keiser, S. (2020, April 28). What to know before you buy a veterinary clinic. DVM 360. https://www.dvm360.com/view/what-know-you-buy-veterinary-clinic
12. Lee, J. (Byungjin). (2022a, April 12). 5 things to consider when buying a practice with real estate. DMC LLP | Dentist Lawyers. https://dentistlawyers.ca/5-things-to-consider-when-buying-a-practice-with-real-estate/
13. LenDRgroup Consulting. (n.d.-b). Buying or leasing practice real estate. LenDRgroup Consulting. https://www.lendrgroupconsulting.com/content-library/buying-or-leasing-your-practice-real
14. McCormick, D. (2024a, January 5). Ownership & buying a veterinary practice. Simmons. https://simmonsinc.com/ownership-and-buying-a-practice/
15. Melchiorre, A. (2023, April 28). Asset purchase vs. stock purchase: How to make the right choice. MelCap Partners | Middle Market Investment Bank in Cleveland, Ohio. https://melcap.com/asset-purchase-vs-stock-purchase-make-right-choice/
16. O’Connor, H. (2023, July 11). Veterinary practice appraisal guide. Terravet. https://terravetrealestate.com/guide-to-veterinary-practice-appraisals/
17. Pick the perfect veterinary hospital location. DVM 360. (n.d.-a). https://www.dvm360.com/view/pick-perfect-veterinary-hospital-location
18. Seven steps to buying a veterinary practice – shepherd veterinary software: Cloud-based Practice Management System. Shepherd Veterinary Software. (n.d.). https://www.shepherd.vet/blog/seven-steps-to-buying-a-veterinary-practice/
19. Treece, K. (2023, August 8). Owner financing: What it is and how it works. Forbes. https://www.forbes.com/advisor/mortgages/owner-financing/
20. Veterinary practice funding: How to finance a new veterinary clinic. ezyVet. (n.d.). https://www.ezyvet.com/blog/veterinary-practice-funding-how-to-finance-a-new-veterinary-clinic
21. Veterinary practice seller refinancing attorney – mahan law. Law Office of Anthony A. Mahan, PLLC. (2022, February 14). https://mahanlaw.com/seller-financing-in-veterinary-practice-sales/
22. Which business structure is right for your practice? (proceedings). DVM 360. (n.d.-b). https://www.dvm360.com/view/which-business-structure-right-your-practice-proceedings
