THE BUSINESS OF PRACTICE: MANAGING A PROFITABLE PRACTICE


countants, and financial advisors may be money well spent, but only if it empowers you to become a better business person. You want translation- al relationships with your advisors, not merely transactional relationships.1 Having a clear picture of your monthly, quarterly,


and year-end financials will help you understand your expenses, your profitability, your net worth on a balance sheet, and better equip you to manage cash day to day. Most veterinarians focus on the top-line revenues, but even if you earn $1,000,000, it is a step in the wrong direction if you are spending $1,000,001. Controlling expenses, managing debt, and keeping the necessary cash on hand to manage the day-to-day flow of money is an art and will take time to truly master. Nobody wants to buy into a poorly managed practice. Poor management and a lack of understanding of your financials will be evi- dent in your discussions with future owners. It will breed a lack of trust and likely doom your efforts from the outset. Equip yourself with the necessary tools or surround yourself with the right people to accurately track your revenues and expenses so that a true picture of your financial health is readily available to support your buy-in discussions.


Understanding Practice Value


Practice value and the method of determining that value will be a key discussion point. It is vital to both you and the incoming partner to have a solid grasp on the financial outlook so that everyone can make a good decision. Associates looking to buy into a practice are generally younger than existing owners, which means they are more recently re- moved from the costs of veterinary education, likely have student loans, and may have young families to support. Bottom line, a significant investment in a partnership opportunity requires careful financial analysis so that the purchase isn’t overly burden- some to the new partner. The last thing you want is a new partner with buyer’s remorse, wishing he or she could go back to just taking home a guaranteed wage. Painting a realistic financial picture is cru- cial, and practice value should be central to your discussion. There are a number of ways that practice value


can be determined. Typically this language is in- cluded within the existing partnership agreement. Industry norms suggest the use of a certified ap- praiser who has had experience appraising at least three practices similar in organizational structure and size to your practice. The National Associa- tion of Certified Valuators and Analysts accredits individuals who have an interest in this field and should be a designation that you should look for when searching for a qualified practice appraiser. Within the veterinary industry, Vet Partners is a group of consultants and business professionals that can be a resource for locating a certified ap- praiser that is familiar with your industry. Spe- cifically, an equine practice appraiser should be


sought out as the differences in equine and com- panion animal veterinary practices can be impact- ful to the final determination of final value. Valuations are subjective, meaning the opinion or experience of the valuator will have an impact on the method of valuation they select, and the weight they give to the various factors that influence the overall value. Many aspects are taken into consid- eration to determine value including the veterinar- ians involved, the remaining lifespan of their useful careers, their current level of production and their expected production in the coming years. Existing equipment and its remaining lifespan will be ana- lyzed, anticipated revenues, expenses, and their effect on the earnings before interest, taxes, depre- ciation, and amortization. Long-term debt of the practice debt will also be a key consideration. A fresh valuation every 3 to 5 years can give you a consistent baseline of value so that you know with certainty the numbers you are dealing with. In addition, going through the process of a valuation will educate you as to the aspects of your practice that are key areas of consideration when determin- ing value. The more familiarity you have with this process, the more confident you will become when discussing the buy-in process with your associates.


The Partnership and Buy/Sell Agreement


If you have an existing partnership agreement, be sure and examine it for its existing rules of owner- ship, and the rules of transferability as it relates to ownership interests. These will be key areas as you ready your practice for a transition. If you don’t have an existing partnership agreement, or are a sole owner, seek the input of an attorney who specializes in corporate law and understands your industry. Such input can give you useful infor- mation as you structure the guidelines of the or- ganization you want to grow into. Partnership agreements and Buy/Sell agreements are just that–they are agreements. You need to under- stand what you are agreeing to and be reminded of the things that you might forget. Specific to rules of transferability will be trigger-


ing events resulting from changes in the partnership brought on by “QRFDDD.” This stands for Quits, Retired, Fired, Divorce, Disabled, and Death.3 These triggering events give rise to ownership interest purchases and should be well understood before entering into a partnership agreement. If an exist- ing partner quits working for the company or is fired or forced to resign, do you really want to keep them involved as an owner of the business? If they ex- perience a divorce and their ownership interest be- comes community property according to the state, do you want to have to deal with a potentially un- friendly spouse? If they are injured and are unable to work, unable to contribute to the revenues and production of the practice, will they remain involved as an owner, or will you have insurance available to buy out their interest? Although the most unlikely


AAEP PROCEEDINGS  Vol. 64  2018 499


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