Robert A. Sparrow
Financial Wellness co-columnist Robert A. Sparrow is a partner with Triune Financial Partners LLC. He helps his clients learn how to live within their means, save, avoid debt, give generously, and set goals – the five fundamentals to leading a financially stable life. He specializes in resolving complex financial situations, and serves clients facing big life changes, such as the sale of a business or the transition into retirement. Learn more at triunefp.comRead Articles Written by Robert A. Sparrow
Financial Wellness co-columnist Fritz Wood is a veterinary industry veteran with a special interest in finance. He works with Triune Financial Partners to connect veterinarians with experienced, independent financial planners. He is the former personal finance editor of Veterinary Economics and was a treasurer and board member at the American Veterinary Medical Foundation. He holds bachelor degrees in accounting and business administration from the University of Kansas.
Cognitively, we understand that uncertainty is part of life. We’re taught to live one day at a time and “Don’t worry about tomorrow, as today’s problems are enough.” Emotionally, we know that uncertainty breeds anxiety and worry. While we might realize that faith and fear cannot coexist, 2022 proved it was much easier said than done.
The year began with the Russian invasion of Ukraine, adding to an already problematic supply chain, especially for world food and energy. We experienced high inflation, a bear stock market with losses exceeding 20% from January’s record highs, and, as of this writing, a possible recession that would shrink the overall economy. Mix in political turmoil, climate change, border insecurity, rising crime and natural disasters. Most folks feel uncomfortable and a little anxious about the future.
The veterinary profession faces even more uncertainty, given the shortage of veterinarians and other team members. The new year, 2023, offers no apparent relief.
So, what do smart people do today with their business and personal finances? The only rational approach is to control the controllables.
Hopefully, you know your veterinary practice’s key performance indicators and work consistently to control what you can to drive to the desired numbers. Focusing on those targets likely leads to a well-run practice with satisfied clients and handsome profitability for the owners.
Ideally, your practice exists in perpetuity. If you’re the owner, your job is to take care of your team, patients and clients and prepare the practice for its next owner. Profitability helps deliver quality medicine and makes the practice valuable to others, thereby ensuring continuity. Unprofitable veterinary practices aren’t worth much. You can’t sell your job.
Practice owners have heard of EBITDA multiples. Think of EBITDA as adjusted earnings and a multiple as a year. Over most of Fritz’s more than 30-year career in the veterinary profession, multiples generally ranged from three to six. Four to five is the average for small animal practices. As of this writing, they’re worth perhaps eight to 12 times adjusted earnings. So, by any historical measure, now is a great time to sell a profitable veterinary clinic.
Practice owners, please note that improved profitability is the best investment you can make. For example, growing profits by $1 might increase the practice value (your personal net worth) by $8 to $12.
We firmly believe the best time to sell a veterinary clinic is when you’re ready. Therefore, the smartest strategy is always to operate the practice as if it’s for sale. Controllable items that buyers find attractive include:
- Total labor expenses less than 40% to 45% of gross income.
- Total cost of goods sold less than 22% of gross income.
- Adjusted earnings in the high teens to 20% of gross income.
- Associate doctors under contracts with standard terms.
- Selling doctors able and willing to stay on for a period.
- A strong staff willing to stay on.
- Accurate and timely financial and operating information.
- Clear separation of business and personal expenses.
Don’t be seduced into thinking that wealth is created from investing. Wise investing preserves and perpetuates the wealth created from a lifetime of saving. A significant liquidity event — the successful sale of a practice, for example — helps as well.
What do smart people do when investing during uncertain times? Here are seven tips.
Evaluate your investment allocations relative to your investment time horizon. Monies needed over the short term (within two years) must be kept in safe places, such as savings accounts, money market funds or short-term certificates of deposit. Monies needed over the midterm (three to six years) should be globally diversified investments of 50% stocks and 50% shorter-term, investment-grade bonds. Finally, long-term monies (seven-plus years) should be in a globally diversified portfolio of 100% stocks. While going all-in on stocks is much more volatile, the move can deliver a higher expected return over time that historically outpaces inflation.
Diversification means owning thousands of different companies in a portfolio. We typically recommend long-term investments holding 65% in U.S. companies, 25% in companies in international developed markets and 10% in emerging-market companies. Low-cost mutual funds and exchange-traded funds are recommended vehicles for a globally diversified portfolio.
Is your portfolio diversified similarly? Are you taking on too much risk or too little? Will your approach compromise future investment returns?
2. Spread It Around
After appropriate investment vehicles are in place, commit to consistently funding each short-, mid- and long-term bucket. Putting excess cash to work by making monthly and annual deposits into mid- and long-term investments is highly desirable. Smart people know that time in the market is the best choice, not timing the market.
3. Think Long Term
Human behavior (specifically, patience and discipline) is the most critical element in being a successful long-term investor. Create your allocations based on your time horizon and fund them consistently. The news media is always full of reasons not to invest in stocks, but history shows that bull and bear markets are normal. Don’t get distracted or beaten down by the 24-hour news cycle. Realize that financial news, like most news, is almost always bad. Never build an investment strategy based on reacting. No one reacts their way to success.
4. Spend Less Than You Earn
Build your lifestyle around what you earn monthly, and be certain your expenditures are below what you bring home. Don’t build your lifestyle on anticipated earnings, bonuses or profit distributions. Spending money you haven’t yet earned or received can get you in trouble. Once you’re living a comfortable lifestyle, stay at that level. Don’t be tempted to spend more on lifestyle needs simply because you make more money. Instead, turn the added income into savings and investments.
5. Save Systematically
We suggest saving and investing 15% of your gross income to build a foundation for long-term retirement needs. The money should come off the top of each paycheck.
6. Avoid Debt
Get into the habit of paying cash for purchases. If you use a credit card, pay off the balance monthly. If you carry credit card debt, prioritize eliminating the debt. Mortgage payments should be no more than 25% of your income.
7. Be Intentional
A successful financial plan is intentional and specific. The results are measured systematically, like your practice’s key performance indicators. Knowing your numbers and consistently tracking progress can lead to desirable outcomes.
Will these seven steps erase all uncertainty and anxiety from your life? Of course not. However, focusing on what you can control will help you avoid noisy distractions and lead you toward financial peace and freedom. Give it a try.
ONE FINAL TIP
Focusing on yourself, as opposed to helping others with some of your wealth, often leads to financial emptiness. So, give generously. Joy and charitable giving directly correlate. Giving away money might break the hold money has over you.