Owning and operating a high-quality veterinary practice requires continuous reinvestment.
“The physical building, the equipment inside, the standard of care and technology continue to advance,” said longtime veterinary consultant Fritz Wood, owner of H.F. Consulting in Lenexa, Kansas. “Every veterinarian in my experience has a wish list, often for a significant upgrade. Some tend to want what they want, not necessarily what they need. Maybe I just want, with all my heart, the latest and greatest — say, digital radiology — while at the same time my practice management system is 20 years out of date. Practice management systems aren’t as sexy as a new surgical or diagnostic tool.”
The “needs” must count, he said, but if a veterinarian really wants something, they’ll find a way to get it. And that’s not all bad.
“For example, in-house labs have reinvigorated people’s careers,” Wood said. “There are whole different ways to use knowledge to help patients right now. If it’s fun, makes you a happier person, differentiates you in your community, damn the torpedoes.”
And while many upgrades bring the prospect of added revenue, that isn’t the only reason to consider upgrades.
“There are absolutely nonfinancial reasons to make continuous upgrades,” he said. “It prevents burnout and causes employees to stay with you. If you fall behind the modern standard of care in your geographic area, good luck finding new employees and getting people to stay.”
When to Upgrade
“The obvious reason is when it breaks, stops working or is not working ideally,” said Karen Felsted, DVM, MS, CPA, CVPM, president of PantheraT Consulting in Dallas. “And technology changes so much, so fast, that clinic efficiency can suffer.
“You might have an autoclave that’s old and you’re not confident it’s working the way it should. When new and better technology becomes available, you need to upgrade to be able to continue offering quality care, to help the efficiency and productivity of the practice.”
While it’s not exactly equipment, Dr. Felsted said practice management software should be upgraded periodically. She noted that some brands are forcing practices to move to the cloud and she expects that trend to continue.
Clinic owners should ask questions in considering upgrades or new equipment, said Robin Brogdon, MA, CEO of BluePrints Veterinary Consulting in Huntington Beach, California. “Is the warranty up? Is maintenance reducing efficiency or effectiveness? Are newer models available that can do more? Is the equipment still adding value to the practice in its current form?”
If clinic efficiency is lagging because of older equipment, it’s time to consider upgrades, said Tom A. McFerson, CPA, ABV, of Gatto McFerson CPAs in Los Angeles.
“If your cash flow is in position, look to upgrade,” he said. “It’s like a house; at some point you want to freshen things up. If you can get equipment at a reasonable price, do it. Sometimes these improvements are good for morale of the staff and client as well as patients.”
Some clinic equipment can last nearly forever, but that doesn’t mean you should always keep it.
“If you’re remodeling,” Brogdon said, “you might find you no longer like the metal fold-down exam tables. You might want a more modern look. Sometimes improved design and functionality are good reasons to upgrade.”
Wood agreed: “Newer fixtures can be more aesthetic, better for the animal, easier to clean. If what you have is unattractive, you probably want to make changes. If it’s dented or damaged, as a client I’d probably jump to the conclusion that the medicine is not state of the art.”
Upgrading isn’t the only reason to look at equipment purchases. Adding new equipment can also lead to additional revenue streams for the practice.
“If you’re missing certain services and have a demand for them, consider adding new equipment and those services to the practice,” McFerson said. “Do a cost/benefit analysis and make sure the expense is worth it to the practice. In general, the more services you can offer to clients, the better.”
Tax Considerations
Are you hesitating to make a big purchase because the cost is daunting? If you need extra incentive for investing in new equipment, consider Section 179 of the Internal Revenue Code.
It allows immediate expense deduction for purchases of depreciable business equipment instead of capitalizing and depreciating it over time, according to Investopedia. The site notes: “This allows businesses to lower their current-year tax liability rather than capitalizing an asset and depreciating it over time in future tax years.”
For tax year 2022, the capital equipment expenditure allowed is limited to $1.08 million. But states’ allowances can vary, so consult your financial adviser about your state’s eligibility limit. McFerson explained that the Internal Revenue Service typically allows capital equipment depreciation over the life of the asset, at the rate of $2,000 a year. But with Section 179, a veterinary clinic can write off the entire cost of equipment, whether financed or leased. The caveat: The equipment must be signed for, in the hospital and functioning by December 31. “You can’t sign the paperwork December 30,” McFerson said.
For example, Wood said, if you buy a piece of equipment for $100,000, Section 179 lets you deduct all $100,000 at once. “It comes down to: Do you want to pay the IRS or buy new equipment?”
ROI and Fee Adjustment
Financial factors when considering an upgrade include assessing return on investment (ROI) and how to adjust pricing and service, if at all.
“Consider the difference in cost and productivity,” said Brogdon. She suggested considering the following questions:
- Will the new equipment cost you more to operate?
- Is there specific training that you or your team will need to undergo to use it properly?
- What does the warranty cost, and what is the equipment’s expected longevity?
- How many times a month will you need to use it to break even?
- What service plans are available, and what is the expected response time when you need help?
- How will it impact the practice if the equipment isn’t working?
Figuring ROI depends on the equipment, what you’re replacing and why, Dr. Felsted said. “In some cases, assessing ROI isn’t going to be a big deal. You have to have an anesthesia machine,” she said, so replacing it as necessary is a no-brainer.
“If you’re picking a new piece of equipment — say, an ultrasound — to offer services you’ve never offered before, think about ROI. If you’re considering a high-dollar item, you clearly have to do more analysis. One, what is the impact on patient care? Two, will it help bring in more revenue and profit? If not specifically revenue and profit, will it help with the productivity and efficiency of the practice?”
Don’t forget that even if a new purchase brings in new revenue, you still have to pay, Dr. Felsted said. “If you’re getting a new system, remember you have to train people to use it, and train enough staff so that if someone leaves, your clinic can still perform the study or service.”
“My observation is that things that have a lower learning curve make greater financial sense,” Wood said. “If there’s a higher learning curve, the equipment tends not to be used as much.”
He suggested estimating two things: “How often will you use it, and what will you charge for it? Always do a worst-case scenario in your planning. Most won’t do this, and it can cost them.”
Whether to adjust fees depends on the particular purchase, Wood said. “Veterinarians should never be reluctant to pass on increases in costs of doing business; it’s the only way to survive. The cost of labor is up so much, and labor is the biggest expense in the clinic. Sometimes prices have to go up.
“To diagnose and treat today is not at all like 30 years ago,” Wood said. “If your clinic is stuck in 1992, it would look very undesirable, strange and out of place today.”
Selecting a Vendor
Internet research, veterinary trade shows, trade magazines and the experiences of colleagues are good sources of information for choosing a vendor.
When talking to providers, McFerson said, “compare prices, terms and timing — sometimes it takes longer to get things these days.”
“Depending on the category, you might have a pretty short list of potential vendors,” Wood noted. “There might be only a couple of businesses in a category. For dental suites, say, there are two or three. Talk to people already using something you’re looking at, and ask for a demonstration. Ask how many installations they’ve done. Will they be there in 10 years when you need help? A pretty good indication is, were they around 10 years ago?”
The big veterinary conferences are a good place to check out what multiple vendors are offering in the product category you’re considering, Dr. Felsted said.
“You want to have a really good idea of why you want to make the purchase,” she said. “If you’re replacing an anesthesia machine, it’s straightforward. If you want an upgraded version, think through what features are important to you. Keeping a list of the features you’re looking for is helpful. In talking to company representatives, you’ll learn what different folks are touting as benefits. This helps narrow your choices.”