Don’t rush into a sale
Five to seven years out is the time to begin prepping your practice for a transition and thinking about what you will do in the next chapter of your life.
The decision to sell a veterinary practice is loaded with financial considerations, but don’t gloss over the need to clearly understand what you want to achieve. Are you tired? Frustrated? Burned out? At retirement age? Overloaded with management duties? Do you want to maximize the sale price or transfer the practice to an associate veterinarian at favorable terms? Do you want to walk away completely or practice at a reduced level?
The largest group of veterinarians selling their practices is motivated by a desire to retire, says Byron Farquer, DVM, CVA, a senior veterinary practice appraiser at Simmons & Associates Pacific Inc. If this describes you, don’t leave until you are fully ready. You need to be emotionally ready to retire, not just mentally or physically ready. Have a plan for your newfound time and freedom. Those who retire successfully retire “to” something rather than “from” something.
Answer these questions:
- Are you looking to sell a partial interest and make a slow exit over a number of years?
- Would you be able to share management responsibilities with a new partner?
- Can you elevate an associate veterinarian to ownership, or should you seek a corporate partner to help behind the scenes and leave you in control of day-to-day operations?
- Are the continued viability and community reputation of your practice a consideration?
- If you want total relief from management responsibilities but want to continue to practice, will you be happy as an employee?
- Can you give up the control, the decision-making authority and even your input on practice decisions?
Engaging advisers to provide expertise and perspective is an important consideration. You could consult with an attorney experienced in corporate transactions and real estate. A business broker familiar with the veterinary industry can be hired if a potential buyer needs to be identified. If your primary need for a certified public accountant had involved tax return preparation or bookkeeping services, a good CPA can offer much more when it comes to the sale of a practice.
“Using a CPA in advance planning could likely save you from a tax gotcha later. Much of the tax impact of a sale transaction is determined by how the sale document is written,” said Doug Freeman, CPA, who owns an accounting firm in Overland Park, Kansas.
“The sale price of a business can be greatly enhanced when the business has a written set of policies and accounting procedures as well as advance-planning tools such as budgets, forecasts and goal tracking,” Freeman said.
Finally, a certified financial planner can help a practice owner make a smart decision in light of the owner’s life goals and current and future financial situations.
I recommend that a practice owner start preparing five to seven years before the anticipated sale. Doing this will allow you to make improvements that enhance the practice’s value and selling price. Buyers pay for historical profitability, so you are more likely to get a superior price if the processes and practices are already implemented.
Practice owners at some point need to do these four things:
1. Obtain a practice valuation. Do not be tempted to self-value your practice using industry rules of thumb or what your colleague netted in a neighboring town. You need an independent, third-party assessment. An independent appraisal will give you an honest valuation. How else are you going to know if a potential buyer is offering a fair price?
2. Have a written financial life plan. The ultimate sale price of your practice is going to be an important part of the plan but is by no means the only key to a successful retirement. You’ll also want to measure and anticipate:
- Your current lifestyle and spending needs.
- Future expenditures, such as a vacation property or new home, vehicles, increased travel and health care.
- Your life expectancy.
Practice owners sometimes use the business to pay for many personal expenses but then fail to realize that the costs will be paid out of pocket during retirement. They grossly underestimate the financial resources necessary to fund their retirement lifestyle.
3. Clean up the financials. Small-business owners usually take the most tax deductions possible. The effect is to lower profits and tax liabilities in the current year. However, when a sale is desired in the next three to five years, such a strategy will not be to the seller’s advantage. For example, if you can add $50,000 to your cash flow, the tax cost would be $10,000 to $15,000 a year. But using a valuation multiple of six times EBITDA (earnings before interest, taxes, depreciation, and amortization), the value is increased by $300,000. Paying a little more in taxes now can be a great trade-off in the long run.
4. Identify potential buyers. If you do not have a buyer waiting in the wings, engage a business broker. The type of buyer you sell to brings considerations beyond just the offer price.
Three Other Factors
As the time for a sale approaches, a practice owner needs to think about these three options:
1. Selling to a partner, an associate or another practice. This is usually considered a friendly sale and might accomplish one of your non-financial goals. One downside is that negotiating a top sale price with a friend or associates can be more difficult. You might be asked to finance the sale by accepting a note for some or all of the purchase price. While seller financing can deliver tax benefits and consistent cash flow, the seller is counting on the practice’s continued success, a risk you might not be willing to assume. If the new owners struggle, you might have to take back ownership and fire-sale the business, or perhaps you’ll have to dive back in, restore the value and sell again.
2. Selling to a corporate consolidator. Corporations are very active in today’s market. You have a better chance of maximizing the sale price if you sell to one. Another benefit is you take on little financial risk and receive a lump-sum payment. Understand, however, that the buyer might require you to stay on as an employee for a few years to assure a smooth transition. Some corporate buyers are hands-off in regard to practice management and some are very hands-on. You need to understand the buyer’s operating philosophy and decide if it fits with your needs and goals.
3. Selling or keeping the real estate. Many veterinarians I work with plan to hold on to the practice real estate and sign a long-term lease with the new owners. Commonly cited reasons for this approach are strong income, the avoidance of capital gains tax and future appreciation in property values. The negatives to holding the real estate are often overlooked. Veterinary buildings are considered special-use property and consequently might have lower appreciation rates, a smaller pool of potential buyers, and lower rents compared with less specialized properties.
A 1031 Exchange, part of the IRS tax code, can defer taxes on the sale of the building. This would allow you to reinvest 100% of the proceeds in new real estate, which could provide better income and potential capital appreciation. From a financial planning perspective, you can potentially reduce your risk with a less specialized real estate investment. The 1031 Exchange rules are not new and are fully accepted by the IRS, but they must be strictly followed. This is a valuable tool and should be considered if your desire is to maximize the value of your real estate.
Financial Wellness columnist Bob Crew is a financial life planner with Triune Financial Partners. Learn more at www.triunefp.com.