In a recent discussion, a veterinarian who would like to sell a solo practitioner equine predominant client list, asked for ideas on how to value the client list. A practice broker shared the opinion that the practice is not worth enough to pay for an appraisal. In the equine world, since 70% of the veterinarians are in solo practice (refer to the National Equine Veterinary Economic Study), this situation may touch quite a few people.
Conventional wisdom tells insists that it is virtually impossible to sell a one doctor practice. In my experience you are not selling or buying a client list. You are selling or buying a potential stream of revenue that will extend into the future. I know from personal experience that it is possible to sell a one doctor practice if it has three solid legs of the “practice sale stool” that today’s market requires:
- Is profitable enough for the return on equity, owner compensation, net of taxes, to support the debt service on the purchase price
- Has a transition plan to assure maximal transfer of clients to the new owner
- Has a culture in which the buyer wants to spend a career. (Yes, a solo practitioner practice has a culture!)
I am writing about this topic in Financial Friday because to fulfill practice sale requirement #1, clean financial statements that clearly define the stream of income generated by a practice are essential to sell a solo practice. Your practice financial statements tell a story of your practice. If they are well presented, they tell a good story and a potential buyer remains interested. If they are poorly presented, they tell a bad story and a potential buyer walks away. Without well-presented financial statements buyers will never look at the transition plan or culture of the practice.
In order to tell the true story of the solo practitioner practice, I believe your chart of accounts should track two classes of compensation to the veterinarian/owner, reflecting both return on effort and return on equity.
Return on effort is veterinary compensation. The market place values a veterinarian in a well-managed practiced at 18-24 percent of collected gross professional service production. Often we are offended by that percentage range but that is the ‘going rate’ for a veterinarian.
Return on equity is owner compensation. The financial reason you own a practice is to have the owner compensation (return on equity). Any veterinary job will pay you the veterinary compensation (return on effort). To make more money you have to be an owner. The revenue generated in the return on equity (owner compensation) determines the value of the practice.
Quantifying return on effort and return on equity enables both the seller and buyer to use a discounted cash flow model to establish the value of the stream of return on equity revenue generated by the practice. In my experience, post great recession, the discounted cash flow valuation is very likely to result in a value at which the sale of the solo practice is feasible.
If you begin preparing your solo practice for sale now you will increase the likelihood of a successful sale when you are ready to move on.
We will need to attack transition strategy and culture in another blog on another day.