Quarter four of each year is a time when veterinary business owners meet with their accountants to forecast how much cash the business will have at year end. If the forecast predicts finishing the year with significant cash and a tax bill to match, an odd sort of heart pounding decision process can kick in.
Veterinary business owners temporarily lose sight of the big picture goal of maximizing enterprise value and improving practice productivity. In a mad rush to spend cash to lower the tax bill, practice owners can reduce the value of their business and spend money that does not result in improved practice productivity.
Yes, simply spending money can reduce a tax bill. Having said that, since most veterinary business owners depend on selling their practice as part of their exit/retirement strategy, we must consider that the value of every business is some multiple of EBIDTA (Earnings Before Interest Depreciation Taxes and Amortization). That multiple can be from 3 to 10 or occasionally higher depending upon the business. Since the value of a business is based on pretax earnings, lowering pretax earnings by simply spending money is, in a vacuum, an inherently a questionable decision.
I am not an advocate of maximizing your tax bill, but I am an advocate of spending money wisely to lower your tax bill. I see veterinary business owners spend money foolishly to move taxable earnings as close to zero as possible. The unintended consequence is that the entire year of hard work on the part of the entire team, may have contributed nothing to the exit/retirement strategy of the owner(s) of the business.
Instead of replacing an ultrasound machine that will work just fine for another year or two, consider spending money on.
- staff and doctor leadership and client service training with the objectives of:
- improving the client experience with your veterinary business.
- generate a competitive advantage in your veterinary marketplace.
- developing a cohesive professional branding and marketing campaign with the objectives of:
- showing current clients more about your brand and your brand promise to them.
- showing potential clients that your practice exists, what you stand for and why they should choose your practice.
- showing why your practice matters
- Training and instrumentation necessary to introduce a new service with the objectives of:
- Demonstrating to your current and potential clients that the practice is progressive
- Generating increased top line revenue and bottom line net profit.
There are dozens of opportunities to spend money that will contribute to improved financial performance of the practice and enhanced exit/retirement strategy. I simply described the first three that popped into my head.
Don’t just spend to reduce taxes, spend smart to reduce taxes!