5 startup horror stories

Welcome, fearless readers, to a quintet of terrifying tales of financial failure, communication cataclysms, and legal low points. As you're poised to pounce on the opportunity of a lifetime—your dream veterinary hospital—unspeakable horrors are lying in wait for you.

That's right, hapless healthcare heroes: Your startup requires a thousand different decisions from concept to execution, all building toward one final goal: a thriving practice. But one short-sighted choice could find you lost in a swamp of increased costs, painfully expensive delays, or—gasp!—flat-out failure. Don't let spine-tingling fear send you screaming away from your dreams. You can fight back.

Tom A. McFerson, CPA

The following heart-pounding profiles of startup practices involve real people (their names have been changed) who had the best of intentions but who made bad, or at least shortsighted, choices. They are cautionary tales, yes, but each has a lesson that will prepare you to keep your practice in the black, on good terms with your partners, and in good stead with your clients.

Read on ... if you dare.

The blob that ate the budget!

Dr. Jones had been dreaming of it her whole professional life. After years of schooling and three different stints as an associate veterinarian, a veterinary hospital of her own was just a year away. The new practice would be a dream come true, a reflection of Dr. Jones' philosophy and the high-quality medicine she would practice. In many ways, the hospital would be a self-portrait. Every detail would be perfect, and the new hospital would have a large, talented staff, a glowing atmosphere, and the dedicated clientele Dr. Jones deserved.

The facility would be large and freestanding—no shopping center leasehold for Dr. Jones. She'd have more space than she needed at first, so she'd have room to grow. The sign would be state-of-the-art and eye-catching. The look and feel of the practice would be first class. She would spare no expense.

When Dr. Jones received design proposals and cost estimates, the total for the land and building was more than she'd expected. And when she added in the expected working capital, her inventory needs, and the cost of equipment and computers, it became clear that funding would be tight.

So, Dr. Jones did the right thing. She ran two years' worth of financial projections and estimated her operational costs. She discovered that the practice would need to gross $900,000 in year one to stay afloat and $1.2 million in year two. That was a tall order, her advisors warned her. To try for those numbers out of the chute would put tremendous pressure on her and the new hospital.

But Dr. Jones was sure she had a loyal following from her term as an associate. She also believed her practice would fill a need in the com munity for high-end, compassionate medicine. All of these factors led her to believe that $900,000 in revenue was within reach. At the end of her first year in business, the practice had grossed $750,000—a tremendous achievement, but short of the goal.

For the next two years, Dr. Jones did well, but she still fell short. Constant financial stress led to health problems for Dr. Jones, and those health problems led to personal problems. After nearly five years of planning, building, and operating her dream practice, Dr. Jones was forced to sell, unable to support the financial burden any longer. She lost close to $400,000 in the transaction.

Master this monster: Don't overbuild, and don't overspend. Getting your startup off the ground will be difficult enough. Don't add to your troubles with additional, and perhaps unnecessary, financial burdens.

Watch your step on ... the horrible floor!

Dr. Adams was determined to keep the new veterinary practice that he was building as close to budget as possible. It wasn't just that he was frugal by nature—which he was. There were also practical concerns, mainly that his working capital and financing were limited.

As the construction entered its final stages, two critical decisions remained: the flooring and the computer system. Dr. Adams' contractor recommended a flooring that was top of the line. It would last for years, be very easy to clean, and look and feel like the flooring of a successful veterinary practice. There was only one problem—it cost twice as much as Dr. Adams wanted to spend.

As for the computers, his consultant recommended a complete system—with a software package, a file server, and multiple workstations—that was easy to use, would track inventory, and was comprehensive in every way. Guess what? Also nearly double what the budget called for. Dr. Adams, short on cash, went with the cheaper choice on both options.

Fast-forward four months. The practice was open and doing well. The floors, however, were a disaster. They looked filthy, carried a permanent stench, and were beginning to bubble up in odd places. The computer system wasn't much better. The hardware was finicky, the staff found the software difficult to use, and customer support was almost nonexistent.

Dr. Adams had little choice but to pay to have the floors pulled up and replaced. A few weeks later, he overhauled the computer system, too.

Two choices that were meant to save the doctor precious working capital wound up costing him more of that capital that he could have imagined.

Master this monster: Remember Dr. Jones? She was too optimistic about income and wound up having to sell her practice. But Dr. Adams found out being too frugal can cost you big as well. Being financially responsible is good, but saving a dime shouldn't cost you a quarter.

The clinic with three brains!

On paper, the three were the perfect team: two veterinarians and a practice manager, each an equal shareholder in an ambitious startup veterinary practice. They each brought different talents to the table. The practice manager had experience building a new facility, having overseen a large construction project at a previous job. One of the doctors had operational knowledge, having worked in a busy facility with multiple veterinarians. The other doctor had the clientele, having been a major producer at a popular nearby practice.

The three had known each other professionally but had never actually worked together. At first that didn't seem like an issue, as they discussed problems openly and came to a consensus on most decisions.

As the construction process came to a close, however, cracks in their "perfect" working relationship started to show. Disagreements bubbled to the surface—the logo, what computer system to use, and the practice's hours all became points of contention.

And things got worse. One of the three had second thoughts about staying involved in the practice. But what could be done? The three owners were on a runaway train with no way off.

Then—fuel to the fire. A romantic relationship developed between the doctors. The practice manager was now the odd man out. And, no surprise, when there was disagreement, none of the decisions went his way.

Things finally exploded over the issue of compensation. The original understanding had been that all three owners would be compensated equally. Now that decision was being second-guessed. Rightly or wrongly, the two doctors questioned the practice manager's compensation package.

Battle lines were drawn, and one of the shareholders—the practice manager—was forced to sell just seven months after opening. Given the heavy debt load already on the books and the buy-out formula written into their shareholder agreement, the remaining owners barely managed to stay afloat. The practice manager did receive some money for his share of the practice, but he walked away feeling that he had wasted two years and watched a lifelong dream go up in smoke.

Master this monster: Know your partners. They're your business version of a spouse. Would you marry someone you hadn't dated?

Revenge of the suspicious boss!

To put it in poker terms, Dr. Harris had the perfect hand for a successful startup practice. She had a great location and a stylish new building, and she was filling a need in the community by offering longer hours and better service.

Dr. Harris also had an ace up her sleeve: a loyal following. She'd spent the past five years working as an associate at a nearby clinic. Over the years, she'd become friendly with many of her clients. Some were on her Christmas card list. A few weeks before her grand opening, Dr. Harris sent these clients—the ones on her holiday card list—an announcement.

Unfortunately, one of these announcements ended up in the hands of her old boss. Convinced that she had stolen his client data, the old boss sued. Even though the announcement only went to 30 or so clients (the rest went to her own family and friends), Dr. Harris was forced to play defense and hire an attorney.

The practice opened, and many of Dr. Harris' old clients found her through word-of-mouth. Due to the litigation, however, all the clients who requested their pets' medical records at the old practice was closely questioned: Why were they leaving, where were they going, and how did they hear about Dr. Harris' practice?

In the end, what should've been a joyous beginning became a painful one. The new practice suffered because of Dr. Harris' legal troubles. Her cash flow took a hit from high legal bills, and her reputation was damaged because of an honest mistake.

Master this monster: Be very careful about how you market your new practice—particularly when you're reaching out to clients from an old job. Consult an attorney before sending out your grand-opening announcements to old clients or contacts.

The consultant who killed the practice!

Dr. Fisher, naive in the ways of ownership, thought he was doing the right thing. The veterinarian's professional dream of building and starting his own practice was moving forward, but now he needed help.

Dr. Fisher knew he needed a consultant. He looked at trade journals and advertisements. There, he found a consultant who seemed qualified. The man had a Web site, appropriate initials behind his name, and could talk the talk. Dr. Fisher hired him without checking his references and sent him a check for $5,000.

Things went downhill almost immediately. Phone calls weren't returned. Tasks weren't accomplished. Money and time were wasted. Things culminated in disaster when the lease for the new location—which the consultant was supposed to have negotiated and nailed down—was signed by a different tenant.

Having lost the perfect location and after spending nearly $25,000 on the consultant, equipment deposits, plans, and permits, Dr. Fisher finally fired the consultant and put his plans on hold. Four years later, he remains an associate, still gun-shy about taking the leap again.

Master this monster: Always, always, always check references before hiring a consultant. This consultant is going to be your battlefield general. You need to be as sure as possible that this person is qualified, up to the challenge, and trustworthy.

Sadly, these chilling stories are only the tip of the iceberg. Some new practices fail because of bad luck (an owner is diagnosed with an illness four months after opening), a lack of due diligence (a megadevelopment of low-income housing is built two blocks away), or a combination of both (a sleazy arcade with a dicey clientele moves in right next door).

But don't give up on dreams—they don't all turn to nightmares. Do your homework, hire the right people, and pay attention to the numbers. You'll be more likely to get a fairy-tale ending to share with friends, family, and colleagues, not a tale of business woe that'll scare them from the room.

Tom A. McFerson, CPA, accredited in business valuation, is a member of the Association of Veterinary Practice Management Consultants and Advisors and a partner with Gatto McFerson in Santa Monica, Calif. Send questions or comments to ve@advanstar.com