Grand opening: The new trend of practice startups

As recently as three years ago, the ribbon-cutting ceremony at the traditional veterinary practice start-up should have been on the endangered species list. Financing was difficult, competition was fierce, and many of our profession's entrepreneurs were opting to purchase thriving practices with solid cash flow instead of creating their own.

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In the past two years, however, many of the lenders and veterinary consultants I've spoken to have seen a noticeable spike in practice start-ups throughout the country. These new businesses run the gamut from small operations (a mobile house-call practice, for instance) to large (a multispecialty hospital) to those in between (a feline practice).

Regardless of practice size, the number of young, aggressive veterinarians hanging out their own shingles has surged. The question is, why in this shaky economy would any veterinarian choose to start his or her own business?

FEWER HIGH-QUALITY PRACTICES FOR SALE

The recession has negatively impacted the profits of many practices across the country. This declining profit margin has led to declining practice value. (See "Impact of a 5 percent revenue drop.") Given the current economic situation, many practice owners have opted to delay selling their practices until the market has recovered. Instead, they've (wisely) decided to hunker down, improve practice cash flow, and ride out the recession. Therefore, many high-quality practices that normally would come up for sale during a typical business cycle are sitting on the sidelines.

Impact of a 5 percent revenue drop

The result? Many—not all, but many—of the practices currently for sale across the country are flawed. As one potential buyer told me a few weeks ago, "There are a lot of damaged goods on the market right now."

A byproduct of this trend is a slew of impatient buyers in the profession. Most of these men and women—who are young, driven, and business-savvy—know what they want in a practice and won't settle for less.

Unlike the previous generation, these practice buyers received a high-quality business education at an early age. This is thanks to veterinary colleges doing a better job of introducing business education to students, veterinary business groups growing more active on campuses, and convention organizers increasing and improving practice management CE.

These buyers understand finances, cash flow, charging appropriately, and profit. They've seen some of their colleagues or mentors struggle with poor decisions, and they don't want to follow them down that path.

These young buyers understand the enormity of the implications of their decisions and don't want to "make do" with a damaged or flawed practice. Their options are to wait for a practice worth buying to come along, to remain an associate for the foreseeable future, or take the leap and start their own practice. Many are choosing the latter.

DOWNTURN IN REAL ESTATE

The commercial real estate industry—for lease and for purchase—has been hit hard recently. Drive down any Main Street or through a local strip mall and you'll undoubtedly see numerous vacancies. A few years ago, in the perennial tug of war between landlords and business owners, landlords had the upper hand. At that time, a veterinarian looking to lease space could expect top rates, few concessions, and a suffocating commercial lease.

Now the tide has turned, and the struggling commercial real estate market is providing fertile ground for veterinary start-ups. With vacancies high and banks circling like sharks, landlords are offering attractive lease deals to new businesses. (For negotiating options, see "Negotiate with your landlord.") Free rent, favorable lease terms, and financial help with practice buildouts (more on that in a moment) are all on the table.

Negotiate with your landlord

Surviving the first two years has always been the main challenge for a start-up. This is the period when all of the practice owner's assumptions and abilities are tested. Signing a friendly commercial lease takes some early pressure off of cash flow and gives the new practice owner a greater chance at success.

AVAILABILITY OF FINANCING

These days start-up practices have access to more capital from a variety of sources than they did in previous years. First off, veterinary lenders, in conjunction with the Small Business Administration, have introduced several loan products to assist veterinarians with start-up ventures. During a time when getting any kind of financing is difficult, these products have helped spark the start-up market.

Also, many of the large medical equipment and computer vendors are offering favorable purchase and lease deals on their systems. Practice owners can now outfit their facilities with medical, office, and computer equipment with only a small down payment. What's more, commercial real estate landlords are paying a lot of the freight toward new-tenant buildouts. Whether the space needs cosmetic work or a full-fledged overhaul, many landlords are willing to cover a large portion of it—in exchange for signing a five-year lease, of course.

And finally, more family money has entered the veterinary arena. This could be a coincidence, or it could be that as traditional investment opportunities dry up, the veterinary industry becomes an increasingly attractive alternative. Whatever the reason, more veterinarians are self-funding their start-up ventures. Self-funding helps in two ways: It makes it easier for the project to get off the ground, and it eases cash flow pressures down the road when these loans need to be repaid.

MY WAY OR THE HIGHWAY

This new crop of veterinary entrepreneurs wants to call the shots. These future owners don't want to take on a shaky staff, tired logo, or flawed floor plan and make the best of it. They want to create and implement their own vision. They believe ownership is a difficult road to success but that ultimately it's the most rewarding path. (For an example, check out "Why I'm starting a new practice, not buying one.")

Why I'm starting a new practice, not buying one

So given the recent surge in start-up activity, what are the best ways for veterinary entrepreneurs to increase their chance of success? Here are some guidelines:

Scale back. One thing we all should have learned during this recession is not to overextend. Many unfortunate people and companies, when the music stopped, were left standing with mountains of debt and no way to pay it back. So be cautious. Don't build the 6,000-square-foot facility when 4,000 will do just fine. Ask yourself whether you need the digital radiography system on day one or can wait a few months.

Remember, surviving the first two years is key. It doesn't do much good to build the facility you think you'll need in five years if you're out of business in one. Keep your plans in moderation. Preserve your cash. Spend your money wisely. Have a safety net. And keep your options open—the goal is to have some flexibility to deal with the challenges if your new practice doesn't go according to plan.

Pick your spot carefully. The real estate professional's mantra is: location, location, location. This certainly applies to veterinary practices as well. Where you decide to place this new business—the city, the neighborhood, even the street corner—will be critical to the success or failure of your practice.

Demographics, competition, the local housing market, population trends, recent economic issues, traffic patterns—analyze all of these items carefully before choosing your location. Some points might trump others. For example, it doesn't help to have a location with great visibility if there are no pet owners in the area. Look at all the factors that will make an impact and make the best decision.

Ask yourself the right questions. Another key to success is to have a good business plan in place. Creating this business plan will involve answering questions—lots and lots of questions. (To get started, answer "Questions to ask before starting a practice." in the related links below.) Determining your identity as a veterinary practice is critical to your success, and these questions will help you develop the backbone of your new business.

Hear that sound? That's the sound of hundreds of scissors nationwide sending a siren call to pet owners to try the newest practices on their blocks. Hopefully the advice above can make those grand openings—and yours—a grand success.

Tom McFerson, CPA, ABV, is a partner with Gatto McFerson CPAs in Santa Monica, Calif. Send questions or comments to ve@advanstar.com.