Hanging with Hafen: The right space at the right time

When it comes to building, leasing, or buying your own veterinary practice, there are tons of options available to you. And even if you've been running your own business for a while, there's room to grow. Here's a look at the different paths your route to veterinary practice ownership can take and what to consider once you get there.

After a few years of practice, most associates are itching to buy an existing veterinary clinic. But this is not the best approach. You don't want any building and practice you can afford when you're just starting out. The veterinarian you're buying from is probably old, and so is the practice. It's earnings ability is declining and the building is worn out. If you use up your money buying a worn-out practice, you won't have any left to revamp it. And unless you have another source of money, you can't afford to buy raw ground and build a new practice. And if you do have the money, be careful of the strings that come with silent partners who don't remain silent.

Leasing

Another option would be to lease a storefront. But before we get into this one, let's talk about an option to leasing, namely, buying an old building or house and making it into a hospital. There is one difference between buying an old house and leasing a storefront. It's called a money pit. Old houses rarely make good veterinary hospitals. They're often on multiple floors; the rooms are too small; and stairs, chimneys, and bearing walls are most likely in the wrong places.

That said, if there are no decent spaces to lease, buying is an option, but look to see what you can lease first. Leasing is a good, low-cost, short-term solution. And that's exactly what you're looking for. You don't have to spend the rest of your life in a lease space, but it is a darn good start. The most critical thing to remember is you should lease a space in a neighborhood with potential. No matter how small the space, pick the right neighborhood. After all, this is the foundation for the rest of your professional life. No matter what kind of good deal you can find in the wrong neighborhood, don't do it. You only need 800 or 900 square feet to start a one- to two-exam room hospital. Even in the most expensive neighborhoods this should be doable.

Here's another hint. Don't lease more than 2,800 square feet, and think about trying to get a first right of refusal on the adjacent space. You're bound to outgrow the first itty-bitty lease space. You really don't want your first lease space to have more than 2,800 square feet because you want the impetus to move sometime in the future. Let's assume it's five years down the road, and you've outgrown your lease space. Now it's time to build.

Building from scratch

Before we start talking about building a facility, let's talk about depreciation or building equity. A building or lease space for practicing medicine is a depreciable asset. Unlike the home you own, the typical building or lease space used for practicing veterinary medicine will be all used up at about the same time it's paid off. A building for practicing medicine is a machine that enables you to practice medicine, much like a tractor enables a farmer to grow corn. It's not going to be worth anything when you finish using it. On the other hand, the land underneath your veterinary hospital is an appreciating asset. Real estate investment should, at minimum, return the same long-term yield as investing in the stock market, but the right property in the right location should return a lot more.

Start small

When it's time to build, the question is how much to build. The smallest freestanding veterinary hospital should be three or four exams rooms and 3,500 square feet. If your practice does not need at least that much space, you should still be in a lease space. At a maximum, don't build more than 5,000 or 6,000 square feet. In our office, we have a rule of thumb that says your new building should not be more than twice as big as your existing building or lease space. If it is, then most likely it will cause too much brain damage. That doesn't mean you can't do it. It just means it will be awfully stressful.

Settle in, but keep planning

Enjoy what you've built, expand the practice, or build again. A lot of you will decide at this point that enjoying what you've built is the right answer, and there's a lot of sense in that. If you do, don't forget to start thinking about how you're going to retire. The best way to retire is to grow the practice enough that your associates can buy you out. Expanding the practice is another option that makes sense if you have a good location and there are aspects of your practice that you can readily expand.

The portion of a typical large-scale, general practice veterinary hospital devoted to medicine is about 4,000 to 5,000 square feet. Beyond that, the ancillary services or new services, such as boarding, grooming, retail, physical rehabilitation, day care, or specialty medicine take over. If you choose to expand beyond a 5,000 square-foot practice, assume that you will no longer be practicing veterinary medicine but instead will be practicing management. Building again is an option, but not in the way you expect.

Satellite hospitals rarely, if ever, succeed. Likewise, managing two hospitals can be a nightmare. But as a number of entrepreneurial free spirits have discovered, taking an associate under your wing, investing in him or her, and acting as a silent partner in his or her first freestanding hospital can be very good for the you and the associate. I've seen this model succeed in a number of places around the country.

Think about the future

The last thing to think about when it comes to a facility is retirement. For simplicity, assume you're in your own building with your own practice. Now what? Sell your practice on the open market? Sell to your associates? Sell to a corporate entity, or sell or rent the real estate and walk away from the practice?

Selling your practice on the open market may appear to be the easiest solution because it doesn't require growing junior associates. But often the terms or the value of the sale isn't what you want. Selling to your associates requires that you have associates, you trust them, and they have money. Selling to a corporation will work if you have a high-grossing practice. Lastly, selling the property and walking away from the practice is the worst-case scenario, but provided you built in a high-growth location, it can work. I've known a number of veterinarians who let their practice trail off but still had very valuable real estate they could sell.

Now, you face one last decision. You can decide: 1.) Hafen is blowing smoke, or 2.) There might be some value in all of this baloney. In either case, it's up to you to pick through the options; see what fits your particular situation; and then craft a life, practice, and an investment that makes sense for you financially and for your long-term lifestyle.