How to finance your team's dream hospital

Whether you’ve put a pencil to paper to sketch out your first, tentative ideas or you’ve got a full blueprint of your dream practice, how you’re going to pay for your facility is probably a question that lurks in the back of your mind each time you think about building. And your team members may be prodding you with their own wish list for the new facility, from additional storage space to a staff lounge and more office space.

But can you afford it?

You have the tools to answer this question. And Veterinary Economics Editorial Advisory Board member Gary Glassman, CPA, who specializes in veterinary accounting and tax planning with Burzenski & Co. in East Haven, Conn., will show you how.

Step 1: Make more money

When you began thinking about what you wanted in a new practice, you probably dreamed of the new services you’d be able to offer in a roomier, more modern setting. And this dreaming needs to become a reality, Glassman says, to help you afford the fixed costs of your new building, which will include your mortgage, property taxes, utilities, insurance, and maintenance service contracts.

So it’s a good idea to begin considering the new and increased revenue streams you can develop to help cover your growing costs. Glassman says two ways to add revenue are to attract new clients and to offer more services to your existing clients. You may also consider raising your fees to cover your new expenses.

If your goal is to attract more clients, you might need to add additional veterinarians. First, Glassman recommends assessing the demographics of your area. Determine the number of households with pets in your area to learn how many full-time veterinarians your area can support. If the community looks promising for growth, Glassman says, use a formula to determine how many veterinarians you may need to add.

Start with the assumption, based on industry standards, that each full-time practitioner will generate 5,000 to 5,500 invoices a year. Then figure your average invoice. Now take the additional growth you require in dollars, divide it by your average invoice, and come to the average invoices required, Glassman says. Divide that number by 5,000 to determine the number of doctors you need.

So if you need to generate $3 million a year to make your project work and your average invoice is $120, here’s what it would look like:

$3 million ÷ $120 = 25,000 ÷ 5,000 = 5 doctors

A word of caution: Don’t hire in anticipation of growth, Glassman says. The smartest approach is to let the volume build and add additional doctors as needed.

It’s also wise to prepare for your transition by looking at any potential shortfalls you might face as you work to grow your practice. Glassman offers this example. He recently consulted with a veterinarian who currently owns a 2,500-square-foot facility and wants to build a 6,000-square-foot facility. His revenue is good, at $1.8 million a year, but to afford his project he needs to generate $3 million a year, which means he has to almost double his revenue. And he doesn’t have a lot of extra cash, because he’s leveraged to the hilt.

“We ran some projections for him to see if this was going to be a successful project,” Glassman says. “Because he’s incurred all these costs and his occupancy costs are going to be so large in the first year, we were looking at a $140,000 loss in the first year. And the question is, how do you cover that? If this doctor doesn’t have a lot of extra money lying around, he’s going to struggle to make his project work.”

Step 2: Make room to grow

Your new facility needs to offer space to grow, and Glassman says one of the most important areas will be your exam rooms. The number of exam rooms will affect the number of clients you can serve.

“Having an extra-large reception area doesn’t do much for you,” he says. “It’s better to make sure you have an adequate number of exam rooms, not only for your existing clients but whatever growth in doctors you might need to afford your mortgage payment.”

Storage and doctor’s offices are often spaces that veterinarians and team members feel get short shrift in a new practice. While they’re not spaces that generate revenue, Glassman says, it’s worthwhile to invest in them for team comfort.

“Doctors need to have adequate space to work on medical records and return phone calls,” he says. “That’s more than sharing a desk in some place the size of a closet.”

Step 3: Plan for the future

As hard as it might be to think about now, your financial plan needs to take into account your eventual exit strategy. While banks may agree to lend you a certain amount, this doesn’t mean your project is viable. To make your practice attractive to potential buyers when you’re ready to sell, the new owner must be able to make more than a salary. And a large mortgage can bite into potential profits.

“A successful project isn’t just one that pays the mortgage,” Glassman says. “You also need the practice to retain some value so you can sell it when you’re ready and walk away with some cash.”

Look at your project strategically with a long-term view, Glassman says. While you might be tempted to pull out all the stops making the practice look as good as it can, you have to keep it real and measure what the cost does to the practice in the long-run.

To evaluate your project’s potential for success, Glassman recommends seeking the opinion of an independent financial or practice advisor. “Don’t rely on the fact that the bank says it will give you the money,” he says. “I’ve seen that too frequently. You want to measure success on all levels, not just whether you can pay off the loan.”

Once you have your building plan nailed down, bring in your advisor to determine whether you can afford the cost of construction, Glassman says. Your chances of success increase when you determine what you need in terms of cash flow. Be prepared for your plan to take a while to implement—and, if possible, be prepared with a cash buffer while you work to meet your goal.

“Even a successful project can be overwhelming,” Glassman says. “You have to have the wherewithal to get from where you are to where you need to be to call your project a success.”

Your financing options

You have many options to finance your practice, and they include local banks, veterinary lenders, and Small Business Association, or SBA, loans. But how do you know which is the best option for your project?

Gary Glassman, CPA, says the best approach is to get multiple proposals from different types of lenders to help make your decision. “It’s a consumer decision, so you want to look at cost of financing and service,” Glassman says. “How much is it going to cost me, and what type of loan are they offering?”

For example, he says, an SBA loan may be more expensive and take longer, but it may offer financing on a project that wouldn’t be possible with other loans. And some veterinary lenders can be more flexible in terms of funding availability.

“The collateral available and the cash flow of the project determine the lender you might need,” Glassman says. “But I always tell people to explore all of their options. Just because you go to one bank doesn’t mean everybody’s going to put the same proposal in front of you, nor will all the costs be the same. Their criteria for lending may all be different. Lending comes in different flavors, shapes, and sizes.”

The biggest and most challenging part of the loan process, Glassman says, is the appraisal of the project. “Property values can be a challenge right now, based on the current market,” he says. “So it’s been a bit difficult to get the funds available out of a project based on what it costs versus how much you’ll be financed.”

Finally, remember this process takes time. Glassman recommends seeking preapproval as soon as you’ve got the costs contained for your project. “Don’t wait until everything’s done to pick and choose your lender,” he says. “You don’t want that process to hold up your project.”