It's never too early to plan for ownership of a veterinary practice

When I speak to veterinary students or new graduates, the topic of an eventual practice purchase often comes up.

More often than not, these young doctors and doctors-in-training tell me that, while they eventually may want to buy a practice, they have many other things to focus on right now and therefore haven't really given a clinic purchase much thought.

At the risk of sounding like the pathologically obsessive planner that my veterinarian father always accused me of being, I believe that waiting until shortly before buying a practice to consider laying the groundwork for such a move is a big mistake.

There is not much doubt that owning a veterinary hospital is the most likely route to attaining maximal financial success as a private practitioner. Consequently, that possibility should be anticipated well before making any overt moves toward actually becoming an owner.

The laws of economics and finance are the reason I feel early planning is vital.

There are certain immutable rules in the world of money. For example, we know the law of supply and demand dictates professional salaries. If there is a temporary surplus of veterinarians in a certain desirable region, salaries are almost certain to drop as more doctors compete for the finite number of positions.

Another unquestionable law of economics is the correlation between interest rates and risk. This is the law I believe makes it very important for young veterinarians to consider the eventual purchase of a practice early on. My thinking goes something like this:

When one considers the high level of student-loan debt young veterinarians carry and the almost certain wish to own a home eventually (which carries with it another large burden of debt), credit and creditworthiness loom as virtually lifelong considerations for veterinarians in private practice.

Just at the point in our careers when we are looking to invest in practice equity, we often are facing a perfect storm of financial obligations: student debt not yet retired, home-mortgage payments just beginning and one or more other costly items showing up (in the form of orthodontics, private-school tuition, college savings and so on).

Hence, when time comes to start putting together a financing package for a practice acquisition, everybody involved starts getting depressed. The buyer/doctor is faced with a steep uphill battle to locate reasonably priced financing to swing the purchase. Banks turn away because of the buyer's credit score. Third-party financing is there, but comes at a high interest rate, correlated with the risk being accepted by such a lender.

My office, for example, represents many practice sellers. They come in to get a contract prepared and my first question is, "how much of a down payment does the buyer have to put down?" The answer is usually zero or close to zero.

My next question to the seller is, "How is he going to finance the purchase?" The seller usually doesn't know, but what he is sure of is one of the following:

• "There is no way I am going to hold paper on this sale; I want out."

• "I would finance some of the purchase, but I will want a good, solid interest rate; certainly above prime."

Now, look what is happening here: The buyer is hitting giant snags and hasn't even made an offer or stopped into a bank. For that matter, the seller isn't exactly thrilled with the no-down-payment scenario unfolding before his eyes, either.

So where does that put the buyer? She now must begin scrambling, crunching numbers, talking to lenders and begging the seller to: take paper, lower the price or negotiate a lower interest rate on an agreement he doesn't want to hold anyway. There is enough tension to go around for everyone. Frequently, the seller just renews his "for sale" ad in the journal.

This is the point at which everyone regrets the potential purchaser did not do any pre-planning. The eventual purchase of a practice should have been considered at each step of the young doctor's professional life.

What steps can a thoughtful young veterinarian with entrepreneurial aspirations take to smooth the future? Here are some valuable considerations that might be undertaken as a new graduate moves through his or her career:

• Marriage planning. If there is a wedding scheduled during or shortly after veterinary school, consider whether both parties plan to continue working and, if so, how much. What is their anticipated income after taxes as it compares to pre-existing debt obligations for each spouse.

Even if the numbers don't "pencil" well enough to result in the possible saving of a meaningful down payment on a practice, do they add up to at least a good or very good credit score in five to 10 years?

• Home-purchase strategy. Does your first house have to be the dream home? Careful real estate shopping early in life can have an enormous impact on a veterinarian's creditworthiness later. Purchasing a reasonably priced fixer-upper in a good neighborhood can do wonders for the eventual purchase of a practice. Buying a home which tests the limits of one's income can make future borrowing very expensive.

• Mortgage hunting. If you are stretched thin, you probably always can still get credit, but remember the economic law I mentioned earlier: That next layer of credit will be pricey. The cost of interest on that new "ideal" practice may make it so expensive to own that it no longer makes sense to buy it. Some hospitals are profitable and make sense when financed reasonably, but suddenly become bad investments when the cost of interest is unduly high as a result of the buyer's lousy credit.

• Personal finance. Most veterinarians are haphazard regarding their savings and investment plans. Errors made early in life in the form of undisciplined saving and a sloppy approach to investing cost us dearly later in life. (This is due to the immutable law of compound interest.) If you don't have a solid plan for saving, develop one. If you don't want to understand investing, shop for a reasonably priced, fee-only investment adviser.

Don't let the economic version of Darwin's Law ruin your opportunity to own a nice veterinary practice. If you don't plan effectively, some other veterinarian or veterinary corporation will.