Planning for future retirement and the sale of your veterinary practice

You've carefully cultivated the success of your practice with your sharp eye for business, client relations, and patient care for the last 15 or 20 years. But now the lure of retirement calls. Or maybe your practice sale is just a tiny dot on the horizon. It's still important to prepare for this transition out of practice ownership.

You're facing tough questions: How can you ensure that the value of your biggest investment is at a level to help fund your financial independence? When are you going to sell? Who are you going to sell to? What do you need to consider before a sale? For starters, you need to know how much your practice is worth now so you know what to improve before it's time to sell. Take some tips from Dr. Shores and Dr. Farmer and start planning your exit strategy now. (Note: This is a composite scenario. The names of the individuals and practice have been changed.)

READY FOR RETIREMENT

Dr. Nancy Shores, age 55, has been the sole owner of Beach Front Animal Hospital for 15 years, and she hopes to retire in five years. She has a buyer lined up and wants to be sure she can afford to reduce her schedule and sell her practice.

To plan for financial security, Dr. Shores must first determine the dollar value of investments she'll need to generate the income she wants to have during retirement. She knows she doesn't want to change her standard of living after she retires. In fact, she plans to travel extensively, which will increase her cost of living. With tax, the required annual income to cover her projected living expenses is $150,000. Dr. Shores has invested in both personal and business assets (see belove "Your plan for financial independence"). Her liquid personal investments include CDs, a Roth IRA, a 401(k), and mutual funds, while her illiquid investments include a rental property. Her business assets include Beach Front Animal Hospital and the real estate the practice is located on, which she owns.

Dr. Shores' advisor has helped her calculate the future value of her personal assets at retirement and compared her current investments to the investment base required to cover her living expenses at retirement. When Dr. Shores sees that her investments, excluding her practice, are $1.1 million shy of her requirements, she knows that her practice has to make up the difference. (Editors' note: Benchmarks 2010: A Study of Well-Managed Practices, features a worksheet to help you summarize your current investment base. To order this year's study, visit dvm360.com/benchmarks.)

WHAT'S THE PRACTICE WORTH?

First, Dr. Shores needs to determine the current value of her practice so she'll know where she stands now in relation to where she wants to be. Disappointingly, her practice value comes in at $439,000, more than half a million dollars less than she hoped. Fortunately, the valuation process that gave her that number has also brought to light the areas that need additional attention.

The practice valuator explains that for Dr. Shores to reach her goal of $1.1 million, she'll need to increase her earnings and suggests several ways to do that. Dr. Shores will value the practice again in three years to ensure she's making progress toward her target value and again at the date of the sale so she'll have an accurate reflection of the practice value.

Dr. Shores' associate, Dr. Kevin Farmer, wants to buy 100 percent of Beach Front Animal Hospital. Because Dr. Shores wants to retire in five years, both doctors have decided it would be best to create a development plan so Dr. Farmer can gain an understanding of how the practice operates and the types of decisions he'll make as an owner. Dr. Shores also wants to be sure Dr. Farmer is prepared for the debt load from the purchase, and Dr. Farmer wants to understand the financial benefits he'll gain and the responsibilities he'll assume as an owner.

While Dr. Shores would prefer to delegate staff development to Dr. Farmer as soon as possible, she recognizes that his current strengths are better suited to medical development and the management of facilities, equipment, and technology. She asks Dr. Farmer to take the lead (with her guidance) in these areas now. In successive years he'll add responsibilities. Dr. Farmer will supplement his ownership knowledge by attending practice management sessions at continuing education conferences so he's comfortable making decisions in all areas of management by the time he buys the practice.

MANAGE THE TRANSITION

Three years before the sale of the practice, Dr. Shores will begin involving Dr. Farmer in strategic planning meetings so he'll have a hand in long-range planning. During monthly management meetings she'll also introduce him to financial management, setting revenue targets and identifying areas where the practice finances can be improved.

Two years from the sale, Dr. Shores will explain the valuation process. Dr. Farmer's advisor will complete an affordability analysis so Dr. Farmer can see how he'll be able to pay off the debt he'll incur purchasing the practice. The year of the sale, Dr. Shores will share all the practice's financial information with Dr. Farmer, and the two of them will begin discussing financing options.

Dr. Shores also realizes the importance of discussing practice philosophy with Dr. Farmer. Though they'll never be partners, the two desire a seamless ownership transition for their team members and clients. Throughout the five years leading up to the sale, monthly management meetings will also include discussions of practice philosophy. Topics might include:

> whether a hands-on or a hands-off management policy works better given the practice history and the current and future owners

> financial management of the practice and views on spending, debt, and reinvestment

> staff development and training expenditures, CE, employment benefits, and desired skill sets.

After five years of preparation, when it finally comes time to sell the practice, Dr. Shores is comfortable that her team and clients will be taken care of and that the proceeds from the sale will help her achieve financial independence.

Dr. Farmer sees that the purchase of Beach Front Animal Hospital is an affordable and financially beneficial decision, and he understands the medical and the management responsibilities he'll handle as an owner. With forethought and consistent planning, the sale of your practice can go just as smoothly.

Denise Tumblin, CPA, is a Veterinary Economics Editorial Advisory Board member and president of Wutchiett Tumblin and Associates in Columbus, Ohio. Helen Hoekstra is a financial and valuation analyst at Wutchiett Tumblin. Please send questions or comments to ve@advanstar.com

Transition into ownership slowly

Dr. Jill Windy bought Noah's Landing Pet Care Clinic in Elkhart, Ind., in January 2009

The practice I bought into has been here since the 1940s, and I'm its fourth owner. I was partners with the owner for three years, and I finished buying him out about a year and a half ago. The initial buy-in process was helpful because we had a clear-cut timeline in mind and knew the purpose of our partnership—to transition me into full ownership. That was a really good time for me, because I got to be a part of every decision and I had some areas I was primarily responsible for.

The transition time was also great because I got to see how the cash flow really worked day-to-day, not just on paper in reports. It gave me more confidence to move into sole ownership.

Another thing that helped was the owner had conducted a certified practice valuation about every three to five years. I got to see the stability of the practice, and that helped me obtain financing because the lenders could see it was a good investment for everyone.

Selling your practice or buying into a practice is a very emotional thing. On the one hand there's the seller who's passing on the practice that's been his baby for 25 years. And the buyer is excited and nervous—some days more nervous than excited. So we were lucky to have the support of our spouses and the practice's management, who weren't as emotionally invested, to keep the process on track.

We had the perfect help to make the transition, but it was challenging. Around the time I bought the practice the economy crashed. Elkhart is the RV capital of the world, so when people stopped buying RVs, the whole town suffered. Through all of that I was still able to obtain financing. It was still possible to get the business loan and the building loan. That was very reassuring.