To start a practice or buy: what's the best option? (Proceedings)

Practice ownership

Practice ownership allows an individual to control one's destiny over financial matters, management matters and medical matters. Practice owners should expect a financial reward from ownership that encompasses a reward or pay for the provision of providing veterinary services, a pay for management duties and an ROI (return on investment) for the privilege of ownership. Ownership helps a practitioner build wealth and financial security.

Starting a practice

Start-up practices are those in their infancy. They begin when the basic planning for them begins to take place. Moreover, the goals and dreams of the practice owner who wants to start their practice will vary. Some may want to open small practices providing only routine services and some may want to have practices offering specialty services, ancillary services or 24 hour care. Regardless of their differences, start ups generally share certain needs:

     1. Assessing the practices potential for success

     2. Choosing the most advantageous legal form

     3. Developing a business plan

     4. Obtaining financing

     5. Set up operations

Attributes of a successful start-up

Another way to reduce the risks associated with practice start-up services is to pick winners (that is, choose those start-ups that appear to have an above average chance of succeeding).

Invest in people

Experiences investors will tell you there are three keys to a successful start-up – management, management, and management. They invest in people, and their investment decisions are based on how experienced the start-up owner is and how the start-up owner carries himself or herself. This, of course, involves many intangibles, including whether the start-up owner:

     • Is driven by a need to succeed.

     • Follows through on commitments.

     • Is positive and optimistic.

     • Can make decisions objectively.

     • Looks on money as a tool to be managed rather than an end in itself.

     • Has the ability to be proactive rather than reactive.

     • Shows resourcefulness.

     • Has good interpersonal and communication skills.

     • Is a self starter.

     • Is capable of working independently to plan, organize, and carry out projects.

     • Recognizes the benefits of experienced business advice.

     • Is in good health.

Assess the product and the market

After assessing the start-up owner, then assess whether:

     • The target market is under serviced.

     • The start-up has a sustainable competitive advantage.

An average full-time practitioner sees 25-30 new clients a month and maintains a client base of 1,200 or 1,400 active clients. To understand a stream of new clients, you must understand the demographics of your area and know that they can support your new hospital. You need to determine saturation related to the number of existing veterinary practices, practicing veterinarians and the movement of the population. Is it increasing, staying the same or decreasing? A Demographic study will let you know.

Understand your geographic area and the population base. How many households are there? How many households have pets? An example of how this information might be useful is as follows:

If your 8 mile geographic radius indicates 8,000 pet-owning (dogs & cats) households and each full-time practitioner has an average client base of 1,200 – 1,400 active clients, your area can support approximately 7 full-time equivalent practitioners. If you determine there are already 10, what is the possibility of future growth from additional doctor hours; however, if you find there are only 4 full-time practitioners, there should be plenty of room for growth.

Order demographic information from ESRI (1-800-292-2224), www.ESRI.com. Order the Site Facts report and Pet and Products Market Potential report.

If the market exists, next is to find the right location. Look for a location with good visibility and high traffic flow. Three big questions exist when it comes to facility: Is zoning and issue, should I rent, should I buy?

Leasing pros

     • Low cost to get into

     • May be in good visible area (Retail shopping areas)

     • Landlord may share in cost of fit up (better tax deductions)

Leasing cons

     • Limited expansion capabilities

     • Limited potential services and products to offer

     • After use of leased premises (another veterinary hospital)

     • Rent payment wasted as a pure use cost. No equity build-up

Building purchase or construction pros

     • You get it your way

     • More control over property use

     • Greater potential for services and products to offer

     • Build a retirement asset

Building purchase or construction cons

     • Difficult to find good locations (zoning restrictions)

     • Sometimes financially difficult to grow into

     • Sometimes more costly to renovate, if purchased

Buying a practice

If you are buying a practice you are paying for an existing income stream and usually the price you will pay is based upon a hospital business appraisal that drive the value from the existing cash flow to support a bank loan over a 7 to 10 year period of time. If it takes you more than 10 years to pay off the hospital note, the asking price was set to high and you will overpay. The advantage of buying a practice over starting one is that the unknown with the start of the practice and with no business is taken out of the equation. Typically practices are purchased on an asset basis meaning you are purchasing only selected assets typically inventory, equipment and goodwill. Practice liabilities are usually not assumed and remain the responsibility of the practice seller to pay off, including equipment leases.

If you are an associate buying into a practice what are the advantages? Well, the cash flow is in place making the purchase less risky. Buying a partial interest initially also allows you to buy the remaining ownership when the originator of the practice wants to retire. This ensures job security. You are buying into a practice typically with management systems in place and where the owner typically provides the financing make the transaction less cumbersome and costly.

The disadvantages associated with buying into a practice are that you wind up in business with at least one partner and you don't get to call all the shots. Once you buy in, it is usually expected that you will purchase the rest of the practice so you are tied to it and also usually tied to the location. Most are offered an opportunity to only purchase a minority interest. Partial buy ins may also be in the form of a stock purchase. You will not have had a chance to determine what entity type you will have and stock purchases occur on an after tax basis. Most associates don't get an initial opportunity to have a stake in the real estate of the practice

Picking entity type

If you are starting or buying, making the right entity choice can be tricky. The entity choices available are as follows:

     • Corporations

     • General Partnerships

     • Limited Liability Company (LLC)

     • Limited Liability Partnership (LLP)

     • Sole Proprietorship

Corporations

All corporations must register within their state, draft articles of incorporation and corporation by-laws. Corporations are administratively restrictive by requiring corporate resolutions and annual meetings to conduct business.

Two types for tax purposes:

     1. "C" Corporations

     2. "S" Corporations

"C" corporations

     • Ttreated a personal service corporations

     • Subject to December year end

     • Subject to flat 35% tax rate on all taxable income

     • Subject to double taxation on liquidation of practice assets are sold

     • Provides limited liability to stockholder/owners

     • Provides fully deductible fringe benefits

     • Can easily transfer ownership through stock

"S" corporations

     • Pass through entities for tax purposes. Taxable income/losses taxed to shareholders

     • Avoids double taxation issues on liquidations

     • Restrictive tax treatment of fringe benefits for owners (health insurance, cafeteria plans)

     • Can easily transfer ownership through stock

     • Unreasonable compensation issues for low compensation

     • Losses deductible to owner only to the extent of tax basis in stock and loans

General partnerships

     • Usually requires no state registration to conduct business but should register practice name

     • Needs at least two owners

     • Entity usually ends when partners split up

     • No double taxations issues

     • Restrictive tax treatment of fringe benefits for owners (health insurance, cafeteria plans

     • Entity provides no limited liability from creditors

     • Entity provides no limited liability from professional acts as well as the acts of other partners.

Limited liability company (LLC)

     • Requires the filing of articles of organization and the drafting of an operating

     • Agreement

     • For tax purposes, they are treated as partnerships (check the box)

     • Usually need at least two owners buy many states now offer single member LLCs

     • Entity usually ends when partners split

     • No double taxation issues

     • Restrictive tax treatment of fringe benefits for owners (health insurance, cafeteria plans)

     • Entity does provide limited creditor liability as well as for the acts of other partners. (Some states don't allow LLCs for professional service type businesses, see LLP)

Sole proprietorship

     • Usually requires no state registration to conduct business, but should register practice

     • Name

     • Relates to one owner entities

     • No double taxation issues

     • Poor treatment of fringe benefit for owner (health insurance, cafeteria plans)

     • No limited liability for owners from creditors or professional liability

The choice of which entity is right for your practice will depend on factors particular to your practice and the State in which you are located. With the variety of entities available, it can be confusing, but practice owners should at least utilize some wall of protection between themselves and their practices. Consequently, sole proprietorships and general partnerships should be of last resort. Entities which offer the most flexibility and ease of implementation should be considered first. Also, for those practice entity, usually a limited liability company (LLC).