Starting from scratch

A client of ours recently reflected on the first year of her start-up practice. She said it was like scaling Half Dome, completing the Mojave Death Race, and winning a pot at the World Series of Poker—all at the same time. There's no doubt, successfully starting a veterinary practice takes a certain type of individual. Do you have the qualities necessary to pull it off?

Like the mountain climber, are you willing to negotiate death-defying feats—borrowing, building, spending, and borrowing more? And are you willing to do this all before you've earned your first dollar, knowing there may not be a net below—no existing clientele and no assurances that clients will even find you?

Like the triathlete, do you possess the courage and stamina to struggle through the certain adversity—slow days, empty waiting rooms, and paltry daily deposits—sometimes with no relief in sight? Can you face the long hours, piles of paperwork, and administrative hassles that your old boss used to handle?

And, like the gambler, do you have the guts to bluff the other players—your lender, your competition, and your staff members—into believing that you're holding all the cards—a strong vision, a thoughtful strategic plan, and a truckload of confidence? Can you make them believe that you're willing to push all your chips to the middle of the table—juggling bills, adding more capital, and not taking a paycheck—if that's what it takes to make your new practice a success?

If you answer all these questions "Yes!" then you're likely an entrepreneur at heart. Most veterinarians who travel this road are, and they're passionate about what they do. That's good, because when you start from scratch, you'll run into some bumps along the way, pretty much guaranteed.

Usually, entrepreneurs have two main goals: to build a business they can be proud of, in this case a practice that provides quality medicine and excellent service, and to make money. Both are important, but the first goal isn't attainable without the second.

Your team of professionals

Achieving profitability

A start-up practice should be able to generate a positive cash flow by about the sixth month. This means you have money left over after you've taken out your expenses, salaries, and loan payments. After the first year, a start-up practice should enjoy a cumulative positive cash flow.

Yet profitability won't just land in your lap. You need to consider these six major questions to successfully plan and build your profitable veterinary practice.

1. What's your vision?

If you're still willing to walk across those burning coals to start a practice from scratch even after all you've read and heard, then you probably have a clear vision of what you want your practice to be. Write this vision down. Write down the size, the look and feel, the quality of medicine you'll offer, what specialties you'll provide, and who your clients will be. And be sure to include details that explain how your practice will be different from the others in your area.

This vision will impact every facet of the launch process, right up to your grand opening. Once you've put your vision on paper, look at it every day, and share it with your staff members and your team of professional advisors.

2. Where's the perfect location?

Choosing your spot is one of the most important decisions you'll make. Carefully consider these factors when picking a location:

• Demographics. What's the makeup of the community? Look at a 10-mile radius to determine whether the people in the surrounding area will make good potential clients. Consider the mix of residential versus commercial property, whether residents are homeowners or renters, what their income levels are, whether homes are multi-family or single-dweller, what the home values are, and whether the area's growing.

• Competition. Is there room for your practice in this community? How many other veterinary clinics are in the area or are scheduled to be built? How many of those practices serve the clientele you're targeting? Visit area practices to find out these answers.

• Facility. Should you buy or rent? Usually, renting is the more prudent cash-flow decision for a start-up practice. But other factors, such as wanting a free-standing facility or area real estate prices, may influence your decision. (See "Rent or Own?" in April 2006 for more.)

How much space do you think you'll need? Moderation is the key here. You probably don't need a behemoth facility. Nothing sinks a new practice quicker than unmanageable rent. Yet you don't want to outgrow your space only months after you've moved in.

Lastly, think about how the site you're considering will affect clients' experiences and the message your new practice sends. For example: How's the traffic? Is the signage visible? Do you have enough parking spaces? Does the entrance need landscaping?

One of the positives about starting your own practice is that you get to pick exactly what you want. So take advantage of this opportunity, and pick a location that's right for you.

3. Who's on your team?

Your team of professional advisors—including your attorney, accountant, architect and/or builder, lender, and marketing consultant—will be instrumental in helping you build the practice you want. To learn how each of these people helps you through the building process, see "Your Team of Professionals".

Figure 1. Estimating first-year revenue

4. How will day-to-day operations work?

Almost all of you have some experience working in practices that you didn't own. And you'll clearly apply the lessons that you've learned about what works—and what doesn't—when it comes to running your practice. You'll learn a lot more in your first few years as an owner. But no matter what prior experience you bring to the job, you'll need to consider these issues:

• Staffing. Initially, you probably want to keep your staff on the lean side. As business grows, you'll need more bodies. As a rough guideline, keep in mind that 49 percent of respondents to the 2004 Veterinary Economics Scheduling and Retail Practices Study say they employ two or three staff members per doctor.

For comparison, benchmark practices employ 3.8 staff members per doctor, according to the 2002 Well-Managed Practice Employee Management Guide, conducted by Wutchiett Tumblin and Associates and Veterinary Economics. Per doctor, that breaks down to 1.2 receptionists, 0.9 licensed technicians, 1.1 veterinary assistants, and 0.6 kennel attendants.

• Hours. What days will you be open? What will your hours be? Will you offer any after-hours appointments? How will you staff the clinic during those time periods?

Monday through Friday, most Well-Managed Practices (79 percent) see their first outpatient appointment between 7:31 a.m. and 9 a.m., according to the 2005 Well-Managed Practice Study. Forty-three percent see their last outpatient appointment before 6 p.m. on Monday through Thursday.

• Pricing. Before you can make any decisions about your actual fees, you must decide what your practice philosophy will be. Will you be a Mercedes or Hyundai? Your prices should follow suit. One tip: Try getting price lists from area clinics to see what makes they are. This will also help you set prices for shopped items, such as vaccinations and elective surgeries. (For more on fee setting, see "Focusing on Fees," in October 2005.)

• Equipment. What do you want? Make that list and then put it away. Now, write down what you need. Remember, you can always buy more later. If you're looking at a new service that would require an expensive piece of equipment, I recommend waiting to buy until you have your legs under you.

• Practice-management software. Offering much more than scheduling and billing, current software options let you integrate inventory, boarding, pharmacy, digital imaging, and more. Demo several practice-management programs and pick the one that gives you and your team the tools you need and that will help you work efficiently and keep accurate records. You also want to make sure you feel comfortable with the product.

To learn more about the software you're considering, talk with practice teams that currently use the product. Find out what they like and don't like about the software, and ask about their relationships with the manufacturers. Did they have a positive experience during the installation? How was the training? Are they pleased with the support services?

5. Where will the money come from?

No, it's not easy, but you must put together financial projections for your new practice. For one, lending institutions will require them before they approve a loan. And these projections show you what to expect.

Figure 2. Tracking first-year cash flow

I recommend preparing a 12-month projection. Your financial consultant can help you evaluate these key areas:

• Revenue. Of course, revenue is the big unknown. But you can estimate. Start by deciding how many days a week and how many hours a day you'll be open. Then estimate a conservative patient count and a conservative average charge per patient. You'll want to consider such key areas as veterinary services, retail, and boarding to calculate potential gross revenues. (See Figure 1 for a sample projection.)

• Expenses. Break down expenses by major area. Some areas will take some guesswork, while other areas, such as rent, will be easier to pinpoint.

• Owner salary. What's the minimum amount of money you need to cover your personal expenses? Factor this amount in initially. Eventually, when the cash flow is there, you can set a more comfortable base salary.

• Debt financing. Once your final loan has been established, what will the monthly payment be?

Keeping these financial projections conservative is critical. Once you're comfortable with the assumptions, analyze the results. Can your revenue in the first year sustain the rent you're about to pay, the staff you're about to hire, the loan payments you're about to make, and the salary you're going to need?

These are the big pieces of this financial puzzle. If after putting conservative projections together your numbers just don't add up, you know something needs to be reworked or reconsidered. (See Figure 2 for a look at a sample projection of first-year cash flow.)

6. How will you attract clients?

To attract the number of clients that you've estimated above, you'll need to market your new practice. And there are lots of ways to let the community know you're there. For example, you could advertise in telephone directories, on the radio, and in local flyers or papers; develop a Web site; send out an e-newsletter; host an open house and invite neighboring businesses or residents; and more.

No matter which strategies you adopt, your marketing campaign should tie everything together; the look of the facility and your logo should be evident in any materials you send out. A unified message helps build momentum as you approach your grand opening. And you want to make a splash, so think about marketing before you open your doors.

Follow up your marketing campaign by making sure new and prospective clients see that you're offering a friendly and knowledgeable staff, high-quality medicine, and excellent customer service. Remember, word of mouth is perhaps the best advertisement, so providing great services is another marketing tool for you and your team.

Eyeing the finish line

Sure, it's daunting to start a practice knowing you don't have any clients and not knowing whether you'll make enough revenue to pay your expenses and turn a profit. As an entrepreneur, though, you're ready to tackle this feat; you believe in your vision and your drive, just like a mountain climber believes she can make it to the top, a tri-athlete believes he can finish the race, and a gambler believes those chips will eventually be hers. You must also believe that your brand new practice will be successful—and profitable. You may not have all the answers, but you've got the questions, which is the first step on the way to the top.

The bottom line

By the end of the first year, a start-up practice should enjoy cumulative positive cash flow. To achieve this goal, you need to:

• draft a clear vision for your business that you can share with your team members and professional advisors

• choose a location that offers plenty of potential clients

• project your likely revenue and expenses, and

• outline the steps you'll take to attract clients to your new business.

Tom A. McFerson, CPA

Tom A. McFerson, CPA, accredited in business valuation, is a member of the Association of Veterinary Practice Management Consultants and Advisors and a partner with Gatto McFerson in Santa Monica, Calif. Send questions or comments to ve@advanstar.com.