Thrift, fear roadblocks to seeking legal advice

In last month's article, we looked at various ways to free-up more ofthe veterinary clinic budget by saving on discretionary legal and accountingfees.

This month, I will point out some beneficial ways to spend some of thatfree cash in order to maximize the economic productivity of the practice.

In a recent meeting which I had with my own accountant, he mentionedthat while he had a number of practice-owning veterinarians as clients,very few of them were generating anything approaching what could be consideredan acceptable return on gross revenue. He told me that he really didn'tunderstand why these practices continued to operate when management wouldlikely make as much or more if they simply went out and got a job.

In addition, these folks wouldn't have to worry about staff turnover,irritated clients, the cost of drugs or any other business headaches.

What's more, he told me, a number of these practitioners are countingon the sale of their equity in their animal hospitals to fund their retirement.They are certain, he explained, that since there is a good deal of businesscoming in the door, eventual sale of the practice for a good price can beassumed. Therefore, constant reinvestment of profit into the practice isassumed to be a wise investment and estate planning technique. Never mindthat his accountant has tried to convince these people otherwise.

Million dollar man

Let me give a non-veterinary example of how the typical scenario unfoldswhen business owners do not proactively seek out quality legal and accountingadvice throughout their careers.

I have a client who owns a very successful automobile restoration business,grossing in the millions of dollar. He is now middle-aged and throughouthis career he has devoted all of his time, energy and personal financesinto building up his operation.

He came to me recently because he is beginning to think about sellingout to one of his employees.

"I need you to help me structure a potential sale," he said."I have to figure out how I can help the buyer finance the purchase."

"What is your net operating margin?" I asked.

He didn't know.

"How much free cash flow would there be if I replaced you with anemployee doing similar work?"

It turns out that this multi-million dollar business pays the owner a$60,000 salary and he pours all the rest back into expansion, advertisingand improvements in the facilities. How much was he "pouring back in?"He didn't know but was sure it must be a lot. He was also sure the businessmust be worth $2 million.

I then asked him if he would be willing to buy an absolutely safe, 10-yeartreasury security from the United States government if it paid interestof 3 percent. Naturally, he said he would never make such an investment.

"How then," I asked, "could you ever expect a bank tofinance a risky investment such as an auto restoration shop when all indicationsare that 3 percent is all the return that can be expected for the foreseeablefuture?"

"But we do $3 million a year in sales!" he exclaimed. "Thenyou are working really hard for your $60,000 a year," I told him. "AndI'm sure your 20 employees appreciate you for giving them a place to work."

So this nice man can now expect to put off his business sale plans indefinitely.No bank will look at the deal. Most fathers-in-law don't have $2 million.Now maybe it is time to get some quality legal and accounting advice andbegin long-term planning.

Missed the boat

Had this client sought qualified planning and counsel earlier in thegame, he might have explored and resolved a number of important businessissues in an objective, unemotional way. Here are a few questions whichall businesses and professional practices should regularly address.

·1. Has expansion and increased gross been a worthwhile endeavor?Is it possible that materials, labor and other overhead have negated theperceived benefits of increased value?

·2. Has the business caved in to frivolous threats and claimsby customers and employees resulting in excessive expenses for write-offs,free goods or workers compensation insurance premiums?

·3. Can enough be billed per hour to justify the high level ofquality which the business brings to its customers? If the market can affordmedium quality, the cost of outstanding quality can destroy profitability.

·4. Where is all the money going? Have adequate safeguards beenput in place to prevent theft and embezzlement? Could better systems beput in place to screen job applicants? Could more be done without violatingemployees' legal rights to privacy?

·5. Does this business need to be larger, to take advantage ofeconomies of scale, or should it actually do less business with each transactionbeing more profitable? A business' size should be determined by profitabilitycriteria, not the ego of its owners.

·6. Could a qualified pension arrangement be designed by an attorneyso that business profits can be shielded from current taxes? Many animalhospitals attempt to control taxable income through poorly considered purchasesof new equipment which can be expensed or depreciated. This is done eventhough the economic benefits of such purchases may be questionable.

·7. Are all the business profits being "reinvested"into a business whose sales price will reflect the value of the capitalinfusion? Will the reinvestment at least yield an increase in current profitability?Is all this "reinvestment" really justifiable at all?

These sorts of determinations should be made on an ongoing basis, notshortly before a business (or professional practice) is near to being sold.The future value of foregone profits today are enormous.

When the effect of compounding of invested profits is considered, itis vastly more expensive to lose a dollar now than to lose one in the future.

Are these strictly legal and accounting questions? They are not. Theyhave legal and accounting elements, but are more complex business questions.Most veterinarians try to figure out the answers in an ad hoc way, by themselves,with no support opinion. That may be a costly mistake.

Not just a pretty face

There is more to good attorneys, CPAs and financial professionals thantheir strict professional definitions would imply.

They can act as consultants and advisors, providing a sounding boardfor new ideas you may have, or ones that they may bring to you once theyhave an understanding of your business. It is amazing how much more clearlya business issue can be defined when it is discussed with a person who knowsthe right questions to ask and is not afraid to play the role of devil'sadvocate.

There are two main reasons doctors do not seek proactive advice: excessivethrift and fear. It is difficult for many health professionals to believethat they might need to pay actual money for ideas that certainly they shouldbe able to come up with on their own. Further, it can be scary to imaginethat a course of action that a doctor has undertaken for years in his practicemay have been a mistake from the outset. If advice is never sought, thedark secret will never come to life.