What pushes your veterinary practice value down?

Practice valuation can be a sad topic in this economy. Who really thinks a practice with fewer transactions and lower transaction amounts can be worth more in the future than in the past?

Practice value is a reflection of profitability. With clients wanting less?— less dentistry, less diagnostics and less prevention — which direction do you think profits are going? Cutting staff temporarily increases profitability, but it's not good for long-term practice health.

In April 2000, a study found that the median ratio of practice sale price to annual revenue was 61 percent. The 25th percentile was 42 percent. Even the 75th percentile was only 87 percent.

What went wrong? The first consideration in those practice sales was what the true owner compensation was. Many owners arbitrarily figure what they'll be paid through their payroll system. This "draw" often has no relation to the medical, surgical and management work they actually perform. Thus, a tax return or P&L statement can make the practice look more or less profitable regardless of reality.

Then there's the work performed by family members, many of whom only show up on the books and seldom for work. And the opposite is also true; many family members don't get paid at all. When the practice owner has to hire someone else to do this work, the expenses associated with that have to be added.

Beauty doesn't pay the bills

Knowing the profitability of your practice is only the first step. You also need to generate profits and keep expenses down. Many owners of no-value or low-value practices can't tear themselves away from the operating room to do this.

When I see the elaborate design of a new, state-of-the-art animal hospital, I get a sinking feeling. My mind goes into "overhead mode." I think about the number of transactions it will take to pay for each added element of architectural excellence. Beauty does not equate to profit, and retirement wishes don't equate to income. In fact, the reverse is often the rule.

Many low-value practices feature beautiful facilities, state-of-the-art equipment and great pay and benefits for large teams. That's great, but these practice owners aren't studying their cost/benefit ratios before construction to ensure that the added costs lead to increased revenue.

If a practice moves into a new state-of-the-art facility and the overhead doubles, there needs to be enough of an increase in revenue — and profits?— to cover the increased overhead.

Use what you're paying for —or stop paying for it

Staffing. Most practices need three to four team members per veterinarian to provide support. Does a doctor actually produce more dollars with five or six team members? If not, those excess salaries hurt profitability.

We know that revenue must be five to seven times payroll, and that rule is not flexible. Adding one or two more employees to maintain a huge facility is counterproductive. That money is better spent on staff training than attractive frills.

Equipment. New machines are seldom used as much as salespeople suggest they will. They look impressive but often serve as vacuums to suck up profits. Recognize there's a limit to the miracles you can personally perform, and refer to specialists when it's the fiscally responsible course.

Inventory. Drugs and supplies will accumulate to fill the space allotted. Many practices have too much inventory on the shelves, don't adequately mark up these items and don't provide fail-safe methods to ensure their clients are charged for the drugs and supplies that are sent home with them.

Fees: What to watch

For many, growth used to be a natural consequence of local development. Little effort was really needed when the area was growing 5 percent to 10 percent every year.

But much of that growth, at least in the northern states, is over. Now 55 million people living in the North in the year 2000 will have relocated to the South and West by 2015, and there's nothing you can do about it.

Now is the time to get your fees in order. Too many practices are so scared by the recession that they haven't increased fees at all or raised only a few fees by small percentages. This isn't good. Most expenses rise annually because goods and services cost more. So if the practice isn't raising its fees at close to 10 percent per year, profitability is circling the drain.

Time: Your most precious asset

New graduates strive to work fewer hours to achieve better balance in their family life and career. I admire that, provided they're paid on production and adjust their income expectations accordingly. But many associates want to be clients' friends, which equates to discounts and services given gratis.

The biggest gift you can give the client is time, and an industry standard of seeing 15 to 18 clients per day has now sunk to 10 to 12. Practices need to adjust the number of veterinarians to the time needed to serve the number of clients, not the other way around.

Your practice should be valued every three years so you can keep a grasp on changes needed. Given enough time, profitability can almost always be improved. Procrastinators beware: This never ever works a year before a sale is intended.

Dr. Snyder, a well-known consultant, publishes Veterinary Productivity, a newsletter for practice productivity. He can be reached at 112 Harmon Cove Towers Secaucus, NJ 07094; (800) 292-7995; Vethelp@comcast.net; fax: (866) 908-6986.