Begin with the End in Mind

Len Jones, DVM CEO & Founder

Nations fastest growing

veterinary brokerage

 

 

 

   Total  Prac*ce  Solu*ons  Group  is  na*onal  brokerage  company,  made  up  of  veterinarians,  a<orneys  and  long  term  professional  business  brokers.    TPSG  members  have  facilitated  countless  successful  prac*ce  sales  and  combine  over  100  years  of  exper*se.    Many  of  our  members  were  former  &  some  current  veterinary  prac*ce  owners.  As  licensed  real  estate  brokers  we  bring  an  exper*se  and  network  second  to  none  and  are  exclusive  in  the  Veterinary  Industry.  Our  crea*ve  thinking  helps  design  custom  structures  that  save  buyers  and  sellers  *me  and  money.  TPSG  is  here  to  hold  your  hand  and  offer  sound  guidance  throughout  the  process.    

 

 

 

 

Services Offered            ®  Prac*ce  Sales  ®  Prac*ce  Appraisals  ®  Contract  Nego*a*ons  ®  Associate  Buy  Ins  ®  Exit  Strategies  ®  Buyer  Representa*on  ®  Financial  assistance  to  buyers  ®  Seller  representa*on  ®  Prac*ce  Consul*ng  ®  Real  estate  sales  and  leasing  ®  Prac*ce  Start  Ups    

Constructing a new facility or choosing to remodel the existing, may be one of the most important decisions that you ever make in relation to your practices current & future value. In today’s discussion, we will look at some important valuation aspects thus enabling you to decide if you can build your dream facility and how this will impact the long term effect on your practices value.

You may be contemplating: •  How will a new facility or remodel impact my

practice value? •  Can I even afford a new facility or remodel? •  How will a new facility or remodel affect future

salability? •  How can I know the long term effects this

decision will make on my retirement. •  What is my exit strategy?

How will a new facility or remodel impact my practice value?

•  Lets begin by looking at the valuation process.

•  Methods of appraising a practice are numerous and have evolved over the years.

•  There are 3 central methods of appraising the business portion of the practice:

1.   Earnings Method 2.   Gross Revenue Method-This does not provide

accurate results 3.   Income Approach to Value or Excess Earnings

Method (Real Estate is valued separately)

How will new facility impact practice value?

1. Earnings Method Advantages- Easy process Disadvantage- Not most accurate Used as rule of thumb 2. Gross Revenue Method

This is not accurate and does not reflect the Management of the practice and the facility value.

Why Don’t Today’s Practices Sell for Gross?

•  Answer- Business pricing methodology is basically the same as it was 40 years ago.

•  However, most veterinary practices cash flow is more variable and rarely hits 50% today . Thus, we need to use a method that accounts for this variability such as the Excess earnings method.

•  Values are down because practice net (as a percentage of gross) is down, and it’s not just due to higher wages or drug costs. Lets examine practice profitability over the last 40 years.

–  What’s Happening?? –  1970 to 1980- practices commonly sold for 1 year’s gross

revenue and practices cash flowed at 50%. –  1990- sales price was around 80% of gross plus inventory –  2000- sales price 75%-85% of gross based on profitability –  2013- sales price are averaging closer to 70% of Gross

revenue.

Today’s Practices Don’t Sell for Gross

How will new facility impact practice value?

3. Income Approach/Excess Earnings Hybrid This method combines:

Tangible assets: Equipment & inventory Intangible assets – Goodwill of business

Advantage-Most accurate, takes into account tangible asset values Disadvantage-Extremely complex, difficult to value intangible Most commonly used

How will a new facility or remodel impact my practice value?

•  Now that we've discussed basic valuation principles lets examine how this can impact your practice.

Case Study

Well established small animal practice, original facility had inadequate parking, only 2 exam rooms, repairs & maintenance started to add up & take a toll on the owner, original facility was appraised for $500K, owner is 50 years young. Moved into beautiful new facility in 2011, spent 1 million for new construction,

 Expense  Analysis  Spreadsheet    Subject  Prac*ce    

1120  S  Corp    Tax  Return   2012   %   Cash  Flow  

Adjustment   2011    %   Cash  Flow  Adjustment     2010      %   Cash  Flow  

Adjustment  2  

Gross  Income   $1,502,946      $  1,280,301      $                949,297    

Percentage  Growth    over  previous  year     17%   35%   2%  

Expenses    

Cost  of  Goods   $373,764   24.87%   $310,029   24.22%   $234,549   24.71%  

Compensa*on  of  Officer   $249,000   16.57%   $249,000   $200,000   15.62%   $200,000   $170,000   17.91%   $170,000  

Salaries  &  Wages   $347,912   23.15%   $332,116   25.94%   $227,145   23.93%  

Repairs  &  Maintenance   $15,577   1.04%   $13,412   1.05%       $14,525   1.53%  

Rents   $70,140   4.67%   $70,140   $70,140   5.48%   $70,140   $35,064   3.69%   $35,064  

Taxes  &  Licenses   $51,307   3.41%   $14,068   $41,021   3.20%   $15,300   $43,058   4.54%   $13,005  

Interest   $7,731   0.51%   $7,731   $6,805   0.53%   $6,805   $5,306   0.56%   $5,306  

Deprecia*on     $16,942   1.13%   $16,942   $5,671   0.44%   $5,671   $14,230   1.50%   $14,230  

Adver*sing   $12,184   0.81%   $14,191   1.11%   $18,286   1.93%  

Pension  &  Profit  Sharing   $17,693   1.18%   $9,400   $14,768   1.15%   $9,400   $17,715   1.87%   $9,400  

Employee  Benefit  Program   $11,728   0.78%   $13,872   1.08%   $7,821   0.82%  

Amor*za*on   $18,225   1.21%   $18,225   $18,225   1.42%   $18,225   $18,225   1.92%   $18,225  

Auto  &  Truck     $4,535   0.30%   $4,535   $1,804   0.14%   $1,804   $2,390   0.25%   $2,390  

Bank  Fees   $7,432   0.49%   $6,392   0.50%   $6,906   0.73%  

Insurance   $10,429   0.69%   $10,267   0.80%   $6,927   0.73%  

Legal  &  Accoun*ng   $5,429   0.36%   $4,886   0.38%   $5,144   0.54%  

Office  Expenses   $26,827   1.78%   $24,721   1.93%   $20,204   2.13%  

Meals  &  Entertainment   $2,243   0.15%   $2,243   $2,110   0.16%   $2,110   $1,634   0.17%   $1,634  

Travel   $545   0.04%   $545   $2,613   0.20%   $2,613   $3,215   0.34%   $3,215  

U*li*es     $15,460   1.03%   $16,124   1.26%   $5,149   0.54%  

0.00%   0.00%   0.00%  

0.00%   0.00%   0.00%  

Total  Expenses     $1,265,103   $1,109,167   $857,493  

Net  Income   $237,843   $171,134   $91,804  

Cash  Flow  Adjustments       $630,672   $503,202   $364,273  

42%   39%   38%  

   

2012   2011   2010  

Total  Cash  Flow  Adjustment     $630,672   $503,202   $364,273  

Reasonable  Veterinary  Compensa*on     $300,580   $256,060   $189,860  

22%  of  Gross  Revenue  

Reasonable  Rent  ($1  Mil  @5%  25  years)     $70,140   $70,140   $70,140  

Less  6%  Return  on  net  tangible  assets  (Equipment)     $9,000   $9,000   $9,000  

(6%  of  150K-­‐equipment  value)    

$379,720   $335,200   $269,000  

Excess  Earnings   $250,952   $168,002   $95,273  

Weighted  Value  of  Excess  Earnings  

3x2012   $752,856  

2x2011   $336,004  

1x2010   $95,273  

Total     $1,184,133  

Total  Weighted  Average    

Divided  by  6     $197,356  

Value  of  Excess  Earnings   $986,778  

Capitalized  @  5%      

Total  Intangible  Assets   $986,778  

Tangible  Assets  

Fixtures  &  Equipment  Value   $150,000  

Inventory  Value   $115,000  

Total  Indicated  Value   $1,251,778  

Total  Rounded  Value   $1,250,000  

 Earnings  Explana*on  Worksheet  

 2010  Prac*ce  Value    Prac*ce  Value  in  Original  Facility    

Prac*ce  Purchase  Price     $740,000  Term  15  Years   180  months  Interest  Rate   5%  Monthly  Payment   $5,851  Yearly  Payment   $70,212  

Real  Estate  Purchase  Price     $500,000  Term  25  Years   300  months  Interest  Rate   5%  Monthly  Payment   $2,922  Yearly  Payment   $35,064  

Total  Monthly  Payment  for  Prac*ce  &  Real  Estate   $8,773  Total  Yearly  Payment  for  Prac*ce  &  Real  Estate   $105,276  

Es*mated  Income  to  buyer  before  debt  service     $364,273  Reference  Valua*on      

Real  Estate  Rental  Income  paid  to  self   $35,064  

Total     $399,337  

Less   $105,276  Debt  Service    

Es*mated  Cash  Flow  to  Buyer  once  debt  is  serviced   $294,061  (before  taxes  &  veterinary  compensa*on  )    

Prac*ce  Sales  Price     $740,000    Real  Estate  Value   $500,000    

$1,240,000    

 2013  Value      Post  Facility  Upgrade      

Prac*ce  Purchase  Price     $1,250,000  Term  15  Years   180  months  Interest  Rate   5%  Monthly  Payment   $9,884  Yearly  Payment   $118,608  

Real  Estate  Purchase  Price     $1,000,000  Term  25  Years   300  months  Interest  Rate   5%  Monthly  Payment   $5,845  Yearly  Payment   $70,140  

Total  Monthly  Payment  for  Prac*ce  &  Real  Estate   $15,729  Total  Yearly  Payment  for  Prac*ce  &  Real  Estate   $188,748  

Es*mated  Income  to  buyer  before  debt  service     $630,672  Reference  Valua*on    Real  Estate  Rental  Income  paid  to  self   $70,140  

Total     $700,812  

Less   $188,748  Debt  Service    

Es*mated  Cash  Flow  to  Buyer  once  debt  is  serviced   $512,064  (before  taxes  &  veterinary  compensa*on  )    

Prac*ce  Sales  Price     $1,250,000    Real  Estate  Value   $1,000,000    

$2,250,000    

Future  Sale  Projec*on    Prac*ce  Purchase  Price     $2,000,000  Term  15  Years   180  months  Interest  Rate   5%  Monthly  Payment   $15,815  Yearly  Payment   $189,780  

Real  Estate  Purchase  Price     $1,500,000  Term  25  Years   300  months  Interest  Rate   5%  Monthly  Payment   $8,768  Yearly  Payment   $105,216  

Total  Monthly  Payment  for  Prac*ce  &  Real  Estate   $24,583  Total  Yearly  Payment  for  Prac*ce  &  Real  Estate   $294,996  

Es*mated  Income  to  buyer  before  debt  service     $750,000  Projected  Earnings    Real  Estate  Rental  Income  paid  to  self   $70,140    

Total     $820,140  

Less   $294,996  Debt  Service    

Es*mated  Cash  Flow  to  Buyer  once  debt  is  serviced   $525,144  (before  taxes  &  veterinary  compensa*on  )    

***Projected  Future  Prac*ce  Sales  Price     $2,000,000    

***Projected  Future  Real  Estate  Value   $1,500,000    

$3,500,000    

•  How did the new facility impact the practice value?

•  Was the owner able to afford the new facility? •  How did the new facility effect future salability •  How can I know the long term effects this decision

will make on my retirement?

Exit Strategies in Practice Ownership

•  What is my exit strategy?

•  Consult with a professional at least 3 years prior to selling (example of profitable & non profitable practice selling price difference)

Exit Strategies in Practice Ownership

•  In order to prepare your Exit Strategy for the sale & marketing of your practice one should know the following:

1.  What are the considerations that drive buyers to a practice?

2.  How practice value is determined? 3.  What factors can I control to influence practice value? 4.  What can I do as a seller to help prepare for practice

transition?

Exit Strategies in Practice Ownership

•  A consultant can teach you how to manage your practice expenses to keep them in line for a profitable practice

•  Exit strategies are essential in selling a practice. •  Preparation is key!

Hopefully now with your new facility you can achieve your financial goals !

Michael A. Porrello,CPA, CVA mporrello@lachercpa.com

1.888.884.1506 www.lachercpa.com

CPAs and Consultants

Using Key Performance Indicators Building Expansion or New Facility

Presented By: Michael A. Porrello, CPA, CVA mporrello@lachercpa.com

Measure Everything… Understand Nothing!!

KPI

Use Excel!!

Ø Revenue Ø Cost of Goods Sold Ø Salary – Veterinarian Ø Salary – Non-Veterinarian Ø General and Administrative Ø Net Income

Additional Areas To Track

Wait Time

Revenue Per Square Foot Revenue Per Hour

Doctor Productivity

ATCs and Transactions

What Is More Important?

• Trends • Bottom Line

Revenue/Number of Doctors

All Revenue* $593,000/doctor Medical Revenue $534,000/doctor Other Revenue $59,000/doctor (Be Careful Of Definition!)

* Financial & Productivity Pulsepoints AAHA 7th Edition

Average Doctor Transaction (ADT)

ATC* $133 Exam Fee $44-$56 (20 to 30 minutes)

* Financial & Productivity Pulsepoints AAHA 7th Edition

Transactions

All Transactions* 5,400/doctor/year (450/month)

Medical Transactions* 4,800/doctor/year

(400/month) Other Transactions 600/doctor/year

(50/month) * Financial & Productivity Pulsepoints

AAHA 7th Edition

Annual Transactions per Veterinarian per Month

Ø Medical 292 Ø Non-Medical 141 Ø Total 433

Active Clients

Total 4,100/year

1,900/doctor

Financial & Productivity Pulsepoints AAHA 7th Edition

New Clients

Financial & Productivity Pulsepoints AAHA 7th Edition

Total 637/year/doctor

53/month/doctor

Identifying Opportunities

Financial Statements

Revenue

Increase Fees

Improve Client

Compliance

Set Protocols Make Recommendations Reminders/Follow-ups Schedule

New Services

© Copyright Lacher McDonald & Co., CPAs

Facility Planning,

Budgeting and Scheduling

"   Programming Questionnaire

"   Programming Matrix

"   Preliminary Project Cost Study/Feasibility

"   Programming Questionnaire

"   Programming Matrix

"   Preliminary Project Cost Study/Feasibility

"   Research Local Code, Ordinance, Zoning, Etc..

"   Schematic Floor Plan & Site Plan

"   Demographic Analysis

"   Refine Project Cost Study & Schematic Design

"   Obtain Financing Commitment

"   Revisit Programming Questionnaire

"   Finalize Floor Plans

"   Develop Exterior Building Elevations

"   Interior Design

"   Product Selection

"   Develop Construction Schedule

"   Integrate Civil, Structural, Mechanical, and Electrical Engineering

"   Finalize Project Cost Estimate

"   Permitting

"   Ground Breaking

"   Bi-Weekly Status Meetings

"   Final Inspections

"   Occupancy

"   Open House

Construction Lending

Demystifying how a Bank looks at a

Construction Loan

Travis York Veterinary General Manager

Live Oak Bank

Basis for Loan Decisions by a Lender

•  Loan Decision is Based upon the ability of the borrower to re-pay the debt and not based upon the collateral to cover a loss if the borrower defaults. The minimum required debt coverage ratio can vary, with an average being 1.25xx and some lenders going to 1.0xx. –  Typically SBA 7(a) and can finance

100% of the project costs

•  Cash Flow Loan •  Collateral Loan •  Loan Decision is Based upon

the ability of the bank to cover their loss via tangible collateral in the scenario of a loan default. The value of the collateral is based upon a liquidated or discounted value. Real estate is generally discounted to 75 to 80% of current FMV or appraised value. –  Conventional Loan or SBA 504

and at most can finance 90% of appraised value not cost.

Loan Products to Finance the Project

•  Conventional Loan Product –  Typically funds 75 to 80% of the appraised value of property

value. (Appraisal Based Product) •  SBA 504 Loan

–  Conventional lender will fund 50% of appraised value, SBA funds 30 to 40% appraised value, borrower funds 10 to 20% or portion not covered by the appraised amount. (Appraisal Based Product)

•  SBA 7(a) Loan –  Lender can provide up to 100% financing of the project. (Cash

Flow Based Product)

Defining key Terms

•  Debt Coverage Ratio -The ratio of cash available for debt servicing to interest, principal and lease payments

•  Tangible Collateral-Real Estate, Certificate of Deposit, Stock, Cash

•  Liquidated or Discounted Value-The estimated value of collateral if sold in a liquidation scenario, this is generally below the current fair market value unless it is a liquid asset.

Lenders goal of Calculating Cash Flow…….

•  To Determine the total cash available to service all owners personal obligations and meet the debt obligations of the business over a prescribed period of time. –  How do banks calculate personal obligations

•  Personal Living Expense Allocation –  Debt Payments plus an established amount per individual in household

•  Debt to Income Ratio (Generally 50%) –  Monthly Debt Payments as a Percent of Income for that time period

–  What is the total debt service obligation for the business •  Monthly or Annualized Payment for the Following Items

–  Existing Capitalized Lease Payments –  Outstanding Notes and Obligations of the Business –  Proposed New Bank Debt

Cash Expenses vs. Non-Cash Expenses

•  Cash Expenses

–  Lay Staff Payroll –  Associate DVM Payroll –  Pharmaceuticals and other

consumables –  Rent (If 3rd Party Landlord) –  Advertising –  Insurance Costs –  Other Expenses paid to 3rd

Parties

•  Non-Cash Expenses –  GAAP Expenses

•  Depreciation •  Amortization •  Inventory Write Down

–  Non-GAAP (Bank Adjustments)

•  Officer Compensation •  Internal Rent or Rent

that will no longer recur •  Interest •  Other supported non-

recurring adjustments

Defining Key Terms

•  Available Cash is defined as the cash after accounting for fixed and variable cash expenses of the business

•  Cash Expense –Are any that require payment of cash during the current period or relatively quickly.

•  Non-Cash Expense-come about from the rules of following Generally Accepted Accounting Procedures (GAAP) and from the timing difference between when cash is actually spent and when the expense is recorded

Defining Key Personal Characteristics

•  Personal Liquidity-Cash available in checking and saving accounts, stocks, bonds and other assets that quickly convert to cash.

•  Personal Assets-Assets such as real estate, retirement accounts, additional closely held companies, accounts receivable and other long term assets

•  Personal Leverage-Amount of debt you are personally obligated –  Revolving Debt (Amount advanced vs. Amount Available) –  Installment Debt

•  Personal Credit Score

Analyzing a Personal Credit Report

Creditor     Type   Balance     Max  Amount     Monthly  Payment  

Annual  Payment    

Ford  Motor  Credit     I   $18,600   $28,000   $525   $6,300  

Wells  Fargo  Home     I   $215,700   $235,000   $1,260     $15,120  

US  Dept  Educa*on     I   $55,000   $115,000   $703   $7,236  

Wells  Fargo  Home  Equity    

R   $28,500   $40,000   $179   $2,148  

American  Express     R   $2,500   $10,000   $25     $300  

Recrea*onal  Merch     I   $15,201   $22,500   $419   $5,028  

Best  Buy     R   $2,970   $3,500   $89   $1,068  

Total     $338,471   $454,000   $3,200   $38,400  

Closely Managing this can Lead to Financing Options

•  As a small business owner your access to business credit is influenced by your management of personal credit.

This is important to remember as you cannot separate the two so use your personal credit wisely to allow for options for your business.

Applying to a Real Deal

Complete Cash Flow Analysis

Calculating Cash Flow

Line  Item  on  Tax  Return     Amount    

Gross  Revenue     1120  S-­‐Line  1(a)     $1,006,567  

Office  Compensa*on     1120  S-­‐Line  7     $76,800  

Rent   1120  S-­‐Line  11   $39,600  

Interest     1120  S-­‐  Line  13   $12,289  

Deprecia*on     1120  S-­‐  Line  14  and  15   $0  

Amor*za*on   1120  S-­‐  Other  Deduc*ons  Schedule    

$22,988  

Ordinary  Income     1120  S-­‐  Line  21     $609  

Total  Cash  Flow     Sum  of  All  Numbers  Above     $252,286  

Required  Officer  Compensa*on     2  Times  Annual  Personal  DS     $76,800  

Cash  Available  for  Debt  Service     Total  CF  less  Required  OC     $175,486  

Debt  Service     Annual  Debt  Service     $160,201  

Debt  Coverage  Ra*o     Cash  Available  for  DS/DS     1.10xx  

Strengths and Weaknesses of the Opportunity

•  Strong Growth Trends •  Good equity in Practice •  Historical Debt Coverage Ratio

is greater than 1:1 after Officer Compensation

•  Experienced Owner/Operator •  Veterinary experienced

contractor and accountant •  Strong personal credit score •  Minimal personal debt

requirements

•  Strengths •  Weaknesses •  No margin for error,

growth is required for excess cash flow

•  Slightly down trending margins

•  Margin is slightly below optimal three year average of 25%

Conclusions

•  As you know the loan was approved and you have seen the results and impact a new facility has had for this owner.

Questions

Contact Information: Travis York Senior Loan Officer at Live Oak Bank 910.798.1209 Travis.York@liveoakbank.com

QUESTIONS?