The Cost of Recession on
Your Practice Value
by Dr. Gerald M.
Snyder, Veterinary Productivity, Inc.
For too many Maryland practices
today, business is slower this year. Other practitioners have
told me that they want to ease into retirement by slowing down,
working only four days a week or shorter days. By default or
intent, there are profound mathematical certainties that need to
be considered before electing this course. You need to be fully
prepared for the disastrous results their planned cutback would
The Fallacy: It seems extremely
logical that a practice with a 60% overhead that cuts its gross
production by $100,000 would create a 40 percent or $40,000 loss
in net income. That is never what really happens!
You need to understand the economic
The overhead on the first $100,000
dollars earned is always 100%. The same with each additional
increment until you reach your break-even point. (About $450,000
in most solo practices.) Only after exceeding your break-even
point does your overhead drop to about 25%. The blend of the pre
and post break-even point overhead is usually about 60%. The
profits are only in the last dollars received!
Every additional revenue dollar lost
hurts much more than its predecessor.
The only expenses on the last $100,000, once past break-even,
are basic lab and pharmacy costs which together might add up to
some 15 percent.
Add another 10 percent for salary
cutbacks and the overhead on that last $100,000 might amount to
25 percent or $25,000, not 60 percent as presumed.
That last $100,000 will cost you a
loss of $75,000, not $40,000 in net profit. And, as practices
are valued at 4-6 times their net excess profits, the selling
price of the reduced practice would certainly drop by $300,000
Whether the slowdown is deliberate
or forced upon you by declining transaction numbers, the effect
on the selling price is the same.
A drop of gross revenues of just
five percent per year caused by declining transactions is just
as disastrous. The cumulative effects sabotage any prospective
retirement funded by the practice sale. (See table above)
In our example of the $100,000
revenue reduction, the practice could not be sold at all, simply
because there was little or no profit.
It is the income earned in the three
years prior to a practice sale that determines your practice’s
value. Without that full income, the practice is worth only the
value of the real estate and assets.
Do not fail to ask your accountant
to calculate your break-even point for you! Then review on a
line byline basis your costs of doing business. Trim the fat!
Work with less so you can maintain the value of your practice.
Dr. Snyder is a practice Management Consultant in Secaucus
NJ. He can be reached at
email@example.com or 800-292-7995