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 produce.

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 dynamics.

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 or more.

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 vethelp@comcast.net or 800-292-7995

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