Originally posted on dvm360 at https://www.dvm360.com/view/7-common-financial-mistakes-practice-owners-make.
If you’re considering practice ownership, here’s what you need to know to help you succeed.
Practice owners typically have 2 main desires: to help provide the best quality of care to animals and eventually sell the practice to maintain their lifestyle after retirement. The problem? When these owners are veterinarian first and practice owner second, they often have minimal experience actually running a practice. Below are 7 common mistakes that practice owners often make, and how to avoid them.
1. Not having an exit plan
A lack of an exit plan is costly for practice owners. Everyone should have an exit plan as soon as they get into a business. The end goal is financial independence. When you’re a veterinarian first, it can be easy to overlook critical decisions that can help you determine whether ownership is appropriate for you. When you're ready to retire, you’ll have to ask yourself, “How much money do I need to maintain my current lifestyle?” This question will drive your decision-making today and into the future.
The following are the 3 most common exit strategies:
- Selling to an associate or employees.
- Selling to a third party like a consolidator.
- Closing the doors.
2. Not compensating employees properly
You might have a decent compensation package with each person receiving a salary based on their expertise and role. Compensation perks and benefits should satisfy one of the following 3 “Rs”: Recruiting – What are you using to bring talent to your hospital? Rewarding – When short-term goals are accomplished, what are you offering to reward each person involved? Retaining– Some employees will impact your time and income if they leave. Compensation agreements can help keep them around long term. You must understand the significance of each of the 3 Rs when searching for high-quality talent. For example, if your practice doesn’t provide a retirement account like a 401(k) but your competitor does. This might cause potential hires to seek employment elsewhere. Some practice owners provide annual cash bonuses to employees to reward the practice’s performance, not the employee’s performance. Each reward program should assign a goal to each person or group to qualify. The reward doesn’t have to be monetary. Finally, you have to consider the impact on your practice when veterinarians, practice managers, or head technicians leave. There are compensation programs available to help motivate employees to stay at your practice long term and through the future sale. These programs would fall under the umbrella of a retention program.
Retention programs should answer the following questions:
- Is it substantial in value?
- Is it emotional to the employee?
- Is the benefit deferred for a set period?
- Can the practice recover costs if that person leaves?
3. Not paying yourself through the practice
Your practice should not be your net worth. Instead, it should help build your net worth. You have to ask yourself tough questions every day. Should money be allocated towards marketing? Employees? Upkeep? There is a certain amount of money that you should put aside for operational expenses. Then there is “dead cash,” which is money that serves no purpose. When you are a pass-through entity such as an LLC or S-Corp, all the profits transfer through to your tax return. You are paying taxes on the profits of the practice, and any money remaining is available. What does this mean to you? The dead cash inside the practice can then be transferred to your finances. Over time, your mindset should be to build the value of your practice and your wealth. The best practice is to establish a systematic savings plan from your practice to your finances and identify any dead cash sitting around every quarter.
4. Being a veterinarian first and a practice owner second
When you own a practice, the goal is to be an owner first, veterinarian second. But you should never sacrifice the quality of your effort by working around the clock; delegate responsibilities to practice managers, another veterinarian, and head technicians. If these roles don’t exist at your practice, then now might be a good time to strategize a way to add them.
5. Not taking a vacation
Everyone needs time away. Practice owners tend to be overworked with no time to rejuvenate. It’s crucial for your overall health, well-being, and the longevity of your practice to take time for yourself. If you’re focused on running your practice and not letting your practice run you, taking vacations becomes easier. The challenge is trying to manage every part of the practice yourself. If you’re a perfectionist like me, your commitment is high, and sharing responsibilities can seem daunting.
6. Not knowing your numbers
Profit loss statements, balance sheets, and tax documents should be updated regularly. These documents are created by accountants who could provide chief financial officer–type services. If you want to create a well-balanced plan to sell your practice, these numbers will be crucial for ensuring you’re getting the most bang for your buck. These documents help provide clarity when you balance the transfer of money from your practice to your finances.
7. Purchasing things for tax write-offs
The last and final mistake is buying things that you think will be perceived as tax savings. For example, if you were to purchase new equipment to replace a perfectly working piece of equipment, how much are you really saving in taxes? The answer is simple. You’re giving up all that cash for new equipment, and in return, you could reduce your taxes by a few thousand dollars. But now, all that cash is gone when you could have just paid the taxes and kept the money. Imagine this happening over and over each year. You could be spending thousands with no real return to the practice or you, the owner. Every decision should be well thought out and never made on a whim without truly understanding the short-term and long-term impacts on your practice. After all, understanding the caveats that come with practice ownership will expand your horizon and set you up for success.
Tom Seeko is the cofounder of Florida Veterinary Advisors, a financial firm based out of Tampa, FL that works with veterinarians throughout the United States. He is also co-founder and cohost of the Smarter Vet Podcast, a podcast to help simplify finances for veterinarians so they can gain clarity, get confidence, experience control, and experience contentment.