Case Studies

Improving Net Profit

If you own a practice, or plan to own one, someday you are going to want to sell it. That is a big reason you have bought, or want to buy, into a practice in the first place, isn’t that true? However, the world is changing around you and the way practices were bought and sold in the past may not be the same today or tomorrow. In fact, it may be quite different from what you think or were accustomed to.

Up until recently, the formula for selling practices was 80-90% or more of gross production. As a result, practice owners adopted a strategy of focusing on increasing gross production, with whatever techniques available, with little regard to their practice’s net profit. This formula is no longer in effect. One of the evolutionary changes in veterinary medicine has been the way practices are valued. These days practice owners are offered 4-5 times their net profit; quite different from the old formula. For example, let’s say your practice grosses $1,000,000 a year. In the past that meant getting $800,000-$900,000 on the sale of your practice. These days, however, if your practice’s net is 10-15% you will only get $400,000-$600,000. Even more seriously, smaller practices tend to have even lower net profits so if you are a solo practitioner, or even a two-doctor practice you may be heading toward some difficult times when you are ready to sell your practice. That is one reason why there are so many practices for sale with so few buyers.

Most refrain from thinking about retiring some day, lest it would grip them in fear. Avoidance is the name of the game here. Yet when the subject is broached, people tend to have the false belief that there will be someone to buy their practices or even that their employer will take care of them. Refusing to look at the way things are only perpetuates an already difficult situation: that there are hundreds of practices for sale around the country and nobody to buy them. The time has arrived to take charge of your retirement, regardless of your position in the practice and of your current age. Laying out the structure for a comfortable retirement will ease many unnecessary worries, especially if you are not far from retiring. If you own a practice, you should give some hard thought to who is going to buy it from you and what you can expect to get for your practice.

Think about and answer the following questions, then:

    How can you switch from focusing on gross production to focusing on net profit?

    How can net profits make your practice more sellable?

    Which services you currently provide carry the highest net profit?

Let's focus on the third question.

What is net profit for you as it pertains to the services you provide? On the surface, it is how much you make from your services minus what is costs you to provide them. It follows that the higher the cost of the service to the clients and the lower your cost, the higher the profit. In calculating net profits, you may also want to include the time factor—your time. With everything else being equal, if a procedure A requires your direct involvement 85% of the time it takes to provide it and procedure B requires only 15% of your direct time, which procedure has a higher net profit?

Why is this factor so important?

If you had more time during the day to dedicate, say, to working on your vision, what impact would that have on your overall net profit?

The following exercise will allow you to calculate which services carry the highest net profit in your practice. It includes all the aforementioned factors.



What did you discover from this exercise?

         Which area of your practice has the potential for the highest net profit?

         Once you identify 1 or 2 potentially most profitable areas, what is your next step?

         If area A typically grosses $400 and area B grosses $300 on average, yet area A takes more than twice your time investment and is labor intensive, which area is more profitable to you?

         What other factors do you have to consider in order to increase net profit in your practice?

         If your current net profit is 10%, how will your practice look and function if it grew to 20%?