begin with the end in mind - live oak bank · 2020-07-14 · • lets begin by looking at the...
TRANSCRIPT
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 [email protected]
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 [email protected]
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 [email protected]
QUESTIONS?