If you were at the AAEP Annual Meeting in San Antonio in November, you likely heard a discussion about how becoming a practice owner could help you pay off your student debt faster than if you remained an associate. Statistics from AVMA show that mean professional income of equine veterinarians varies significantly depending on whether that veterinarian is a practice owner or an associate. The mean income for practice owners in 2009 was $155,682, compared to $85,055 for equine associates, according to data in the AVMA Report on Veterinary Compensation, 2009 edition. If you had an extra $70,000 annually, your student debt would be paid off in no time! An interesting concept, but before you jump feet-first into practice ownership, here are a few things to consider.
Average student debt for new grads keeps climbing. According to AVMA, the mean starting salary among new grads who accepted full-time positions was $53,868 for men and $44,740 for women. Mean educational debt among the respondents was $125,592 for men and $144,654 for women. In a perfect world, if a new grad could devote 100 percent of that starting salary to debt service, it would take at least three years to pay off that student debt. But we live in the real world. Once you factor in what you spend on groceries, rent, clothing and transportation, plus income taxes, it will take many years to make that debt go away.
Is Practice Ownership Advisable?
Over the long term, the answer may be yes. But in the short term, that is much less certain. Whether you start your own practice or buy into an existing one, you will likely take on additional debt. Even assuming the practice is profitable from the time you become an owner, you may not see additional money in your pocket for several years. Here’s why:
• The money to start or buy a practice will likely come from taking on additional debt. To repay that debt, the practice will have to generate profits and also be able to distribute those profits to you as an owner.
• There is a difference between practice profits and practice cash flow. If there is debt at the practice level (loans, obligations to former owners or vehicle leases, for example), practice profits will be used to service that debt. Only the interest portion of those payments will show as an expense on the profit-and-loss statement. The principal portion is not an expense–it’s a reduction of a liability on the balance sheet–and is therefore not a deductible expense. But it is still money that comes out of the practice. That means that profits on paper (on the profit-and-loss statement) will be higher than the amount of cash available for you to take out and use to repay your personal debt to start or buy the practice.
• If you own less than a controlling interest in the practice, and don’t have an owner’s agreement that specifically gives you some control in one or more areas, the controlling owners can choose to spend the profits in ways that reduce your access to cash to pay your acquisition debt.
• If the practice operates as a C, or regular, corporation, the practice’s accountant may advise the practice to pay out the profits as compensation or pay other deductible expenses by year end to reduce the potential for corporate income tax, generally due at the highest corporate rate. However, unless you, as a new owner, get your share of those profits either as compensation or by receiving some other deductible payment, your share of the profits may not be sufficient to cover your debt service to buy in.
• Generally, being an associate means that you have minimal risk of not getting paid for your services. However, once you become an owner, you drop lower on the food chain. If money is tight for some reason outside your control, you may not receive payment for your veterinary services, let alone profit distributions, because your priority as an owner will be to ensure that your doctors and staff are paid first.
So why would anyone ever become an owner? Because whether you are starting a practice or buying one, you have more long-term upside potential than you will as an associate, once you have finished paying the costs to get into ownership.
If you plan to become a practice owner, you should know that the veterinary lenders do not expect you to have paid off your student debt prior to buying or starting a practice. They will, of course, counsel you about the amount of additional debt you can reasonably afford, but they understand that student debt is a fact of life for most young doctors. They also know that in the long term, there are significant benefits to practice ownership, especially after you have paid off the debt you incur to become an owner. Here are a few of those benefits:
• Being an owner gives you the right to operate the practice as you see fit. That means you can set the goals, hire based on criteria you set (assuming those meet legal requirements), determine the standard of care, etc.
• There is no substitute for the personal satisfaction that comes from watching a practice grow and succeed because of the leadership and direction you provide as well as the decisions you make.
• Building long-term relationships with clients, peers, and referral sources is personally rewarding. Surrounding yourself with people you like and respect gives you more motivation to go to work each day.
• Practice owners stand to benefit financially from operating high quality, efficient practices. As an owner, you profit financially from not only your own work but from the services your doctors and staff provide. To the extent you can grow the revenue and control the expenses, the difference falls to the bottom line.
• As an owner, you can decide how those profits are spent. Do you want to buy new equipment, expand the facility, increase your own compensation or profit distributions, pay bonuses or add a new service? The choice is yours as the owner.
• Most owners enjoy the process of mentoring new doctors and staff. Finding the best people, bringing them on board, and watching them grow, both technically and in their interactions with your clients and community, gives your practice the continuity you hoped it would have.
Overall, ownership may not be the fastest path toward paying off your student debt, but it can provide you with a very satisfying career. Before you take the plunge, be sure you do your homework.
Taking the Purchase Plunge
First, if you are buying all or part of a practice, be sure the price you are paying is fair. Even if the seller offers to provide financing for you, you still need to know that your share of the practice profits will cover the payments you will need to make in order to buy in. Don’t be afraid to get an outside consultant’s view of the practice’s historical finances in light of the price you are being asked to pay.
Second, if you are starting a practice, don’t overcommit yourself on equipment until you have some sense of the revenue you can produce. Keeping your expenses low at the outset will allow you to make a profit sooner so that you can pay yourself and pay down any loans or leases you have taken out.
Finally, if you will be a co-owner, be sure you all negotiate and sign substantive written agreements that spell out each owner’s rights and responsibilities, deal with compensation issues for owners as well as profit distributions, and document what happens if an owner leaves voluntarily, dies, become disabled, loses the license to practice medicine, etc.
Overall, don’t shy away from practice ownership, but don’t count on ownership as the way to pay off your debts in the short term.–Leslie A. Mamalis
Leslie A. Mamalis leads Summit Veterinary Advisors’ equine business consulting services. She is based in Littleton, Colorado.