Begin with the End in Mind

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.

Today s Practices Don t Sell for Gross 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.

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%

Earnings Explana*on Worksheet 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

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

Prac*ce Purchase Price $1,250,000 Term 15 Years 180 months Interest Rate 5% Monthly Payment $9,884 Yearly Payment $118,608 2013 Value Post Facility Upgrade 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 $630,672Reference Valua*on Real Estate Rental Income paid to self $70,140 Total $700,812 Less $188,748Debt 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

Prac*ce Purchase Price $2,000,000 Term 15 Years 180 months Interest Rate 5% Monthly Payment $15,815 Yearly Payment $189,780 Future Sale Projec*on 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 $750,000Projected Earnings Real Estate Rental Income paid to self $70,140 Total $820,140 Less $294,996Debt 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 mporrello@lachercpa.com 1.888.884.1506 www.lachercpa.com

Using Key Performance Indicators Building Expansion or New Facility Presented By: Michael A. Porrello, CPA, CVA mporrello@lachercpa.com CPAs and Consultants

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* Medical Revenue $593,000/doctor $534,000/doctor Other Revenue $59,000/doctor (Be Careful Of Definition!) * Financial & Productivity Pulsepoints AAHA 7 th Edition

Average Doctor Transaction (ADT) ATC* $133 Exam Fee $44-$56 (20 to 30 minutes) * Financial & Productivity Pulsepoints AAHA 7 th 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 7 th 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 7 th Edition

New Clients Total 637/year/doctor 53/month/doctor Financial & Productivity Pulsepoints AAHA 7 th Edition

Identifying Opportunities Financial Statements Revenue Increase Fees Improve Client Compliance New Services Set Protocols Make Recommendations Reminders/Follow-ups Schedule 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 Cash Flow Loan 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 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 3 rd Party Landlord) Advertising Insurance Costs Other Expenses paid to 3 rd 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 nonrecurring 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 $22,988 Schedule 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 Strengths 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 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 Travis.York@liveoakbank.com

QUESTIONS?