Pricing models for Veterinary Practices

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By Dr Hugh White MVSc MACVSc (Director CVE & ValuVet consultant)

There are two ends of the pricing spectrum evident in veterinary practices but three pricing models:

  • those who elect to charge low fees and have a high caseload
  • those who charge high fees, where the caseload is limited to those who can afford their services
  • those who are ‘caught in the middle’ who for perceived competitive or altruistic reasons the owners of the practice believe that veterinary care should be affordable for everyone.

 

Which is the better way to go?

We have often said that ‘you can’t discount your way to prosperity’ and in the main, there is an element of truth in that statement for most practices but as with all ‘truisms’, there can be exceptions. Recently we have seen a profitable practice adopting a low pricing strategy, so how is it able to

survive with lower fees and others not? The main reason is knowing your market – the practice was located in a low socio-economic area (ABS and SEIFA data confirmed this) and the fees and service offering were set strategically to what the local market could afford. The other reason for the success of this practice was that their invoicing policy was to charge fees for all services in detail – fees were

then discounted to meet the expectation created by a fee estimate but they still ‘charged for everything’.

Low fees may mean that more people may attend the practice, therefore cases have to be seen quickly in order to get through each day, and there may not be sufficient time to work up difficult cases, to offer appropriate in-house care or to cater for complicated surgeries – some of these cases may need to be referred on. Cashflow is king so there is a need to ensure that payment is made, otherwise the returns will be insufficient for the owners to pay appropriate wages to their team. High caseload/ low fee practices are often very demanding on employees’ time and require quick thinking, good people skills and sound knowledge. This in turn necessitates employing people who are hard-working, committed and comfortable with pushing their patients and clients through.

 

What are the disadvantages of a low-price strategy?

Many vets find it stressful to have constant, back to back appointments and insufficient time to delve into more complicated cases in detail. Vets may also feel that they do not have enough time to hear their clients’ concerns or to treat their animals properly. Stress and job dissatisfaction create falling productivity, absenteeism, sickness and resignations. In some practices, we see the more senior practice owners shoulder the burden of cases or after-hours workload to compensate as younger associates cannot or will not work at the same pace. If a practice becomes known for high caseloads and insufficient vet support, potential employees will tend to look for other options, which can place the practice in a precarious position.

 

When it comes time to sell the practice, potential buyers may not want to run the practice the same way, but realise that if they buy the practice, raise the fees and charge for everything, many of the existing clients may disappear. Alternatively, higher fee practices can be at risk of pricing themselves out of the market, but the benefits are that that they are in a better position to offer the best possible treatment, which can be rewarding professionally for all concerned. Flexible practices are prepared to tailor

treatment options to suit the clients’ willingness to pay and there will always be some clients who will never use the practice. Extreme high end practices run the risk of declining caseloads in tougher economic times, but most successful practices can maintain caseload by offering realistic prices;

preparing transparent, printed estimates; charging for everything that they provide; and maintaining clear and open lines of communication.

Start of a new year– some questions to ponder

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By David Sharp BEcon, ACA

Australia Day has come and gone, you are struggling to keep your new year’s resolutions, and you are

already engrossed in the day to day running of the practice. Before it is too late take some time

and space, and consider the following….you have already done so but put in the too hard basket,

hopefully the following will assist with that decision making process.

 

  1. Should I give myself a pay rise?

The short answer is yes, if you deserve it. It is important the owner takes a commercial market salary from the business for the work the owner does. If you are not sure what that is consider what you would be prepared to pay someone to do your job. After taking into account this salary what is left over is the true profit. Next process is to look at that true profit from the perspective of an investor/owner of the business. Does the profit reflect a good return on your investment? What should the profit be, are you under or over performing, what is the next step to build that profit further. Often business owners confuse profits and salary, the salary is for the work you do, the profit is the return on your investment. If there is no profit after paying yourself a market salary your Practice is most likely underperforming. Time to make some changes!

 

  1. Should I incentivise my staff with bonuses?

The short answer is that bonuses nearly always come with negative consequences. Employees will work

towards a bonus and may neglect those areas that are not affected by the bonus. Another likely outcome is that employees start to assume the bonus is part of their salary package and can become upset if the bonus is not paid.

One solution is to pay bonuses purely on a discretionary basis. A bonus may take into account extraordinary commitment to the Practice or reflect a strong financial result of the Practice for the year. If a bonus is not expected or taken for granted it becomes a very powerful way of saying thank you and acknowledging an employee’s performance.

 

  1. A final question to consider, how can my practice improve my life this year?

Certainly, as accountants we are asked this question by business owners all the time. Based on many years in our own businesses we believe there are 2 main ways:

 

Firstly, how can I spend more time doing the business things I enjoy the most? Secondly how can I have more time to spend with my family & friends?

 

The answer may be easy, but the implementation is always a real challenge. Identify tasks/processes in

the practice that you must be on top of and the tasks/ processes that you enjoy. Work out how to delegate the critical tasks/processes to employees you trust and then supervise and review these closely and frequently. You do not need to physically do the tasks/processes but you must make sure they are being done correctly and on time. This should create discretionary time to spend doing the things you love whether in the practice or at home. One word of caution; you will have to pay employee to do the work you are not doing so as per above, you may need to adjust your salary accordingly!

 

In summary, it is important you consider your practice in the context of your life. The practice must work for you – if you are a slave to your practice it is time to rethink how the practice is run. Invariably happy practice owners end up with profitable practices. If you need someone to bounce ideas off speak with your accountant; they should know you and your business, be a strong point of reference and source of good common sense business advice!

Positioning your practice for sale

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In most cases, you can only sell your practice once so if you want maximise the return on your investment you need to make it easy for buyers to see opportunity in buying your practice. Most practices we value are for sale (either to an incoming partner of as an open sale) so the following are issues that we commonly encounter:

 

  1. Start early enough! 3 – 5 years can be a good lead time for setting up a practice for sale. Sadly we encounter practices that are just not ready to sell (even though the owners are) – to sell in the current situation would be to almost ‘give the practice away’. Given a practice

development plan (part of our service) and a bit of time to make some changes, it is possible to make a huge difference to the practice value and often for very little outlay. It makes good sense to get your practice valued (it is never a wasted exercise) as soon as you have decided to sell because if the value is less than you were counting on, at least you will have a benchmark

and hopefully the time available to improve on it.

 

  1. Keep accurate and well-presented financial records. A lot of vets do their own book keeping and with rare exception, this can always be done more professionally and accurately by outsourcing to a qualified person who is able to communicate with and keep your accountant

happy. When selling a practice or for ongoing financial monitoring, it helps if your accountant can present your books with at least a 2 year comparison.

 

  1. If you are putting money in your back pocket (it’s tempting not to if it’s your own business) then stop immediately. When valuing a practice we can only account for the money on the books, not what might be going elsewhere. Apart from being illegal, there is no good business reason why you will profit in the end from redirecting practice funds.

 

  1. Vets are chronic under-chargers for their services and in most cases it is the practice principal who holds the practice back on this one. If you have not done so recently, participate in a fee survey (I am happy to recommend MPV as being well constructed, informative and statistically sound). This will at least give you some idea what you are missing out on and give you an opportunity to selectively adjust your fees to a more competitive level.

 

  1. HR issues will affect staff morale, productivity and ultimately the value of the business. If you have existing staff issues, it is best to sort those out before handing the practice on. The new owner will not be impressed if he or she has to inherit problems that hold the practice back – they may quickly come to the conclusion that they have paid too much for the

practice.

 

  1. Keep some KPIs (key performance indicators) on your practice activities and performance – it places the vendor in a much stronger position with regards to justifying a ‘price’ for the business if you can exhibit practice growth over a number of key practice areas. If I were purchasing a practice, at the very least, I would want to know how many ‘active clients’ had visited the

practice in the last 12 months; how many invoices were written and what the practice turnover (ex GST) was for the same year period. Practices that show negative growth will be marked down of course but much less so if good records are kept, so the source of the problem

can be identified.

 

  1. Be transparent with staff once you have decided to sell – the truth always comes out eventually (often with a certain amount of mis-information, thus creating morale problems) and it is far better to control the situation with the right information and at the same time reassuring

your team that you will do everything to ensure the continuity of their jobs after the sale. In my experience, most practice purchasers do not want to ‘rock the boat’ when then take over and provided there are no HR issues left unsolved or staffing inefficiencies that need correcting for the business to operate profitably, they are only too happy to go forward with the existing staff.

 

  1. You will get the best price for your practice if the business is able to operate without you. In other words, there should be sufficient practice management systems in place that the practice literally runs itself. Very few practices ever reach this level (some do) but you need to manage the practice like a business and be prepared to delegate various duties to appropriate staff members or outsource if you have to. The best test for this is to go on a decent holiday and see if the practice income is maintained.

 

ValuVet can perform an assessment on your practice to identify areas of weakness that need to be fixed in order to maximise practice profitability before sale. Most practice owners put a lifetime of hard work into running their practice and for many, it forms a goodly part of their superannuation so there is nothing wrong with maximising that investment when the time comes – it is your right to do so.