What collateral does a veterinary practice actually have?

The absence of a receivable is the defining feature of veterinary practice finance. In human healthcare, the receivable is the asset and the payer mix is the underwriting question. In veterinary medicine the client pays at the desk, which is excellent for cash flow and leaves nothing to pledge.

What else is there? Equipment at 310,000 of book value, which an appraiser might put at 40 per cent on an orderly liquidation basis: 124,000. Inventory of pharmaceuticals, diets and supplies at 68,000, discounted to perhaps 35 per cent: 23,800. Leasehold improvements at 240,000 — the surgical suite, the runs, the plumbing, the radiology shielding — worth a great deal to another veterinary practice at that exact address and nothing to anyone else.

Total hard collateral, generously counted: about 164,800. Against a 1,400,000 acquisition loan that is 11.8 per cent coverage.

What is actually being underwritten

Cash flow, after paying someone to do the work.

Suppose the practice produces an 18 per cent EBITDA margin: 333,000. Now subtract a market salary for a veterinarian to replace the owner's clinical production — say 145,000. What remains is 188,000.

A 1,400,000 loan over ten years at an illustrative 9.5 per cent costs 217,388 a year. Coverage: 0.86. It does not work.

Run it the other way. At a 1.25 coverage requirement, 188,000 of cash flow supports annual debt service of 150,400, which over ten years at the same rate is a loan of about 968,591. At 1.35 coverage it is about 896,844.

So the practice supports something under a million dollars of debt, and the purchase price is 1,400,000. The gap of roughly 430,000 has to come from buyer equity, a seller note on standby, or a seller who accepts a lower price. That is the conversation, and it is far more productive to have it before an offer than after.

What moves the numbers

How these deals are assembled

• A term loan with an SBA guarantee for the bulk of the price, over a longer amortisation than the collateral would otherwise justify. The guarantee is doing the work the collateral cannot; eligibility and equity injection rules are programme-specific and worth checking against current guidance at sba.gov.
• A seller note, frequently on full standby, which both fills the equity gap and keeps the seller invested in the transition.
• Buyer equity, which in a goodwill-heavy professional practice purchase is not optional.
• Equipment finance for post-closing capital purchases — digital radiography, ultrasound, dental and monitoring equipment — which is genuine equipment lending with genuine collateral.
• A small working capital line, which is genuinely small in a business with no receivables: it covers inventory, payroll timing and the first few months of transition.
• A personal guarantee, always.

The diligence that changes the price

1. Reconcile practice management system revenue to the tax return and to deposits. Three sources, one number. Discrepancies are common and informative.
2. Active client count and visits per client, over three years. A practice with flat revenue and a falling active client count is being held up by price increases.
3. Production by provider, so you can see how much of the business belongs to the seller personally.
4. Fee schedule against the local market. A practice that has under-priced for years has upside; one that has over-priced has a client attrition risk on your watch.
5. Equipment age and condition, with a capital plan. Anaesthesia machines, autoclaves and imaging equipment all have finite lives, and a purchase price that assumes none of it needs replacing is wrong.
6. The lease. Term, options, assignment, and whether it survives a sale. A practice in a leased building with three years left and no options is a business with a three-year horizon.
7. Licensing and ownership rules. Veterinary practice licensing, premises permits and controlled substance registrations are regulated at state and federal level, and several states have rules about who may own a practice. Controlled substance registration is location-specific and does not simply transfer. Confirm the current requirements with the state veterinary board and the relevant federal agency before closing, because these are timing-critical.

What to ask for and what to refuse

Ask the lender, before you make an offer, what replacement salary they will use and what coverage ratio they require. Those two numbers determine the maximum loan, and therefore the maximum price you can pay without more equity.

Ask the seller for a transition commitment in writing, with a defined period and defined obligations, and for a non-compete with a radius that reflects where the clients actually live.

Refuse to sign a purchase agreement before you have run the coverage arithmetic with a real salary in it. The most common failure in practice acquisition is an agreed price that no lender will fund, discovered in week six, with a deposit at risk and a seller who now believes the practice is worth what the agreement says.