Strategic Success: Common Traits Among Top Practices

There is no “one-size-fits-all” or “easy to- implement” secret to success for dental practices. However, I do see commonalities in the strategies of top practices. These practices have 15% to 20% annual growth and maintain above average profitability. Here are their common traits, along with strategies I’ve seen that have worked well for my dental practice customers.

To read the full article, click here Strategic Success: Common Traits Among Top Practices


Short Sales and Finding Future Financing

A lasting effect of the Great Recession has been the growing number of professionals caught in the real estate devaluation of residential properties. In the past, steady property appreciation seemed to make any home mortgage safe for the bank and owner. But the last several years have led to many borrowers finding they owe more than their homes are worth.

Some borrowers have decided the best option is to sell the home, with the bank’s permission, for less than what is owed. The amount of loan still unpaid after the sale is called a “deficiency balance” or “short sale,” which may or may not be forgiven by the bank.

THE IMPACT ON CREDIT SCORES

Not surprisingly, a short sale has a huge negative impact on the borrower’s credit score, regardless of whether the loan was current before the sale. According to an April 2011 CNNMoney article, a 780 credit (FICO) score will see a 160-point drop following a short sale, while a 680 score will see an 85-point drop. This is the same magnitude drop as from a foreclosure.

Like all negative credit listings, this will remain on the credit record for a number of years. The question we hear repeatedly from potential practice owners is, “How will this affect my ability to arrange practice financing?” or “How is this black mark on my credit score perceived by decision makers at a bank?”

HOW TO FIND FINANCING

The effect on practice financing depends on the flexibility of your lender’s credit standards, the circumstances surrounding the short sale, and other credit factors involved with the practice acquisition.

The first area to investigate is the flexibility of credit standards. Some banks require a minimum FICO score for their borrowers with no exceptions. Typically, this score is around 650. If you have a short sale on your record, especially a recent one, your score will probably be below this minimum.

Likewise, a bank may have a policy to never finance anyone with a short sale or bankruptcy on his or her credit report. If the bank is unwilling to bend, do not get discouraged. Keep searching for a bank that will listen to your situation.

WORKING WITH THE BANK

The second factor a bank will consider is the circumstances surrounding the short sale. If you had the income to sup­port the mortgage payment but chose to walk away because there was no equity in the property (strategic default), that will likely be perceived negatively by the banker. Was the loan kept current until the short sale? If so, this can mitigate the negative perception.

If, however, you needed to leave the area for a job, or experienced an interruption of income that led to the inability to pay, the resulting short sale might be viewed more neutrally.

It will be extremely helpful to your case if all other debts have been paid in a timely manner. If the short sale is the only blemish on your credit report, it will be easier to explain. If several other accounts were delinquent or charged off, you will probably find fewer banks willing to listen to the circumstances of the short sale.

Bottom line: Be prepared to honestly describe what happened, and show how you were trying to work with your bank to resolve a difficult situation.

Finally, the bank will likely ask the following questions to gauge the overall strength of the loan request:

  • Is the cash flow of the practice growing and healthy?
  • Have you demonstrated skills to succeed not only as a great dentist but also as a great business owner?
  • Is the purchase price of the practice reasonable?
  • Are you purchasing the practice with a partner who has no personal credit blemishes?
  • Do you have a terrific transition plan that shows you understand the practice’s competitive position in the market, and can successfully accomplish the ownership change without losing clients?

If too many of these questions are answered negatively, the short sale can probably not be overcome by the lender. But if answers are positive, the short sale may not prevent you from obtaining the loan.

A bank’s credit decision is always a judgment call. A weakness in one area can be offset by strengths in other aspects of the loan request. Be sure to highlight why the loan is a safe risk for the bank. Do not avoid talking about the short sale, but show why you are confident that the loan you’re requesting will succeed.

 

DAVID LUCHT is the chief risk officer for Live Oak Bank. Before joining Live Oak Bank in May of 2007 as a founding member, Lucht held high-ranking positions in many different successful banking institutions. He was the chief credit officer, executive vice president, and director for First Merit Bank out of Akron, Ohio, where he was responsible for leading the turnaround in credit culture and performance of the $10.5 billion bank.

 

To download a copy of this article, click here: Short Sales and Finding Future Financing

 

Reprinted from the June 2013 edition of DENTAL ECONOMICS
Copyright 2013 by PennWell Corporation


The Successful Strategy to Compete in the Marketplace Today

Ok, I admit it. I am getting depressed reading about the Veterinary marketplace today I hear “Schools are producing too many veterinarians. People are reducing the amount of dogs they own and cat owners aren’t bringing Tigger into the practice as often. Student debt keeps rising, salaries keep sinking, low-cost spay/neuter clinics, vaccine clinics, 1-800 Petmeds are ruining my business!” I could go on, but you get my point. There is no shortage of negative talk out there.

But, if things are so bad, why does Live Oak Bank’s Veterinary Loan Portfolio continue to be filled with customers who I am proud to be in business with? I still believe in the industry, and continue to see practices grow and thrive. However, I do see clients who are growing faster than normal, and with margins that are stellar. That gave me the idea for this article, to give you the secret strategy that helps these thriving veterinarians overcome all the macro-economic challenges.

Spoiler Alert: Of course, there is no one-size fits all secret or an easy-to-implement strategy of success for the veterinary business, or any other industry. However, I have seen some very cool strategies that have led to practices that are growing 15-20%/year with above average profitability. Interestingly, although these strategies are on the surface very divergent from each other, they share some common characteristics. So, let me quickly give you my common characteristics of successful practices, and then give you some of my favorite specific practice strategies that seem to resonate with customers.

Common characteristics:

  • Positive Attitude. I have never met a scussessful practice owner who views the world with an “I can’t get that done” attitude. They try new stuff, celebrate what works and throw out the attempts that don’t.
  • Team Oriented. As a credit person, when I walk into a veterinarian’s office and hear the veterinarian/owner praise the skills and work ethic of her staff (who all smile broadly at the owner) as we walk through, I don’t even need to look at the numbers to know that this practice is operating at a high level. Good leaders invest in and train their team, and those team members typically respond by pleasing the customer.
  • Owner embraces the “Business” side of their practice. Veterinarians/owners who work to learn the business side of their practice, e.g. understanding the margin made on various services, how to control inventory, what marketing endeavors bring in clients, etc. are more successful than those owners who have limited interest in the “business side” of their practice, and hand it off like a stinky diaper to one of their employees.

Those are my simple-minded common ground traits every successful practice should have. I know nothing new there. Now for a few of my favorite strategies we have in our portfolio.

The Low-Cost Provider

Travis asked me to go see a clinic with him. I was surprised when I walked into her practice. I had seen the numbers…. 45-50% revenue growth in each the past two years, a 30% Net Operating Income margin. I thought it had to be a high-end clinic, maybe a lot of orthopedic surgeries going on, modern equipment, etc. To my surprise, the office appeared very modest. The practice was in an old converted house with cramped exam rooms and older equipment.

The DVM/owner explained that the practice is positioned in the market as the low-cost provider. Exam fees are $20 under the competition, walk-ins are welcome and appointment times are short: 10-15 minutes. The practice thrives on low-cost spays/neuters done efficiently, vaccines and vomiting pets. Tech appointments at even lower costs are available. Complex issues are referred out to other general practices in the area. There is no website, and marketing has essentially been word of mouth. This owner identified that this niche in the market was under-served, and has remained true mto the mission of serving this segment. The staff is very well trained to handle these types of patients.

Every cost is well accounted for, inventory is basic, no fancy drugs here, customers love walking out of the clinic with a $75 average transaction charge, the owner’s staff wages are 24% of revenue, cost of goods sold is 22% and she does $1 million of revenue as the only veterinarian.

One Plus One Equals Three

A young veterinarian (let’s call him Dr. Jones) was doing $450,000 out of small leasehold with two exam rooms. The community he lives in has a population of 85,000, and ten veterinary practices are within five miles of his clinic. His practice didn’t have the greatest visibility, and his growth was stalled. He worked six days/week and handled the business side of the practice himself. He was very efficient, with a 35% Net Operating Margin. This meant long hours and little vacation. His dream was to build a new building, but his revenue and cash flow just couldn’t support that.

1 mile away, a 60 year old veterinarian (Dr. Smith) had a very similar practice. $450,000 in revenue, 35% NOI margin, long hours and stalled growth. His worry was different. When he was ready to retire, who would want his small leasehold practice in this overly-competitive market? See the solution coming? That’s right, Dr. Jones and Dr. Smith got to know each other over a couple of years and decided to merge their two practices into a single, brand new, beautiful 3,000 sq. ft. facility.

The revenues have grown to $1.2 million and the NOI margin has increased to 41%. They have a full-time practice manager and can even take a day off here and there. When Dr. Smith is ready to retire (which might be delayed now that his life is so much better), Dr. Jones is ready to buy at a formula that was determined at the beginning of the merger. They are able to think more strategically about their business now that they have the time and have recently seen great results by trying a web optimization program.

Paperless and Visual

The final practice: I just love this one, where the main goal is to practice high quality medicine and to educate the customer on what this means. The market is upper income and loves their pets the way I do. Staff training is intense. They need to understand why certain protocols are enforced and the benefits to the patient. They are articulate and take pride in being the knowledgeable. The staff carries i-Pads, all information is entered into the paperless system (missed charges are not a problem) and exams are 30 minutes.

When a diagnosis and treatment plan are presented, it is done visually. X-rays and lab results are shown to the client on the wide-screen monitors in the exam room, and the client acceptance rate of the treatment plan is really high. The practice invests in the latest equipment, but only after being confident that it will not only be beneficial to the patient’s health, but that it can also generate incremental revenue. Dental x-ray and laser surgery are understood and explained to clients who appreciate the medical benefits to their pets, ATC is over $200 and the clients are happy. The owner understood his market and tailored every aspect of his practice to deliver this high standard of care.

To download a copy of this article, click here: The Successful Strategy to Compete in the Marketplace Today


Short Sales and Finding Future Financing

DavidLucht_2One of the lasting effects of the real estate bubble and Great Recession is the growing number of professionals caught in the real estate devaluation of residential properties. In the past, home appreciation seemed to make any home mortgage safe for both the bank and owner, but the last few years have led to instances where the borrower can find herself 50 percent underwater on her home loan.

In some instances, this has led a borrower to decide that the best option is to a sell the home, with the bank’s permission, for less than what is owed. The amount of loan left after the sale is commonly known as a “deficiency balance,” which may or may not be forgiven by the bank.

A Look at Short Sales

To understand how a short sale is perceived by a bank, a borrower must first understand that a typical bank considers a mortgage loan a contractual commitment by the borrower to repay the debt borrowed, regardless of what the house is worth. Even if circumstances make this nearly impossible for the borrower, the first reaction of a banker is to look upon a short sale as a breaking of the borrower’s commitment. The banker will see you as someone a bank took a loss on.

This may indeed be harsh, and not an accurate viewpoint given today’s economy, but you should anticipate needing to explain what happened, if your banker is willing to listen. A short sale will have a huge negative impact onthe individual’s credit score, regardless of whether the loan was current until the sale. According to an April 2011 CNNMoney article, a person with a 780 credit score will see a 160-point drop in his credit score, while a person with a 680 score before the short sale will see an 85-point drop. This is the same magnitude drop that you would receive from a foreclosure. The negative impact will occur regardless of how long you kept the mortgage current before the short sale.

The Impact on Financing

Like all derogatory credit items, this will continue to be present on the person’s credit for a number of years. The question we hear repeatedly from potential practice owners is, “How will this affect my ability to arrange financing?” or “How is this black mark on mycredit score perceived by decision-makers at a bank?”

The answer is not black and white. The effect depends on the flexibility of the credit standards of the bank looking at the practice acquisition loan, the circumstances surrounding the short sale, and other credit factors involved with the practice acquisition. The first area to investigate is the flexibility of the bank’s credit standards. Some banks require a minimum FICO score for their borrowers, with no exceptions.

Typically, this score is around 650. If you have a short sale on your record, especially a recent one, your score will typically be below this minimum. Likewise, a bank may have a policy to never finance anyone with a short sale or bankruptcy on their credit report. If the bank is unwilling to bend, don’t get discouraged. Keep searching for a bank that will listen.

Working with the Bank

Once a bank will listen, the second factor a bank will look at is the circumstances surrounding the short sale. Be prepared to explain the causes of the short sale. If a person has the income to support the mortgage payment, but chooses to walk away simply because there is no equity in the property (strategic default), that will most likely be perceived by the banker negatively.

If, however, the borrower needs to leave the area for a job, or experiences an interruption of income that led to the inability to pay, the resulting short sale might be viewed more neutrally. Was the loan kept current until the short sale? If so, this can mitigate the negative perception. It will be extremely helpful to your case if all other debts have been paid in a timely manner.

If the short sale is the only blemish on your credit report, it will be easier to explain. If several other accounts were delinquent or charged off, you will probably find fewer banks willing to listen to the circumstances of the short sale. Bottom line: Be prepared to honestly describe what happened, and show how you were trying to work with your bank to resolve a difficult situation.

Finally, the bank will be looking at the overall strength of the loan opportunity to mitigate the negative perception of the short sale. The bank will ask the following questions to gauge the overall strength of the loan request:

Q Is the cash flow of the practice growing and healthy?

Q Do you have the demonstrated skills to succeed not only as a great veterinarian but also as a great business owner?

Q Is the purchase price of the practice reasonable?

Q Are you purchasing the practice with a partner who has no personal credit blemishes?

Q Do you have a terrific transition plan that shows you understand the practice’s competitive position in the market, and can successfully accomplish the ownership change without losing clients?

If too many of these questions are answered in the negative, the short sale can probably not be overcome in the mind of the lender. But if everything is very positive in these areas, the short sale may not prevent you from obtaining the loan. A bank’s credit decision is always a judgment call. One potential weakness in one area can be offset by strengths in other aspects of the loan request. Be sure to highlight why this is a safe loan for the bank. Don’t shy away from talking about the potential negative short sale, but show why you are confident that the loan you are requesting will work well.

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David Lucht is chief risk officer for Live Oak Bank, based in Wilmington, N.C. Before joining Live Oak Bank in 2007 as a founding member, Lucht held high-ranking positions in many successful banking institutions. He was the chief credit officer, executive vice president and director for First Merit Bank of Akron, Ohio, where he was responsible for leading the turnaround in credit culture and performance of the $10.5 billion bank.

This Education Series article was underwritten by Live Oak Bank of Wilmington, N.C.

 

To download a copy of this article, click here: Short Sales and Finding Future Financing