Part 3 of Valuation Basics – Salaries & Wages

by | Oct 4, 2020

The biggest cost category in your P&L (Profit & Loss) will be the Salaries and Wages group. As such, it will be difficult to have a favorable practice valuation if salaries and wages are sub-optimal.

Now, let me add a big disclaimer; optimal Salaries and Wages are very subjective and dependent on the unique factors of each hospital. What is “right” for one hospital can be “wrong” for another.

Before diving in, more ground rules

  • The focus will be general practice (GP) companion animal hospitals.
  • For doctor compensation, I will focus on strict production pay. I am not suggesting that production only is better than salary or production with base
  • Production will be assumed to follow a generic definition, delivery of services or products, at the time of client visit.
  • It is assumed the correct costs/expenses are mapped to the Salaries and Wages group of the P&L. For instance, payroll taxes, employee benefits and/or health insurance costs should not be included in the Salaries and Wages group.

With all that out of the way, let’s start with what you should consider in the Salaries and Wages group.

1 – Restate owners compensation, inclusive of all their contribution/involvement in the hospital.

  • Recalculate owners compensation to fair market value (FMV). My default assumption for GP owners is 22% production pay.
  • Include FMV compensation for admin/practice manager work or in lieu of admin work add additional production you expect.

2 – Recognize “holes” and redundancy in the Salaries and Wages group.

  • If associate or relief vets compensation does not equate to 20% production pay, include a valuation adjustment.
  • If you have a part time practice manager (PM) or one not a FMV compensation, include an adjustment.
  • Bookkeeping expenses typically would go away (corporate synergy), so include an adjustment to remove.
  • If you have an “extra” receptionist or manager and it is already determined that in the near future there will be a reduction, include an adjustment to remove.
  • Family members on the payroll, who do not have to be backfilled, can be removed with an adjustment.

3 – Review overall trend/direction of Salaries and Wages and assess whether it matches the overall plan for the hospital.

  • I will intentionally skip elaborating on this point, as it will undoubtedly get misconstrued.
  • You can email me if this is an area of concern.

How will the corporate consolidators treat your Salaries and Wages.

  1. Some consolidators are strictly Salary, so they will restate your production based compensation and adjust with a Salary.
  2. Some are production based. I have seen 20% production used in an LOI (Letter of Intent), and I have seen 23% production used in an LOI.
  3. Some will include an associate adjustment as noted above, and some will not.
  4. Some will include a PM adjustment as noted above, and some will not.
  5. Smaller consolidators will likely not consider bookkeeping a synergy, so no adjustment.
  6. How production is defined will vary by consolidator, hence your production based compensation can vary depending on the consolidator.

What you should do next to be proactive and ensure the best possible outcome in your practice valuation.

  1. Changing direction in Salaries and Wages takes time, so give yourself enough time to realize the change.
  2. If you are not reviewing your P&L at least monthly, you are not doing yourself any favors.

Side Notes

  • Adjustments in Salaries and Wages group will change the statutory benefits (payroll tax + workers comp) for the hospital. Don’t forget to include an adjustment for those category changes.
  • Boarded specialist production pay will start at 25%, and can go up from there.
  • Specialty & Emergency hospitals will have significantly higher Salaries and Wages compared to GP hospitals, but it will offset with lower COGS.
  • If you are considering production with guaranteed base forms of compensation…please consider it thoroughly as there are many layers and nuances.

Final Thoughts

Every hospital has unique tangible and intangible variables like location, service mix, people/culture, client base, and many other factors that makes your hospital unique. Each consolidator is equally unique. Salaries and Wages are one part of a bigger puzzle called a practice valuation, which is just one variable in the broader ecosystem of the veterinary consolidator market. It is not a one size fits all. To realize the best outcome you will have to find the right match. You have #VCA the market leader and Sean Hayes ready to help. Steve Ager at #NVA, ready to take over the #1 spot and also someone I consider a mentor. But maybe Dr. George Robinson at #Heartland Veterinary Partners will impress you the most, or a dear friend Ana Good at #Mission Veterinary Partners perhaps will make the best offer, or Trent Homec another old friend at #Pathway, or my friends at #Rarebreed and Daniel Espinal will be the best fit, or Eyal Cohen at #Veterinary Care Group, or Len Podolsky at #EverVet Partners. I will stop here, as I am off topic.

Next week we will cover the Facilities & Rent group in the P&L and perhaps continue my consolidator list.