Exploring the purchase of a clinic can look promising at first glance, especially when the numbers show strong revenue. But finding the right location is only half the battle. The real work starts when you dig into the financial statements. It is easy for buyers to see high revenue and assume the business is highly profitable, yet strong collections alone do not guarantee a successful purchase.
To protect your investment, you should treat the acquisition like a lender treats underwriting. Underwriting is the process of verifying financial information to understand the true risk of a deal. This means your veterinary practice due diligence needs to start before you sign a Letter of Intent (LOI), not after.
By analyzing the numbers early, you can figure out if the business actually generates enough cash to pay your staff, cover your loan, and provide you with an income. First Bank of the Lake is a nationwide Small Business Administration (SBA) Preferred Lender, and we see how thorough due diligence makes a difference. Let us walk through how you can validate the cash flow of a veterinary practice before you buy it.
When you review a clinic's tax returns, you are looking at reported performance. Reported performance shows what the seller told the government to minimize their tax bill. Lender-underwritten performance is different. This is the actual cash flow the business produces after removing personal expenses and unusual tax deductions.
Lenders focus on the durability of the cash flow, not just its history. Durability means the revenue is likely to continue after the seller leaves. A clinic might have made money for ten years, but if that income relies entirely on the departing owner, the cash flow is not durable.
There is a direct connection between validated cash flow and financing. SBA loans are made by lenders and partially backed by the SBA. While the SBA sets guidelines and caps interest rates, the lender ultimately decides if the cash flow can support the loan payments. If the cash flow is not validated, you may struggle to secure financing.
Normalized cash flow in a veterinary practice is the true financial benefit a new owner can expect to receive. It takes the clinic's net income and adjusts it to reflect how the business will run under standard, normal conditions.
Buyers typically review several common adjustments to find this number. These adjustments are called "add-backs." Add-backs are expenses that the current owner paid through the business that a new owner will not have to pay. By adding these expenses back to the profit margin, you get a clearer picture of the available cash.
However, why must add-backs be defensible? Because a lender will review them closely. If an add-back is just a guess or represents an expense the clinic actually needs to operate, the lender will reject it. Defensible add-backs are documented, realistic, and easy to prove.
When performing veterinary acquisition due diligence, you need to know which add-backs are acceptable. A few common categories typically pass a lender's review.
First, look at differences in owner compensation. If the seller paid themselves a salary well above the industry average, the excess amount can generally be added back. Next, look for one-time or unusual expenses. For example, if the clinic had to pay a large legal settlement last year, that is not a recurring cost.
Discretionary spending is another major category. Sellers often run personal vehicles, family cell phone plans, or excessive travel through the business. These are usually valid add-backs. Finally, look for non-recurring costs, such as a major computer system upgrade that will not need to be replaced for another decade.
Even experienced veterinarians can make financial missteps during a purchase. One of the most common mistakes is accepting seller adjustments too quickly. The seller's broker wants the cash flow to look as high as possible, so they may include aggressive add-backs. You must verify each one.
Using overly optimistic retention assumptions is another frequent error. Buyers often assume every client and staff member will stay after the sale. In reality, some turnover is almost guaranteed. Ignoring the needed post-close investments can also hurt you. If the clinic's equipment is severely outdated, you will need to spend money to replace it, reducing your available cash.
Finally, forgetting about working capital needs is a critical mistake. Working capital is the cash you need to keep the doors open before your first accounts receivable are paid. If you drain your bank account for the down payment and leave nothing for payroll, the business will struggle immediately.
To protect yourself, you need a retention-adjusted cash flow model. This model predicts how much cash the clinic will generate after accounting for the transition. You should always assume some client attrition. Usually, a small percentage of clients will leave when their preferred doctor retires.
You also need to adjust the procedure mix if the seller was highly specialized. If the seller performed complex orthopedic surgeries and you only do general practice, your revenue will drop. Rework the doctor production assumptions based on your actual skills and the skills of your associate veterinarians.
Do not forget to add marketing and stabilization costs to your model. You may need to invest in advertising to announce the change in ownership and attract new clients. Factoring these costs into your model gives you a much safer estimate of your true cash flow.
Transition risk is the threat that the business changes simply because the owner has changed. If the seller performed most of the surgeries or generated the vast majority of the revenue, transition risk is high. When they leave, the revenue leaves with them unless they slowly hand off those clients to you.
Referral relationships also carry transition risk. If the seller controlled all local referral relationships through personal friendships, those referrals might stop. Key staff may also decide to leave. Veterinary technicians and office managers often remain loyal to the original owner and may seek new jobs when the clinic is sold.
Client trust may need to be rebuilt from the ground up. The community trusted the previous owner for years. You will have to prove yourself, which means your initial cash flow might dip while you build your own reputation.
Red Flag: High Staff Turnover-
Frequent turnover may point to compensation issues, weak management, or cultural instability. Look beyond headcount and ask how long key employees have stayed, why departures happened, and who is critical to day-to-day operations.
When you partner with an experienced SBA lender like First Bank of the Lake, you quickly learn what a proper buying a veterinary practice checklist looks like. A lender-style review leaves no stone unturned.
Your checklist should start with historical financial performance. You want to see three years of tax returns and current year-to-date profit and loss statements. You also need a quality-of-earnings review to verify that the reported income actually hit the bank accounts.
Next, request a breakdown of doctor production by provider. You need to know exactly who is bringing in the money. Review the revenue mix by service line to determine whether the clinic relies too heavily on a single treatment. Finally, assess client retention, staffing stability, and your working capital requirements to ensure the business can run smoothly from day one.
Consider a common scenario we often see in veterinary acquisitions. A buyer finds a clinic generating heavy profits. The tax returns look great, and the asking price seems fair. However, during the veterinary practice due diligence process, the buyer discovers the seller works 60 hours a week and handles all emergency calls.
The buyer only wants to work 40 hours a week and does not plan to offer after-hours care. In this situation, the strong historical performance will not fully transfer. The buyer will either lose emergency revenue or have to hire an associate veterinarian, which would add a massive new salary expense.
This is why underwriting may require more support from the seller during the transition. The seller might need to stay on part-time for six months to help transition clients. Because the profit margins will shrink under the new owner's business model, extra working capital may be needed to cover expenses while the practice stabilizes.
Before you finalize your LOI or pay a deposit, you need to answer a few critical questions. First, which cash flows are likely to survive the transition? Be honest with yourself about what revenue will stay and what will leave.
Second, what assumptions am I making that may not hold? If you assume all staff will keep their current pay rates, you might be surprised when they demand raises from the new owner.
Third, how much stabilization capital do I need? SBA financing guidelines often require an equity injection, typically starting at around 10% but varying by transaction. You must ensure you have enough cash for the down payment and the early operating months. Finally, ask yourself: what would a lender challenge in this deal? If you can spot the weaknesses before the bank does, you are in a much better negotiating position.
The goal of veterinary practice due diligence is not simply to confirm that you want to do the deal. The goal is to test whether the cash flow is real, durable, and financeable. Buying a clinic is a massive financial step, and traditional loans can sometimes fall short when a deal requires flexible terms.
SBA financing is generally a strong fit for these acquisitions, especially since it is designed for owner-occupied operating businesses. However, every successful SBA loan relies on accurate cash flow validation. Take your time, verify every number, and partner with professionals who understand the industry.
Explore whether SBA financing fits your goals by speaking with an experienced lender. When you approach due diligence with a critical eye, you protect your future and set your new practice up for long-term success.
The friendly financial experts at First Bank of the Lake offer SBA loans designed with the needs of our customers in mind. We have financed more than $2 billion in SBA loans since 2020 and were ranked the 15th-largest SBA lender in the United States in 2024. Since our founding in October 1985, we have offered outstanding customer service and the best financial options for customers’ needs. Today, First Bank of the Lake offers loans for business enterprises across the United States. To learn more about our bank or learn more about SBA loans, visit our website, visit the Veterinary SBA Loans page, or check us out on Facebook or LinkedIn. Our friendly and knowledgeable staff members will be happy to discuss your loan options with you and to help you achieve success in the veterinary industry. Please contact us at (888) 828-5689 or fill out the form to get your business loan questions answered today!