Associate Buy-ins – An Unfair Fight

December 6, 2021

Younger veterinarians are facing a vastly different world than earlier generations of doctors. Historically, animal hospitals were small independent businesses that were often owned and operated by their founders. Moreover, when it came time to retire, owners typically either sold their practice to a junior associate or to another DVM looking to go out on their own.

Valuing a Veterinary Clinic – A Simple Framework

 The economics of these transactions involved the purchaser arriving at a veterinary practice valuation based upon an analysis of the value of the various pieces of the clinic. In other words, buyers would break down the different things they were buying and assign values to each. Totaling these items together would give them a price.

 As GILE Healthcare Real Estate ( https://youtu.be/YMmlrmudjgM ) noted in a video they posted a bit more than 2 years ago, the value of a veterinary practice resides in the following areas. First, the equipment that the selling owner will pass to the new operator. Second, the trained staff that the new owner inherits that will allow them to, not only hit the ground running, but also may encourage customer retention based upon client loyal to certain staff members. Third, the clinic’s practice operation systems, both technological and operating, which permit information exchanges between the staff and facilitate workflow. And, fourth, and finally, purchasers are acquiring the existing client base. This last item may be the most valuable asset.

 Historically, for smaller, one or two doctor practices, doctor to doctor transactions would often be completed for a price equal to something less than the practice’s annual revenue. Obviously, this price would reflect the value drivers mentioned above. For example, if a practice’s equipment was near the end of its useful life, the buyer would adjust the price downward. This was done knowing that they would need to purchase replacement equipment in the near future.

 Selling to Another Veterinarian vs Selling to Corporate

 As GILE mentions in their case study, the value of a doctor to doctor transaction was typically 80% of annual revenues. This price level allowed the new buyer to purchase the practice and have an expectation that they could operate it profitability.

Corporate groups have changed the game. These potential purchasers of are willing to pay well above 100% of annual revenues for the larger (2 plus Dvm’s) small animal vet practices.

Corporate consolidators look at veterinary practice sales and valuation in a fundamentally different way than a veterinarian looking to buy a veterinary hospital. Corporate buyers almost always evaluate a practice using a multiple of a clinic’s cash flow in the form of earnings before interest taxes and depreciation or EBITDA. Normalized EBITDA, once established, provides an acquirer with a good sense of what a practice’s sustainable financial performance will be.

 More importantly, consolidators benefit because the market will value the EBITDA of large, multi-practice veterinary companies more than the cash flow of a single practice. As such, if a consolidator can buy individual practices for veterinary valuation multiples of 10x EBITDA and, ultimately sell itself for 15x EBITDA, it can earn an attractive return on investment.  No surprise that veterinary practice sale multiples have been on the rise.

Moreover, private equity and other corporate buyers have been attracted to the veterinary service business since it is simply a good business. Its clients/customers are very invested in its outcomes. Pet owners are typically willing to spend generously to get their cherished companions well, creating some pricing power. Tort risk and insurance issues are negligible.

At the same time, combining practices into a larger organization provides the benefits of scale with respect to purchasing. It also facilitates the sharing of services, like information technology services, as well as sharing best practices.

 The aforementioned financial promise and business characteristics combine to make consolidators more aggressive buyers of practices. Indeed, as the GILE video points out, corporate buyers are often willing to pay as much as 50% more for certain clinics. Naturally, this fact makes it more difficult for doctors to buy existing practices. Unless the selling DVM specifically wants to keep their practice independent or is willing to sacrifice some value to put it into the hands of another veterinarian.

Where does this leave younger doctors who dream of owning their own practice? Moreover, where does this leave current practice owners looking to retire by selling their practices?

What Can an Ambitious Veterinarian Do?

Doctors looking to own and operate an independent practice need to focus on areas of the market where corporate groups are not active. For example, most consolidators do not actively seek to acquire single doctor practices (though there are exceptions). Younger veterinarians can often buy these businesses at some percentage of revenue. Obviously, buyers must be aware of the valuation issues regarding equipment, staff and clients.

If an expandable practice in an attractive market area can be successfully acquired, the new owner can quickly add another doctor or doctors and new equipment, as well as upgrade its physical facilities and systems. These changes will act as value drivers, while allowing the practice to successfully compete against larger rivals. It’s also worth noting that there seems to be no shortage of lenders willing to back new owners.

What Can or Should an Existing Veterinary Practice Owner Do?

So, how should a clinic owner considering selling their practice view the current environment? No question, it is becoming harder and harder to be never-corporate. Given the 40+ corporate buyers currently acquiring practices, it seems that there’s a corporate buyer for every seller. Moreover, it’s become harder to ignore the  high veterinary valuation multiples and practice valuations these buyers are willing to pay.

If you are the owner of a practice and are considering selling we recommend you talk with an expert.  You should know all your options before deciding to sell as well as who to sell to. An experienced advisor can walk you through the alternative paths. Particularly for larger practices, there maybe other routes to transition your practice to a corporate while providing a pathway to ownership for valued associates.

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