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Solo doctor veterinary hospitals often conjure up romantic imagery of a small town, self-reliant sole practitioner. In our imaginations, these idealized veterinarians are part of the glue that holds together communities in a Norman Rockwell-like America. And, indeed, many practicing veterinarians likely had this vision in the back of their minds when they made the decision to practice animal medicine.
Twenty years ago over 50% of veterinarians practicing in mixed and companion animal practices worked as sole practitioners. Today that percentage is likely about half that or less. Nevertheless, given the approximately 30,000 veterinary practices in the United States, that means that there are still more than 5,000single doctor practices spread around the country.
We at VetValue often hear from older sole practitioners as they struggle to understand how to value their practices. Single veterinarian animal hospitals pose a unique valuation challenge since so much of the practice’s value resides in the doctor him or herself. Most single doctor practices naturally take on the personality of the veterinarian who leads it. Moreover, the practice is also identified in its respective market area as one and the same as the veterinarian who owns it. There is always an overarching question of how to assess a pet healthcare service business when its most valuable and recognizable asset might be exiting as part of a transition. As a result, this type of practice, when they are sold, will often trade at a discount.
Despite this discount, most single doctor practices are not of much interest to corporate buyers. This is the case even if the selling owner promises to continue working for a certain number of years. These purchasers are typically looking to buy practices with multiple doctors that can be viewed as an ongoing business regardless of the loss of critical personnel.
Corporate buyers are naturally concerned about the disruption to the business that even a well-planned and orderly transition from one single doctor to another sole practitioner may cause. In addition, we often find single doctor practices in less densely populated areas that themselves are less attractive to large corporate operators of pet clinics.
The differences between single doctor and multi-veterinarian practices are reflected in the ways that each are valued. VetValue has found that larger multi-DVM practices can be valued by using a traditional private equity, multiple of cash flow model. Simplistically, this model calculates a practice’s value by first determining its normalized pre-tax, pre-non-cash expenses operating cash flow (VetValue uses EBITDA which equals Earnings Before, Interest, Taxes, Depreciation and Amortization as this number) and then multiplying this amount by a “multiple” that is determined both by market and practice specific factors. It should be noted that two things are implied when using such a model. First, there is an expectation that EBITDA represents what the practice can sustainably produce in operating cash flow. Second, there is an active market for similar assets from which a reasonable estimate of a multiple can be determined.
Unfortunately, both of the just-mentioned pieces of data are typically not available for single veterinarian practices. As previously pointed out, there is no guarantee that a single doctor practice will maintain its financial operating performance once the owner departs. At the same time, the market for single veterinarian animal hospitals is sufficiently fragmented to impede the determination of reasonable market multiples.
So, where does this leave the veterinarian that has served his or her community for a long period of time as the owner of a successful practice when it comes time to retire? Despite the impediments mentioned above, there still IS a market for single doctor practices. Transitioning sole practitioners do sell their pet clinics all the time.
Many times, single doctor animal hospitals will be sold to younger veterinarians who are looking to go out on their own and have limited financial resources. Purchase prices are often calculated as a percentage of, or a, multiple of revenues. This methodology greatly simplifies the valuation of the business by eliminating the need to distinguish between what is a personal versus a practice expense.
Single doctor veterinary practice owners who are selling their hospitals will often use a broker to help identify potential buyers. Business brokers should not be confused with transition advisors who are hired to assist larger practice owners sell their practices to corporate consolidators. While both get paid through a fee structure that is only effective if a successful transaction takes place, transition advisors do more work to understand, model and market their client’s business and often run an intensive market-based auction-like sale process. Meanwhile, business brokers adopt a strategy more like a real-estate agent. They compile information needed by prospective purchasers and provide a nexus to connect sellers and buyers thus facilitate finding a buyer.
At the end of the day, there will always be a place and a market for single doctor veterinary practices. So, what should a sole practitioner who is deciding to sell do? Our recommendation is that veterinarians looking to sell their single doctor practices start by doing enough research and due diligence to understand the market for such businesses. A combination of understanding their practice’s financial statements, doing a valuation on an app, like VetValue, and talking with a number of business brokers, should give any selling doctor a good sense of what their practice is worth. Further discussions with practice brokers in their area should allow them to select the best broker to do the job. The process, while time consuming and, at times, complex hopefully will put the practice in the hands of a worthy successor.