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The steady consolidation of veterinary practices and increasing purchase prices has created a pressing question for independent veterinary practice owners. Do I sell or do I stay independent?
As any animal hospital owner knows, deciding to sell a practice is a difficult decision. A market-based valuation, like those available at VetValue.pet, helps frame one aspect of this question about practice sales –“what’s my practice worth now?”
However, more is required to really understand whether and when selling to a corporate consolidator or another buyer makes sense. Financial concepts and models, while subject to number of variables, provide an excellent framework through which to do this analysis. Before plunging into the numbers, it is worth spending some time reviewing the qualitative factors that may drive a practice owner to sell or not sell their clinic.
There has been a constant drumbeat in certain quarters of the veterinary community bemoaning the loss of independent veterinary hospitals and independent veterinarians. DVM owners who sell can often be faced with corporate directives that seem more focused on profit than on patients. There is a fear within the industry that doctors who practice as part of a corporate team will not have complete independence when it comes to their ability to make medical decisions.
Meanwhile, besides the potential financial reward, selling a veterinary practice can bring other benefits to the animal hospital owner. Many clinic owners feel bogged down by the business end of their practices. Selling to a larger organization can relieve owners of some of the management decisions and responsibilities they find so onerous. As an employee or partner, the selling owner can get back to practicing medicine with less worry about financial, technology or personnel decisions.
This change can allow animal hospital owners to devote more time to both their families and their lives outside of work. In addition, becoming part of a bigger company can provide access to a host of additional resources. These include both financial resources that can permit the acquisition of real-estate to the newest clinical equipment as well as the management resources that foster the adoption of best practices.
Financially, selling owners often are trading potential future earnings coming from ongoing salary and ownership distributions for an upfront payment. This fact allows the modeling of different scenarios so that an animal hospital owner can gain a better understanding of the financial impact of the ownership decisions they might make.
Indeed, by creating a simple financial model, albeit with a number of variables and assumptions, it is possible to provide a unique insight into the sell or operate decision. The model itself involves making assumptions that allow for the creation of 10-year financial projections for a generic veterinary practice. Once this has been done, the financial theory of time value of money, present value (PV), permits the comparison of the different scenarios.
We created four different scenarios to be analyzed relative to a five- or ten year plan to retire:
· Stay independent, sell at retirement (in 5 or 10 years) in an all cash deal
· Sell to corporate today for all cash and retire in 5 or 10 years
· Sell to corporate today, and retain a joint venture (JV) interest in the practice sold and retire in 5 or 10 years.
· Sell to corporate today, and acquire a roll-over equity interest in the acquirer and retire in 5 or 10 years
We looked at "Sell Today" scenario from the standpoint of: i) the selling owner retiring 5 years after the sale, and ii) the owner retiring 10 years after the sale.
For each of these scenarios, we generated cash flows based upon a consistent set of assumptions. We made assumptions regarding everything from gross revenues, to profit margins, prospective tax rates on income and capital gains, expected yearly revenue improvements and sale/exit multiples. While these assumptions are realistic based upon our in-depth knowledge of animal hospital financial metrics, they are somewhat arbitrary. Nevertheless, and most importantly, they were applied consistently.
The analysis provides some interesting, but not surprising, results. The practice owner’s retirement timeframe is a significant factor in determining whether to stay independent or to sell, all other things being equal.
Independent pet clinic owners who are looking to work for at least another 10 years, should seriously consider remaining independent. This longer time period permits independent animal hospital owners to capture the additional value generated from the distributions that come from ownership. Staying independent increases value by 31% versus selling for all cash and then working as a salaried employee for another 10 years.
On the other hand, if a practice owner is contemplating retiring in five years, a sale to corporate or private equity now is the way to most likely to maximize long term career earnings. By selling now and retiring in five years, an owner can create significant additional value versus continuing to operate and selling at retirement.
Under our assumptions, the decision to sell added value ranging from +5% if a practice is sold for all cash, to more than 45% if a practice is sold and the practice owner is allowed to roll over a portion (30%) of the proceeds into equity of a well-run, growing acquirer.
Most sell or stay independent discussions seem to be focused more on the qualitative aspects mentioned at the beginning of this paper without doing the rigorous financial analysis to quantify this incredibly important decision. We hope by changing this conversation, we can help the owners of animal hospitals make better, more informed transition decisions.
We encourage any practice owners who are interested in seeing what this analysis might look like for their individual practice to contact Carson Taylor at VetValue