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A Broker is an intermediary between a buyer and seller. Having a 3rd party help with certain sales is useful for several reasons. The Broker
1) Guides the transaction, using their experience to move everyone through the process
2) Advocates for the seller in negotiations and through marketing
3) Identifies and engages suitable buyers/partners
These are useful services when the transactions are complicated and for high stakes. Transitioning a veterinary practice checks those boxes.
Many veterinary practice owners work full time as clinicians and have never sold a practice before. Preparing for and closing a veterinary practice transition* while also practicing medicine and managing a practice is a heavy lift. Buyers will provide all the help that is needed once the seller has accepted the offer. The price of this "help" is generally a less attractive offer for the seller, and favorable deal terms for the buyer.
The Broker works for the seller. Employing a broker who can explain what is coming when and why, will make things easier for a selling veterinarian. Hiring a highly responsive and diligent ally who will draft financial analysis and marketing materials is better. Engaging a team who can do all of that and has the experience to manage the potential buyers conducting diligence is ideal.
The way in which the broker designs the transition process can create (or remove) significant value for the selling client. Purchasers of veterinary practices are private companies or individuals that do not share the prices they pay. There is no ticker tape, nor public database of recent deals to compare a selling client's practice to.
The process to sell a veterinary practice should include an element of price discovery. Buyers in competition will best determine what a practice is worth. If a Broker's process doesn’t generate enough competition between potential buyers, there will not be adequate price discovery. The result of inadequate price discovery is a sub-optimal sale valuation for the client.
In many veterinary practice sales, the seller will continue with the practice under the buyer’s ownership. Having the doctor seller and the buyer engage in a pitched negotiation may “poison the well” for later collaboration, destroying value.
Instead, the attorneys representing both parties will often stand between the buyer and seller. This can raise transaction costs without improving the outcome because attorneys are not as familiar with the business issues that matter. Having a broker negotiate with the buyer directly can reduce legal fees, while mitigating buyer-seller conflict.
The best time to negotiate material deal terms is before an offer is accepted. The more the seller can negotiate before the offer is accepted, the better. Once the offer is agreed to, the cost of walking away will be much higher for the seller. Post-offer diligence will always be more taxing on the small business seller relative to the larger company buyer.
Experience is critical in these negotiations. The buyers and their attorneys have loads of it. The selling doctor likely has very little of it. His attorney can narrow the gap, but an experienced broker and an experienced attorney are a more formidable advocate.
An initial offer is typically non-binding because the buyer is presenting it without having completed diligence. If there are surprises in diligence, the buyer can freely “re-trade” his offer. In this case, the seller's only recourse is to re-negotiate, or walk away.
It is the broker's job to make sure there will be no surprises during the diligence process. A thorough negotiation of a non-binding offer must be supported by comprehensive preparation. . If the brokers hasn't done their own diligence, their skill and experience in negotiation will count for little. In this way, the seller’s leverage in negotiation is created, or undermined by her preparation for the transition.
There is a relatively small universe of buyers of veterinary practices. A corporate will have the highest willingness to pay for almost any practice that is being transitioned. A notable exception is a one doctor, or two doctor practice where the seller is a retiring clinician. Having the highest willingness to pay is not the same as being the “best” buyer for a given seller.
A veterinary practice broker’s task is no more difficult than having 20-30 potential buyers a phone call, or email away. In other markets, the broker may need to vet hundreds, maybe thousands of potential buyers.
In veterinary, a simple vetting of the buyers is important, but not critical because corporate buyers are unlikely to be fraudulent. To add value through vetting, a veterinary practice broker needs to go a layer deeper. In an ideal situation a broker will have sold or marketed practices to all potential buyers. The broker should know the buyers' management team, capital raising history, regional focus, preferred deal structures and business philosophy.
Generally, buyers want selling doctors to continue with the business once it has been transitioned. In many other industries, this is not the case. For this reason, the deal structures employed and consideration offered in veterinary practice transitions are more diverse than in other markets. A single practice transition offer may include cash, equity in a practice level joint venture and an earn-out.
A veterinary clinic broker can help the seller compare offers that use diverse forms of deal consideration and structure. A broker should identify the risks / upsides inherent in each offer, so the client can decide which best meets her goals.
A good broker is an ally for a veterinarian selling a practice. But a good broker can be hard to find. Part II discusses how to find a good one.
Brokers in many industries, including veterinary services view their role relatively narrowly. Their “goal” is to find a buyer for the seller’s practice who will present an offer the seller will accept.
Brokers can accomplish this goal by delivering an excellent offer to the seller. But delivering any offer that meets the value expectations of the seller will also accomplish this goal. For the broker, it is generally easier and quicker to get a lesser offer and have the client accept it.
Brokers sometimes use appraisals to set client valuation expectations at an easily achievable level. Not all brokers conduct themselves this way. Those that do usually do it because they are responding to incentives. We'll discuss incentives in part III.
The outcome of a transition process run to quickly find an offer the client will accept will be sub-optimal. It is not difficult to get an offer for a multi-doctor practice in a market with 30+ private equity backed corporates aggressively looking for deals. Paying someone to do only this should be avoided.
An Advisor views their goal more broadly. Their goal is to find (and close) the best offer that exists in the market for their client. Finding and closing the best offer requires diligent preparation and the expertise to create a competitive dynamic amongst potential buyers.
Critically, achieving this goal has nothing to do with the seller’s expectations of sale value. Seller's expectations for sale value tend to miss the mark, and broker's have every incentive to lower these expectations.
To capture the benefits of having a broker help will the sale of a practice, the seller should engage a broker who has the Advisor mindset. With the right Advisor, the sale value achieved can easily exceed what the client thought possible.
Our affiliate dvmEvolution is a one of the few true advisors to independent veterinary practices. Ask the partners at dvmEvolution how they plan and execute a veterinary practice transition. Next, ask the same questions to a business broker. The difference between how an advisor and how a broker sees their roles should be apparent. The Advisor's mindset will lead to a much better outcome for the seller.
*I use the words “sale” and “transition” synonymously. There are many forms a veterinary practice "sale” can take with most buyers calling a “sale” a partnership. In any case we are talking about a transition of a practice’s ownership