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For any veterinary practice buyer purchasing an existing practice, a practice with multiple doctors who will continue after the acquisition presents less integration risk. A change in ownership can commonly disrupt a practice’s key asset, its people. If one doctor leaves, while another remains, an owner can cover fixed costs until another can be recruited. If one doctor leaves leaving an empty practice, the practice will be burning cash.
The trouble for the owner will be great indeed if she is not a DVM. It’s well understood that corporate consolidators (corporates) prefer to buy veterinary clinics where multiple DVMs will continue with the practice post transaction for this reason, among many other reasons.
It’s also well known that corporates have the ability to pay more for these practices than a DVM owner would be able to. I hear commonly that individual or associates who want to acquire practice ownership are “priced out” of the market for multi-doctor practices.
It’s understood that corporate acquirers have both a greater willingness and ability to pay for multi-doctor practices than any individual DVM. I think what is less well understood is many of the reasons why this is the case.
David v Goliath
Most corporate consolidators are owned by private equity funds or other institutional investors. These private equity funds bring expertise in business financing and ongoing relationships with lenders. Putting aside any difference in how a consolidator’s credit risk differs from that of a single practice, consolidators already have the advantage of knowing how to work the system.
They have another major advantage: a portfolio of multiple practices has less credit risk than a single practice. Less credit risk means a lower interest rate on debt, but it also means more capacity to borrow. Said differently, the amount of debt a corporate can borrow per unit of profit is higher. Sometimes as high as 7 times. If a corporate consolidator can borrow $7 for every $1 dollar of profit (EBITDA, really), they can acquire a practice at 7x EBITDA without needing to invest a single dollar of equity.
Relative to an individual buyer, a corporate can finance a greater portion of the purchase price with debt, leveraged loans typically, which present far more favorable financing terms in every respect than what an individual DVM will obtain from the small business lending desk of a commercial bank. As a result, a consolidator’s weighted average cost of capital is substantially lower than what any individual practice owner will be able to secure on their own. This gives a consolidator a much higher ability to pay than an individual DVM buyer.
Consolidators bring a greater willingness to pay, because they have the teams and infrastructure dedicated to acquiring practices. They can quickly and effectively evaluate acquisitions. Combine this with institutional knowledge learned through doing acquisitions on repeat and you have a party who can be decisive when they want an acquisition and confident that their diligence process will reveal any major issue.
The Stone that the Builder Refused
A greater willingness and ability to pay will win out every time, which is why I don’t think DVM Owners, or would-be owners should chase practice deals that are candidates for corporate acquisition, unless they have a strong “angle”. Having an “angle” might allow a DVM to acquire the practice for materially less than what someone else might be willing to pay for it.
The best angle is to be the progeny of the seller. This angle is solid but not available to everyone. Sometimes being a long-time associate at the practice can be an angle. Whether it’s advisable to take money from a selling parent or partner’s pocket with your angle is for you to decide.
If you don’t have a solid angle you should drop the idea of acquiring a multi-doctor practice. Instead focus on acquiring practices where one or no doctors will continue post acquisition. In fact, there are many practices for sale which will not attract any, or only very tepid corporate interest. These include solo doctor practices where the owner plans to require post sale (Empty Practice), and in many cases two doctor practices where one of the doctors will retire post sale (One DVM Practice). Part II will discuss acquiring these practices at length