“Never in the history of companion animal veterinary medicine has there been a better time for a practice to sell.”
Owen McCafferty, Vice President of Development Companion Animal Practices North America, LLC (CAPNA). ¹
No matter your feelings about the trend, investment is flowing and consolidators have taken an increasing share of the veterinary services market. ² VCA’s 9.1 billion dollar sale to Mars ³ is just one of the most recent in a line of major practice acquisitions.
“The multiples right now are huge,” notes McCafferty. “Practices used to be purchased at about 70-80% of gross income in small animal medicine. Now it’s not uncommon to see the same type of practice sell at 100%, 110% or even 120%. For special practices, the multiples are even higher, based on profitability.”
However, he cautions that not every practice will get that multiple and it depends on a number of factors. What might lead to an increase in purchase price in the current market?
We spoke with prospective acquirers and industry experts to find out:
1) Finding the right fit: Charlotte Lacroix, DVM, JD, President of Veterinary Business Advisors, notes that purchasers and consolidators aren’t all looking for the same thing. 4
For example, some won’t consider fixer-uppers or specialty practices. Others might have location as their primary factor or prefer a specific type of sale, practice size, etc. Lacroix encourages prospective sellers to do your research and find out which acquirers (whether it’s one of the major corporations, an equity firm, a smaller partnership, or even a private individual) are likely to be interested in the type of practice you have.
2) Bigger is usually better: “The larger the practice the better,” says Neil Tauber, Co-Founder and Senior Vice President of Development of VCA, Inc. 5 Many larger acquirers look for a minimum of 1.3-2 million per year in revenue from a prospective practice, but are happy to see revenue a lot higher. (Tauber notes that VCA has practices with revenue in excess of 30 million.)
However, with so much competition for the larger practices, the market for slightly smaller ones is beginning to heat up, according to John Volk of Brakke Consulting. Len Donato, VMD, Owner of Radnor Veterinary Hospital in Wayne, PA, is an example of why 6. Donato currently owns a single practice, but he and two partners are looking to acquire one to two more in the coming months. “We’re looking in the niche below [1.3 million]” he says. “That makes it a little easier” he explains, because they’re less likely to be in competition with the bigger consolidators.
3) Having more than one hospital can help: Some owners see high-priced purchases of hospital networks, do the math per hospital, and think that their single hospital is worth the same. “It’s a fault in logic to think that,” says McCafferty of CAPNA, “because the one-off practice is not a platform.” Functional and profitable networks of practices can increase value beyond what an individual hospital is worth. The work to combine those hospitals is already done. Efficiencies may already be put in place. Also, the time and energy it would take for the acquirer to otherwise find, review and purchase that many practices individually is saved. In other words, “the sum is greater than the components.”
4) Number of doctors makes a difference: Consolidators may consider practices as small as two doctor practices, but most prefer at least three. “If you have a two doctor practice and one doctor leaves, it can be a struggle for the acquirer,” notes Volk. “We get approached on occasion by individuals who are running a single person practice doing over one million dollars,” says Tauber of VCA, which requires at least two full time veterinarian equivalents (FTEs). “If something happens to the individual, or they choose to retire shortly after we buy it, you really bought a broken practice.” The acquirer makes a difference here, with private investors like Donato being more open to a smaller number of doctors.
5) How long you’re willing to stay: Having an owner who is willing to stay at least a year and, in some cases a lot longer, is usually highly desirable or required.
6) How long your team’s been on board and their efficiencies: “You want to buy a practice where the staff is stable,” says Tauber. VCA looks for practices that have doctors who have been there at least two or three years. “If they have been there for 5 and 10 and 15 years, even better.”
Having an efficient medical workforce can also be a big attractor, according to Lacroix. Think about how your team is spending its time. Are doctors supported by a strong group of certified technicians? This allows practice doctors to focus on care and generate more revenue, possibly increasing a number of factors that could attract a purchaser.
7) Strong non-competes with associates: While certain states in the U.S. do not enforce non-competes, most acquirers will have this as a must where applicable, even if they have to be put in place post-acquisition, notes Lacroix. Having them in place in advance helps.
8) Location, location, location: “We want to have practices that are probably within half an hour to an hour [of Radnor Veterinary Hospital],” says Donato. Which can be fairly typical for smaller acquirers. Others care more about urban and suburban versus rural, or that the practice is located in an area where the pet-owning population is growing.
9) Presence of a long term lease with option to buy: While private acquirers may purchase the property (and some consider it a bonus), larger consolidators typically prefer to lease. “They want to operate the business, but not be in the real estate business,” explains Volk. So, if you don’t already own your facility, be sure to ask for things like a long-lived lease.
Property terms and price have the ability to kill an otherwise great deal. Acquirers “have to be able to assume a lease arrangement with the seller that they can live with financially,” explains Jim Remillard, MPA, CPC, CVPM, Founder of RMA, Inc. 7 Consolidators look for leases that have “small annual increases, or only ones tied to the CPI, or a very small cap of 2-3%, with an option to buy.”
10) Capital improvements already in place with room to expand: Having a facility that is in good shape and doesn’t require much polish added by the buyer can be a strong preference for most acquirers. However, having room to expand might also be.
11) Overall profitability and costs at or better than industry averages: While most acquirers we spoke with indicated that exact expectations vary by region, they did emphasize that numbers for profitability and costs for medical staff can be especially important. Remillard notes that acquirers typically like to see profitability of at least 15- 20% and compensation for doctors between 18-22% of what they produce. Remillard says Vet Partners and other organizations and associations have examined the financials of what hospitals typically spend for leases, staffing and other costs and report these on a regular basis. When adjusted for region and demographics, this can help hospitals understand where they stand and what ratios might be expected by – or be impressive to – a buyer.
12) Client retention and growth are steady: Seeing a strong presence of both high client retention and new client acquisition trends can be key for an acquirer, according to Remillard. However, exact numbers vary on current client loss, your hospital size and whether new clients make up for that loss. “For a practice that has a retention rate of 80-90%, which would be pretty outstanding, the number of individuals that they need to acquire to replace those that they have lost in the past year will be dependent on the number of doctors you have and the location of the practice,” he says, “Historically we would like to see every FTE doctor see at least one, if not two, new patients every day, but that goal is becoming more and more unattainable and unrealistic to achieve in these market conditions.”
13) What type of medicine do you practice and can the acquirer provide efficiencies: “We really want a practice that’s a full-service hospital. We don’t buy hospitals that just do spay and neuters, or just wellness,” notes Tauber at VCA. Whether the practice is already there, or the acquirer sees a cost-effective way they can help your hospital get there, being a hospital that practices the type of medicine in line with the acquirer can be important. “We want them to be on the cutting edge,” Tauber says of practices post- acquisition, but adds that VCA can look at its existing internal resources, like lower-cost purchases of supplies and equipment, to get them there.
14) Make the center of focus the practice, not a “celebrity” doctor: “If people come because of you, not because of the practice or others in the practice, you become so much a critical part of [its success] that you cannot deliver the good will to a third party.” McCafferty of CAPNA warns. Put emphasis on the team and hospital, not a single doctor.
15) Honest sellers finish first: Finally, one factor was echoed by most of the acquirers and consultants we spoke with – being honest about your hospital’s financials makes a big difference. Several of the consultants noted that hiring the most competent accounting firm possible is a must-do for any practice owner contemplating selling in the coming years. The reason has both to do with letting you see an accounting of your practice and giving buyers a sense of you. The “wink-wink, nudge-nudge” approach to talking about what you have on your tax returns versus what you really brought home doesn’t instill a sense of confidence in buyers. “It doesn’t make you feel that they’ll be the most honest person when you’re dealing with them,” notes Donato. He added that this was his biggest red flag.
One last key factor of purchase price that many mentioned was the less-predictable strategy behind a buyer’s decision to purchase your business. While this may have nothing to do with you, or the current state of your hospital, a buyer motivated by outside factors has an incentive to pay a higher price. However, sellers may not have any insight into what this is so working to make your practice as strong, stable and growth-oriented as possible — and hiring someone who can help you understand the players — are good places to start.
1 Owen McCafferty. Vice President of Development Companion Animal Practices North America, LLC (CAPNA). Personal interview. February 22, 2017.
2 John Volk. Analyst and Project Manager. Brakke Consulting, Inc. Personal Interview. February 15, 2017.
3 Bash Halow, LVT, CVPM. Mission to Mars: What we can learn from the recent VCA acquisition January 13, 2017. http://veterinarynews.dvm360.com/mission-mars-what-we-can-learn-recent-vca-acquisition. Accessed March 1, 2017.
4 Charlotte Lacroix, DVM, JD, President of Veterinary Business Advisors. Personal interview. February 27, 2017.
5 Neil Tauber. Co-Founder and Senior Vice President of Development of VCA, Inc. Personal Interview. February 28, 2017.
6 Len Donato, VMD, DABVP. Owner of Radnor Veterinary Hospital. Personal Interview. March 2, 2017.
7 Jim Remillard, MPA, CPC, CVPM. Founder of RMA, Inc. Personal interview. February 23, 2017.