“Never in the history of companion animal veterinary medicine has there been a better time for a veterinary practice to sell.”
—Owen McCafferty, Companion Animal Practices of North America (CAPNA)
No matter what your feelings are about the trend, investment money is flowing and consolidators are taking an increasing share of the veterinary services market. VCA’s $9.1 billion sale to Mars is just one of the most recent in a line of major practice acquisitions.
“The multiples right now are huge,” says Owen McCafferty, vice president of Companion Animal Practices of North America (CAPNA), a consolidator. “Practices used to be purchased at about 70 to 80 percent 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 percent. For specialty practices the multiples are even higher based on profitability.”
But not every practice owner gets that much when selling to a corporation. So what makes the difference? We spoke with prospective acquirers and industry experts to find out. (And do you see that logo there? Click on it—click right here—for all our fantastic coverage on the topic of this brave new world of corporate medicine.)
What they want ... in a practice
Practice purchasers and consolidators aren’t all looking for the same thing, says Charlotte Lacroix, DVM, JD, president of Veterinary Business Advisors. Some won’t consider fixer-uppers or specialty practices. Others have to have a certain location or practice size before they’ll consider making an offer. Lacroix encourages prospective sellers to do their 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 interested in their type of practice.
1. High revenue. “The larger the practice the better,” says Neil Tauber, co-founder and senior vice president of development for VCA.
Many large acquirers look for a minimum of $1.3 to 2 million per year in revenue from a prospective practice but are happy to see revenue a lot higher. (Tauber notes that VCA includes practices with revenue in excess of $30 million.)
However, with so much competition for the larger practices, the market for slightly smaller hospitals is beginning to heat up, says John Volk of Brakke Consulting. Consider Len Donato, VMD, owner of Radnor Veterinary Hospital in Wayne, Pennsylvania. Donato 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]” Donato says, which means he’s less likely to be competing with the larger consolidators.
2. More hospitals. More than one practice location can drive up an acquirer’s offer. So don’t make the mistake of seeing a high-priced purchase of a hospital network, doing the math per hospital and then thinking a single hospital is—or should be—worth the same.
“It’s a fault in logic to think that,” says McCafferty. Functional and profitable networks of practices can increase value beyond what an individual hospital is worth. The work to combine those hospitals has already been done. Efficiencies may already be in place. Also, the time and energy it would take for the acquirer to find, review and purchase that many practices individually is saved. In other words, the sum is greater than its parts.
3. A good location. “We want practices that are within half an hour to an hour of our main hospitals,” says Donato. That can be fairly typical for smaller acquirers.
Other consolidators care more about urban and suburban versus rural, or that the practice is located in an area where the pet-owning population is growing.
4. Room to expand. A facility that’s in good shape and doesn’t require much additional polish can strongly influence acquirers. A building and location with room to expand might also have an impact.
What they want ... in doctors and staff
When you look at today’s corporate purchases of practices, you’ll see trends for veterinarians and team members: more doctors, a demand that the seller stick around for months or years, and a proven, low-turnover staff.
5. More doctors, not fewer. The number of doctors makes a difference: Consolidators may consider practices with just two doctors, but most prefer at least three full-time veterinarians.
“If you have a two-doctor practice and one doctor leaves, it can be a struggle for the acquirer.”
— John Volk, Brakke Consulting
“If you have a two-doctor practice and one doctor leaves, it can be a struggle for the acquirer,” Volk says.
VCA’s Tauber agrees: “We get approached on occasion by individuals running a single-doctor practice doing over $1 million,” which usually requires at least two full-time veterinarian equivalents (FTEs), he says. “If something happens to the individual, or they choose to retire shortly after we buy it, we’ve 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.
6. A practice owner who’ll stick around. A practice owner who’s willing to stay at least a year—or in some cases a lot longer—is highly desirable and sometimes required by the corporate buyer.
7. A long-lasting, efficient staff. Buyers want to see a team with employees who’ve been on board for a while and help the hospital run faster and more efficiently.
“If the team members have been there for five, 10, 15 years, even better.”
— Neil Tauber, VCA
“You want to buy a practice where the staff is stable,” says Tauber, who adds that VCA looks for practices with doctors who’ve been there at least two or three years. “If the team members have been there for five, 10, 15 years, even better.”
An efficient medical workforce can also be a big attractor, Lacroix says. Think about how your team is spending its time. Are doctors supported by a strong group of licensed technicians? This allows the doctors to focus on care and generate more revenue, possibly increasing the number of factors that attract a purchaser.
What they want ... in the financials
Many consolidators want financially strong practices to buy. The NoLo practices named a few years ago (referring to no-value or low-value veterinary businesses) will almost never bring consolidators or outside equity to the table. These buyers want the profits, the clients and straight-shooting financial discussion from the start.
8. Better-than-average profit and cost control. While most acquirers interviewed for this article said exact expectations varied by region, they did emphasize that profitability and medical staff costs are especially important.
Jim Remillard, MPA, CPC, CVPM, founder of Remillard Management Associates, says acquirers typically like to see profitability of at least 15 to 20 percent and compensation for doctors between 18 and 22 percent of what they produce. Remillard says many organizations and associations look at what veterinary hospitals are spending for leases, staffing and other costs and report these on a regular basis. When adjusted for region and demographics, these benchmarks can help hospitals understand where they stand and what ratios might be expected by—or impressive to—a particular buyer.
9. Great client retention. Seeing strong client retention data and equally strong new-client acquisition numbers can be key for an acquirer, Remillard says. However, exact numbers in these areas are a moving target in today’s economy.
“We like to see every doctor seeing at least one to two new patients every day, but that goal is becoming more and more unattainable.”
— Jim Remillard, Remillard Management Associates
“For a practice with a retention rate of 80 to 90 percent, which is pretty outstanding, the number of new clients they need to acquire to replace those lost in the past year will depend on the number of doctors and the practice location,” he says. “Historically we 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.”
10. Honest numbers. One factor echoed by most of the acquirers and consultants interviewed here? Being honest about your hospital’s financials makes a big difference. Several of the consultants noted that any practice owner contemplating selling in the coming years needs to hire the most competent accounting firm possible. Forthright accounts not only give buyers an accurate idea of your business; they also give buyers a sense of who you are as a business owner.
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 a buyer feel that you’ll be the most honest person when they’re dealing with you,” notes Donato. He added that this was his biggest red flag.
What they want ... in the fine print
These last two consolidator considerations are small parts of the overall picture, but for some buyers they can make or break a deal.
11. Associate noncompetes. While certain states don’t enforce noncompete clauses in employment contracts, most acquirers will include strong noncompete agreements as must-haves where applicable, even if they have to be put in place after the purchase, notes Lacroix. Having them in place in advance helps.
12. Long-term leases with options to buy. While some acquirers may purchase the property (and many consider it a bonus), larger consolidators typically prefer to lease.
“Buyers want to operate the business, but not be in the real estate business.”
— John Volk, Brakke Consulting
“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] need to be able to assume a lease arrangement with the seller that they can live with financially,” explains Remillard. Consolidators look for leases that have “small annual increases, or only ones tied to the consumer price index, or a very small cap of 2 to 3 percent, with an option to buy.”
One last key purchase price factor that many experts mention is the less-predictable strategy behind a buyer’s decision to purchase your business: What pressures is that particular buyer feeling right now?
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.