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Practice sales, loans weathering the storm

Money, credit available for those with good valuations, brokers say
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Nov 01, 2008

NATIONAL REPORT — Anyone wishing to buy or sell a veterinary practice shouldn't have any more difficulty doing so than they would have had before the recent sharp downturn in the U.S. economy.

That's the word from some leading practice brokers and lenders contacted by DVM Newsmagazine. They say there's sufficient money to lend and very little change in credit terms, with veterinarians still being considered among the most creditworthy.

Any practices that are difficult to sell likely were already in that position before recent Wall Street volatility and the $700 billion bailout of banks, brokers say.

"I can't say what might happen over the next few months, but so far activity for us has stayed about the same. The only real challenge I have is finding good, saleable practices that are worth buying," Dick Goebel, DVM, president of practice brokerage Simmons & Associates' Great Lakes division in Monticello, Ind. Up to one third of practices already on the market for some time may be virtually unsellable, Goebel says, depending on their location, type of practice and profit history.

But, in general, "When I asked the three lenders we use most often whether anything that's happened in the financial markets has changed business patterns for them, two said absolutely not — that nothing has changed — and the other simply dropped their fixed (loan) rate guaranty period from five years to three but otherwise terms are the same and activity is steady," Goebel says.

Two field sales managers for Matsco, a practice-lending arm of California-based Wells Fargo Bank, and a regional sales manager for Banc of America Practice Solutions, a division of Bank of America that makes loans for veterinary-practice acquisitions and expansions, had similar comments.

"Activity is normal for us. I'm doing plenty of acquisitions this year. Rates may be up a bit and credit a little tighter in places, but we're busy. Veterinarians are a good credit risk," says Jim Baum, field sales manager for Matsco's MidAtlantic division.

"We have money to lend. That hasn't changed in the last two or three months," says Tom Baker, Matsco field sales manager for the Midwest region. "Some traditional commercial bank lending may be pulling back from (veterinary) acquisitions or start-ups. The market is more conservative and cautious, but for us things are basically moving about the same."

Despite the overall credit crunch, existing veterinary-loan clients in good standing can even get short-term loans for emergency needs, Baker says.

What impact the current downturn might be having on client transactions isn't widely known yet, but one lender says it's probably not severe, at least not in his area. "People are still going to bring in their pets," Ian Widensky, Northeast regional sales manager for Banc of America Practice Solutions, who is based in New York City.

"Our business hasn't slowed at all. We've had more in the last two or three months than we had in the early months of this year. We've even financed seven start-up practices in the region from Maine to Virginia."

Practitioners see current market conditions as more of a reason to sell, Widensky says. "They know that practice valuations are down, now averaging about 75 percent of two years' average gross, where in the past it was up to 100 percent of two years' average gross. So they're telling themselves now is the time.

"We haven't tightened up credit terms because this is our niche. Our portfolio is doing well. We did $90 million last month. And delinquencies are under half of one percent."

The low delinquency rate bears out veterinarians' reputation as good credit risks. Simmons' Web site says that Small Business Administration (SBA) loan performance data indicate that veterinary-practice loans are in the "lowest risk" category.

But, explaining the challenge of finding saleable practices, Goebel says "about one third are not saleable, and of the remaining two-thirds about a third sell quickly." Selling a practice is contingent on three key factors — location, practice type and financial viability, based on gross revenue, he says. The average practice yearly gross is about $800,000, and several are in the millions, Goebel says.

"But if the yearly gross is $300,000 or less, it's going to be very hard to sell, if at all. That seller merely has a job to sell, not much else except equipment and other tangibles. That's because a prospective buyer needs to turn a profit and service the debt," he says.

What he terms unsellable practices tend to be in rural areas, with no easy access to an emergency clinic, Goebel explains.

"And mixed-animal and equine practices usually need an internal buyer — a partner or associate."

Goebel's estimate that as many as one third are unsellable "might be a bit too high," Baum says.

"But it's true that many, especially older, doctors are staying on because they know their practice has seen better days. They can't sell it for enough to allow them to retire."

What about start-up practices in the current economic climate?

"We don't deal with start-ups, but I'd have real pause in launching a start-up right now," Goebel says.

"It's probably not a good idea until we get through this current situation. With a start-up, on Day 1 you have no business; you have to grow it and yet you still have obligations. The lenders we know encourage start-up people not to quit their day jobs, but to try to keep earning money, maybe as a part-time associate, while gradually building the new practice. It's really a terrible time right now for start-ups, but for existing practices not so bad."