BUSINESS PRACTICE

Now, Later, or Never: Evaluating Your Practice for Sale or Other Options

By Cath Paulhamus

Business has been booming for equine veterinary practices during the pandemic, according to Mike Pownall, DVM, MBA, a partner at McKee-Pownall Equine Services.

Working from home and unable to vacation, clients are spending more time with (and money on) their horses, Dr. Pownall said at the 67th AAEP Annual Convention. The profession is busier than normal, but often working with fewer staff—and not enough graduating veterinarians are joining practices.

In this environment, older or long-term practice owners are facing burnout as they work to keep up with the demands of treating patients and running a business.

At the same time, corporate groups have stepped up their offers to acquire equine practices. As Dr. Pownall explained, these groups have been making exceptionally high offers, sometimes in the range of 15 times EBITDA (earnings before interest, taxes, depreciation, and amortization). These attractive offers are prompting practice owners to consider exit strategies earlier than they planned. Would it be better to sell to a corporate consolidator now, in this market, before these opportunities pass? If the owner is not ready, what are some alternative business models that can help ease workload, improve cash flow and ensure the practice (and its reputation) will endure?

Valuation Factors

When considering the financial impact of selling (or merging) one’s practice, it’s critical to understand how veterinary practices are valued—and how to prepare for it. Sometimes it’s a better strategy to postpone a few years with the goal of positioning the practice for a higher valuation.

Dr. Pownall explained that offers are usually based on multiples of EBITDA. In the past, it was usually 4 or 5 times, but in the current competitive market, it’s now up to 10- or 15-times EBITDA. A higher multiple indicates a lower perceived risk for the buyer. Before selling, owners can improve their position, not only by increasing their EBIDTA, but also by ameliorating aspects of the practice that appear “risky.”

When reviewing financials, corporations will “normalize” the practice’s EBITDA by comparing it with industry norms in the area. For example, if the practice is underpaying staff, the numbers will be adjusted to be in line with average salaries (thereby, lowering the practice valuation), he explained. In addition, buyers prefer consistent revenue growth and EBITDA, over 3 years, rather than extreme changes in either direction.

Corporations are essentially buying future cash flow, which depends on a number of factors—not all of them financial, according to Dr. Pownall. For example, is the practice losing or gaining clients? Are there enough veterinarians in the practice to maintain its reputation? A practice with a reputation based on 1 owner-veterinarian might not retain loyal clients when the owner retires.

Another factor to consider is staff retention—are they likely to stay and provide consistent, personalized service to help retain clients if ownership changes?

Once an owner has considered how the practice will be valued, personal/professional goals come into play. Is she or he close enough to retiring? How will this decision affect personal relationships with clients and staff?

Is corporate ownership of equine practices a positive model for the profession? Corporate owners are in the business of selling at a higher value, Dr. Pownall said. “For veterinarians, making money is helpful, but we’re also there to take care of pets. Sometimes we make decisions on what’s best for the pet as opposed to what’s best for the business financially. Maybe it’s better for the reputation of the business, or we want to take care of a particular client . . . we need to make money, but we have other goals, too.”

ALTERNATIVE BUSINESS MODELS

If the owner doesn’t need the assurance of selling quickly in the current environment, there are new business models evolving in the industry, such as a management company, shared ownership, franchise, and merger. “These are not just hypothetical models we thought of,” Dr. Mike Pownall said. “These are actually being used in the real world right now.” Choosing between the options depends on an owner’s career stage, amount of control one wants to retain, and how one views collaboration—and whether one is looking for expanded business opportunities.

Unfortunately, currently, there are few options to bring in young veterinarians or staff into ownership positions. Therefore, stakeholders want to see practice management move forward at the highest professional level, for all those committed to equine care.

According to Dr. Pownall, a partner at McKee-Pownall Equine Services, important features of these options include:

• the ability to attract and retain staff

• economies of scale (shared purchasing, administrative support)

• increased profitability (EBIDTA)

• decreased risk

• options for an exit strategy.

Management company. Practices that decide to work collaboratively may create a management company to handle administrative burdens, such as payroll, marketing and insurances. The assets and value remain with the management company, which can be owned by the veterinarians or even staff members, and it has a contract with each of the practices stating that most of the combined profit flows to the management company. This pool of resources allows for better health insurance, purchasing power and other services.

Shared ownership. In this model, there is also a management company, but with shared ownership among all the participating practices (each one owns shares of each entity). For example, there could be a central hospital hub, surrounded by satellite clinics. “By owning a little bit of each other, we’re incentivized to make sure that other clinics and the hub are doing well,” Dr. Pownall said. “You don’t mind referring because you have a stake in it, and when they do well, you do well.”

Franchise. Practices that have developed something special or innovative may want to replicate that idea and expand to areas with untapped opportunities. Owners can scale and monetize what they’ve established. Or provide an associate with a way to jump start a new practice. With franchise models, owners can sell their concept for an initial fee plus ongoing royalties The parent company handles equipment, marketing and brand management, along with other core support systems.

Merger. Multiple practices with synergies can merge, working together and sharing resources such as equipment, but functioning independently under a management company. They can be sold eventually as one company.