Who's buying? Who's selling?

Profession has changed, but entrepreneurial spirit largely remains
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The veterinary profession has undergone some profound changes in the past few decades. Women now represent a majority of practitioners. The Great Recession impacted the economic realities for many veterinarians. And corporate-owned practices are becoming an increasingly familiar part of the veterinary landscape.

So, how have all these trends affected the market for veterinary practices?

According to interviews with a handful of veterinary business advisers, the market for veterinary practices has undergone some profound changes in the past few decades, but in other ways, it has stayed the same.

Swinging of the pendulum

For one thing, owning a practice is more difficult than it used to be 10 or more years ago, according to Dr. Karen E. Felsted, treasurer of the VetPartners association of practice consultants and president of Dr. Felsted Veterinary Consulting.

Troubling signs emerged in the early 2000s. That was the start of clients visiting practices less frequently, coupled with the number of clinics increasing. But because the economy was good at the time and veterinarians could raise fees substantially to counterbalance declining transaction numbers, it wasn’t seen as a problem.

Illustration: Who's Buying / Who's Selling shingles“Now, post-recession, you have to work harder to make a practice financially successful,” she said. “You have to pay attention to the business side of things. If you don’t want to, then you can hire a manager to do that, but even so, you have to manage the manager.”

David McCormick, veterinary practice appraiser and practice management consultant for Simmons Veterinary Practice Sales & Appraisals, notes that while the market for practices may not be what it was 15 to 20 years ago, the economy did not have much of an impact, save for one area—sellers’ willingness to retire. Many older owners have hung onto their practices longer to recoup retirement money they lost when the stock market tanked.

As for buyers, multiple advisers say it’s a myth that fewer veterinarians want to buy a practice than before or that women aren’t as inclined as men to be owners.

“Half of buyers are women. They can be just as successful as their male counterparts. Women are buying and selling; there is no gender difference,” McCormick said.

These conditions have created a serious seller’s market. Melisa K. Edwards, vice president of veterinary practice finance at Bank of America, says for the past three years, there’s been a drought of listings throughout the U.S. of good veterinary practices, which she defines as those with good cash flow and over $500,000 in annual revenue. Edwards says she is seeing five to 10 pre-qualified borrowers for each practice on the market.

“There’s a flood of associates out there. The (veterinary schools) keep graduating them year over year, and we’re seeing downward pressure on associate salaries while student debt is at an all-time high,” Edwards said.

“There are a number of younger doctors out there who realize the only way they are going to get ahead is to own a practice, and there are not a lot of listings.”

However, she anticipates this pent-up supply will be unleashed on the market in three to five years “because at some point, (older owners) have to sell.”

“If you want to own a practice and can’t find one right now, if you can hold on, there will be a lot of opportunities in the next couple of years. I would caution against rash decisions or coming to terms that are going to deteriorate your financial position,” Edwards said.

Deciding factors

Dr. David King, charter member of VetPartners and owner and president of Simmons Southcentral, says the categories that affect a practice’s desirability are profits, location, growth, and transition of goodwill.

A potential new category may be the type of practice. Buyers have increasingly been shying away from mixed animal and large animal practices in favor of small animal practices, particularly in urban areas.

“Thirty or 40 years ago, most veterinarians were coming out of rural societies—farm boys, essentially. But, as society is becoming more urbanized, so (are) veterinarians. The small town vet is becoming few and far between,” Dr. King said. “The sad thing is many mixed and large animal practices are very profitable.”

Equine practices, too, can be difficult to sell but for a different reason—variability in the transition of goodwill.

“If you have a five-doctor practice with a single owner and he only sees 20 percent of clients and is selling to an associate, that goodwill is not as closely tied to him because he’s not seeing all the clients, so it’s less of a risk (to the buyer). Compare that to a mobile equine practice where the owner is seeing 100 percent of clients, 100 percent of the time. Equine clients love their vet, meaning the goodwill is closely tied to the DVM. So if someone buys this mobile clinic, the risk to that buyer will be higher due to the fact that the clients may not transfer well,” Dr. King said.

That’s not to say that companion animal practices can’t have their own challenges. Dr. Felsted has seen a number of deals fall through when the seller thought a practice was worth more than it actually was. McCormick also says feline-specific, holistic, and specialty practices can be harder to sell because of a smaller pool of potential buyers.

McCormick says it’s a myth that no one is buying solo practices. In fact, buyouts from one owner to another owner continue to be the most common ownership transition option, according to McCormick and others, as they are often the simplest.

Many of the advisers added that owners incorrectly assume that their high-grossing or multiowner practices can only be sold to corporate entities.

In fact, a number of private buyers will buy a practice only if it is grossing more than $1 million, McCormick said.

Edwards explained, “You’re not going to place someone with $250,000 in student loans and a $500,000 mortgage in a practice with $400,000 in revenue. The larger practice owners probably believe that their associate can’t buy the practice because of their debt, but the larger practices are exactly the ones their associates are more likely to afford due to better cash flow.”

Veterinarians, in general, are very debt-averse. They get afraid of the zeros, and the way they look at the practice is like a home. They think, ‘I can’t afford it because my payment is X,’ but as long as the practice is priced right, it should be able to support itself, whatever price is on there.”

Options to consider

While buyouts may be the most common route to practice ownership, associates have other options to consider.

Dr. King recommends buy-ins, or owning a certain stake in the practice, for “someone who wants to be an owner but doesn’t have the skill set or confidence to be a 100 percent owner out of the gate.”

“The person (buying in) is essentially getting their share for free as long as they don’t screw it up. The negative side for the seller is they’re giving a certain part of the profits away. The positive side for the seller is the intangible side of things,” Dr. King said. “I’ve seen an associate become a partial owner, and all of a sudden, profits start going higher because they’re starting to care about the expense side of things.”

Buy-ins can also be a good idea for mixed animal practice owners as a planned exit strategy, Dr. King said.

He gave the example of a practice in West Texas where the owner hires recent graduates from Texas A&M University and pays them a generous wage, around $100,000 annually, in the hopes of having them set down roots in the area. The owner has been so successful that he’s gone from owning a one-doctor practice to owning a five-doctor practice with the expectation that one or more associates could own it when he retires, “which is great for that type of practice because it would be hard to sell otherwise,” Dr. King said.

Multiowner practices have been gaining in popularity as associates desire ownership but want to retain “normal” hours. McCormick strongly recommends an attorney experienced in veterinary practice sales for multi­owner operating agreements. “Multiple owners can be good; just make sure everything is updated from the last entrance or exit,” he said, adding that all financial transactions should be transparent for ongoing success.

Most of the advisers interviewed for this story generally advised against startups. That’s because there are few areas that need another practice, Dr. Felsted said. One example might be a downtown area that formerly didn’t have many residents but now does after a revitalization.

Startups prove to be more difficult than buy-ins or buyouts because practitioners have to attract clients and, presumably, take them from another practice. In addition, Dr. Felsted has heard from banks that they expect startups to generate only $250,000 to $400,000 in the first year.

“When you consider that a productive veterinarian in practice is personally generating more than $500,000, you can see in the first year of the startup that maybe that veterinarian won’t generate the revenue they thought they would. And I agree, I think it’s harder to generate higher ends of revenue in the first year of a startup than it used to be. These owners still have expenses like loan payments for renovations and equipment,” she said.

Startups may be more realistic for a veterinarian with a spouse who works and can support the family, Dr. Felsted said.

An alternative to startups, buy-ins, and buyouts is acquiring a nearby clinic’s client records. This is an option when a practice owner is nearly ready to retire, is moving away, or doesn’t want to be an owner in the area any longer.

Dr. King says these transactions tend to be very profitable for buyers, but with a few caveats. “It has to be the same demographic and within a certain drive time, and you need to transition clients properly. But, if you do it properly and you have excess capacity in your practice to handle the extra clients without hiring more staff, you can get close to 100 percent of clients without increasing fixed expenses. The only thing it costs to produce the income would be the cost of drugs and supplies and the salary of a DVM to produce the income, so the profit margin is very high—in the ballpark of 40 to 50 percent,” he said.

Motivation beyond money

Notwithstanding all the financial benefits that can come with owning a practice, McCormick says it’s important to note that veterinarians who go into ownership for money alone don’t last.

“You have to want to be an owner. That entrepreneurial spirit about wanting to build something bigger than themselves. Because it’s not a 9-to-5 job. When pipes burst in the winter or a tree falls on the practice or a staff member leaves, you have to be there and fill in. That drive comes from something bigger than ‘That’s my job,’” McCormick said.

The AVMA offers a personal financial planning tool to help veterinarians build an estimate of their budgetary needs so they can plan how to repay debt while saving for the future.

The Association also has a personal financial planning resources page that includes links to a retirement calculator, information on student loan repayment basics, and a veterinary salary calculator, which allows practitioners to see percentile breakdowns of salaries based on practice type, years of experience, and owner versus associate status.

Related JAVMA links:

Corporate practice becomes part of the landscape (Dec. 15, 2011)

The economic state of small animal practice (May 15, 2010)