At the 2022 AAEP Convention, Dr. Andrew Clark explained the landscape of corporate entity purchases of equine practices. To begin, Clark explained that selling an equine practice at the full appraised value is a relatively new opportunity. Historically, they transacted at a discounted rate because these practices were not a liquid asset. There was virtually no marketplace in which to sell these practices other than internal sales to associates. “Practice owners had to ‘grow their own’ buyers from the associate pool,” he said. They calculated the full value of the practice with business valuation formulas commonly used for all types of businesses. Then, they applied a marketability discount to the true value to arrive at the price at which there was a willing associate buyer and a willing seller, he explained.
Equine Practice EBITDA
Recently, Clark continued, a new market for equine practices has developed. Now, corporate investors believe that a practice is worth more than its appraised value. Those corporate investors have begun acquiring equine veterinary practices at those high multiples. He explained that the practice buyer is buying a stream of cash that the business will deliver into the future. The unit of measure commonly used to value that stream of cash is Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
“The practice’s EBITDA is the basis of what is being sold to the buyer,” he said. “The value of a practice is usually calculated as a multiple of the businesses’ EBITDA.” The multiple in the equation depends on the level of uncertainty that the business’s cash stream will grow over time. By decreasing the uncertainty of future delivery of that stream of cash, a seller can maximize the value of their practice.
Level of Uncertainty in Equine Practice Sales
Because the value is based on the dependability of the EBITDA, the level of risk of these future returns being realized can substantially impact value, the speaker stated. There are many factors that increase or decrease the level of uncertainty. Some of the common risk factors include clients’ loyalty to the practice owner(s) rather than to the practice, no successor veterinarian identified to be a leader after the owners sell the practice, a random pricing strategy that is not based upon on cost of providing a service, poor financial policies and high accounts receivable, inadequate inventory management, poor regulatory compliance with controlled substance and OSHA requirements, and inadequate medical records not in compliance with the state board of examiners’ regulations.
Best Practices for Successful Sale of Equine Practice to a Corporate Entity
Whether or not an equine practice can be sold to a corporate entity and at what price depends on the practice size and level of future certainty in profitability, Clark continued. “The three primary objectives of the practice ownership team contemplating sale to a corporate aggregator should be to maximize EBITDA, increase client loyalty, and establish a veterinary successor as the leader of the veterinary team,” he stated. In fact, these should be the primary objectives in managing any veterinary business whether it is for sale or not. To maximize financial return to the owner, he explained, the key is to identify and mitigate the risks that impact cash flow, profitability and regulatory compliance consequences.
Mitigate Cash Flow Risks
To maximize EBITDA, Clark continued, the practice owner must realize that the revenue and cash flow generated by the caseload of a practice are influenced by pricing, discounting and collection policy. “The higher the prices, the lower the discounts and the sooner money is collected, the more EBITDA the practice can earn,” he stated. “A major obstacle to healthy EBITDA is the tendency of veterinarians to assume responsibility for subsidizing an expensive hobby of their clients.”
Focus on Client Loyalty
With regard to client loyalty, the speaker emphasized that it must be to the practice, not to the individual veterinarian(s). “Personal brand loyalty adds virtually no value to a buyer, while practice brand loyalty has tremendous value,” he said.
In closing, Clark said, “The multiple used in the valuation of a veterinary practice will be proportionally higher in relation to the success in establishing client loyalty and a successor lead veterinarian.” Corporate buyers are looking for high profit, loyal clients and a veterinary team with good leadership that will remain into the future, he concluded.
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