Mike Pownall, DVM, MBA, is a partner in McKee-Pownall Equine Services in Canada and a partner in Oculus Insights. That company is focused on helping veterinarians and other members of the animal health care industry improve their businesses.
Pownall emphasized that there are different steps you can take to make your practice more attractive to purchase depending on your age and how long until you want to retire. Are you 65 and just want to get out quickly? If you have a three-vet practice that is doing well, then it should sell easily. However, if you are a solo practitioner, then other practices in the area can just “wait you out” and when you retire take over your clients.
Topics covered in this podcast include:
- What you should do for a “planned retirement” sale of your practice (i.e., I want to retire in five years)
- Pre-retirement sale of practice (i.e., what can you do to make your practice more profitable and therefore more attractive to private or corporate purchasers)
- Purchasing and consolidating another practice or multiple practices (i.e., you are 5-10 years from retirement and see the opportunity to incorporate other practices into your business, thus making your company more attractive for purchase in the future)
- Corporate options
Pownall warned that cash flow is one of the top benchmarks that private or corporate investors will look at to determine how much you will receive for your practice. New owners want a history of multiple years showing consistent and rising cash flow.
EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure of a company’s overall financial performance and health. Often you will hear of the “multiple” of EBITDA that is offered for purchasing a company. Pownall said if your profitability is 10% then your EBITDA is $100,000 from $1 million in sales ($1,000,000 x 10% = $100,000). If you are offered a multiple of 5, then 5 x $100,000 = $500,000.
However, Pownall advised if you know ahead of time that you will be selling your practice and can focus on increasing your profitability, then you can see a tremendous increase in what you can get from the sale of your practice.
If you increase income to $1.5 million and your profitability is 15%, then you could see a sale price of $1.25 million ($1,500,000 x 15% = $225,000; with a multiple of 5 you see $225,000 x 5 = $1,125,000).
That’s an increase in sale price of $625,000!
If you are interested in purchasing an incorporating another area practice into your equine veterinary business, you probably should look at buying based on production. That would mean the selling veterinarian might have a purchase program that looks like this:
- Year 1—selling practitioner gets 10% of gross revenue collected
- Year 2—selling practitioner gets 8% of gross revenue collected
- Year 3—selling practitioner gets 6% of gross revenue collected
This type of program incentivizes the selling vet to transition clients to you.
In most corporate purchases, the investment group or equity group is buying cash flow. Their goal is to purchase multiple practices, earn money for investors, then sell that group of practices to a larger group.
There are some corporate groups (such as MARS) that purchase veterinary practices as part of their overall business plan and don’t plan to re-sell the group of businesses they purchase. Other corporate buyers are looking to take advantage of corporate economies of scale, which generally is easier with small animal clinics than equine practices.
No matter how you sell, there usually is a one- to two-year transition period built into the purchase contract. That means the selling veterinarian will have to stay that length of time to get the entirety of the purchase price. A veterinarian who sells for $1 million might get $750,000 up front and if he/she meets the goals of the purchase contract then he/she will receive another $250,000 at the end of the purchase period.
As you can see, there are lots of little curves and even dead ends in the consideration of selling your equine veterinary practice. Listen to this podcast and talk with your financial advisors to learn how to best position your practice for sale.