As I sit here with writer’s cramp, I began to ponder messages that owners and associates may want to hear and consider going into 2019 and beyond.
Buyers still available
Although the swarm of corporate invaders continues to grow almost exponentially, there are many, many (the great majority) practices that do not meet the corporate target level of interest (typically multi-doctor practices grossing in excess of $1.3M). The remarkable thing is that, in spite of the myriad of articles, advertisements and the spoken word, we continue to hear comments from the non-target owners that, “My associate wants to buy it but has no money and can’t afford it.” So the owner is frustrated that he/she has no buyer. While this may be true for low grossing practices (getting to be under $400K) that provide insufficient Net Cash Flow to service debt and still provide a reasonable personal income to the buyer (typically exceeding $100K), it is certainly untrue for a practice grossing over $700K.
You see, the Cash Flow is the critical tier of net income that determines the maximum price one can afford to pay. If the practice is valued and priced correctly, there should be ample Cash Flow to support the price debt service and a reasonable personal income to the buyer/owner. So the practice actually buys itself. Or said another way, the buyer uses the practice’s Cash Flow to buy the practice.
And the good thing is that there are many lenders with money to lend on those transactions with ample Cash Flow behind it. Although some cash down and /or some small liquidity are an enhancement, absolutely neither is a necessity for a buyer to have to purchase a practice.
So when you are considering buying a practice, know the Cash Flow and how it is defined and created. Quite simply, view Cash Flow as a bucket of money that is available from the practice for the owner’s discretionary use. From the lenders’ perspective, it services debt and the buyer’s personal lifestyle requirements. In determining Cash Flow, it is important to have someone on your team to know how it’s done properly.
Future of companion animal practice ownership
Although there are dozens of corporate buyers, they are typically targeting two-doctor and above practices grossing in excess of $1,300,000 with good earnings and located in suburban areas. I think that there will always be a place for private practice. Veterinary medicine is a very personal and service-oriented business, and there will always be clients seeking practices that can serve them on a personal level.
- A recent Brakke study indicates that in the next five years 75% of practices will still be privately owned. However the 25% corporately owned will represent 50% of practice visits.
- Considering that there are approximately 28,000 companion animal practices, approximately 15,000 will meet corporate criteria. Currently corporate consolidators own approximately 3600 practices. Within five years that figure should approximate 7000, leaving about 21,000 under private ownership. Of these, when sold, will be to internal partners and associates and to fair market buyers.
With corporate purchase value/prices (We at Simmons call this “Corporate Investment Value”) far exceeding the fair market price that private veterinarians are able and willing to pay, we at Simmons are experiencing more and more practice owners less sensitive to corporate sale in favor of the windfall. Money talks.
Want to own be an owner?
This is creating a problem for new practice owners who are unable to compete with the corporate market in these high target practices (which everyone wants). So what is one to do? We recommend several measures:
- Lower your target standards to eliminate corporate competition
- Look for a poorly performing practice that has the potential to grow into your dream practice.
- Work with the owner to purchase or buy-in
- Widen your area scope and be willing to relocate
- Buy a smaller practice then buy another nearby and merge the two under a single location
