Richard A. Goebel, DVM, Simmons Great Lakes

For the full transcript visit: Mergers For Practices At Risk As An Exit Strategy

Trends Affecting the Practice Market While the balance between buyers and sellers seems to be in equilibrium at the moment, the next decade may reveal a different trend. The post-WWII population explosion, commonly referred to as the Baby Boom, has dramatically affected the U.S. economy for decades. The phenomenon will similarly affect our profession. As they reach retirement age during the coming decade, Boomer veterinarians will be contemplating ownership transition at rates never before experienced. It is likely that the number of practices becoming available for sale will exceed the number of buyers interested. Accordingly, if not all practices sell due to a shortage of buyers, only the most attractive practices will be expected to sell. Another trend that is measurable is the attitude of recent veterinary graduates. Fewer desire to be sole owners of practices, while many have interest in sharing ownership. Others have no interest in ownership at all.1,2 This trend, if it continues, will cause further reduction in the number of interested buyers for an increasing number of practices expected to be on the market.A positive trend has emerged in practice sale financing. Seller financing seemed to be the only choice for practice owners just a decade ago. In more recent years, many lenders have recognized the low risk in loaning money to veterinarians for practice acquisitions. Veterinarians have the lowest loss rate for loans guaranteed by the Small Business Administration (SBA). Accordingly, banks and commercial lenders will loan money secured not only by tangible assets but by anticipated future cash flows as well. This historic change in lender perspective issued in an era where 90-100% financing is not uncommon. If a veterinarian sells her practice and relocates 1,000 miles away, she would probably not relish the idea of repossessing the practice if the new owner flounders. With significant third party financing, this dilemma can be avoided. However, if the practice is “at risk” and unattractive to the marketplace of buyers, then no amount of third party financing will be useful.“Practice-at-risk” defined

One factor that puts a practice at risk is insufficient gross revenue or total sales from products and services. AAHA survey data indicates that roughly 20% of practices gross less than $350,000 per year. These practices are considered to be at a high level of risk. Unless a practice grosses more than $350K, it is hard to find a buyer and lender who will be interested. There must be sufficient gross to pay for fixed expenses, expenses related to providing service (drugs and supplies, labor), salary for the new owner and an additional stream of revenue to service the new acquisition debt. The seller that has a practice with no debt located on real estate with no mortgage may lack an appreciation for this buyer and lender dilemma.Other factors that affect salability include a species mix other than traditional small animal practice, a practice without convenient access to after hour emergency referral service, and practices that have not been well maintained (facility, equipment and/or inventory out-to-date).

Who will be affected?

Retiring “boomers” will be affected but so also will be those who are considering a career switch, a geographical relocation, or forced sale due to poor health or competing family priorities and commitments.

Having noted that only half of the veterinarians selling practices are of retirement age, it is this senior age group that is of greatest concern.4 The cause for concern is that failure to recognize the risk factors and failure to take steps to avoid becoming a practice at risk can result in a dilemma requiring several years to resolve. For the veterinarian contemplating retirement, those years may not be available.

If a retiring veterinarian puts up a practice for sale that has provided a veterinarian salary but no profit, the goodwill (intangible) value will be negligible. By contrast, a healthy practice’s value is typically ¼ to 1/3 tangible (equipment, inventory) value and 2/3 to ¾ intangible (goodwill) value. The practice with no goodwill to sell is forced to sell for the value of the equipment (depreciated) and inventory. Without goodwill value, this may mean liquidation which pays about 10 cents on the dollar.

A word to the wise

When planning for retirement, it is wise to save throughout your career and invest for retirement rather than count on the practice sale to be a major retirement funding source.5

If one needs $75,000 in spendable income in retirement, one will need roughly 20 times that amount as a principle amount from which this passive income may accrue (assumes 5% annual return). This translates into a required nest egg in the amount of $1,500,000. Not many practice sales will net this amount to a single owner.

What action will reduce the risk?

To reduce the risk that threatens practice value, consider the following:

  1. Focus on profitability. Target 12-20% as an acceptable working range for profits after paying fair market rent (yes, even if you own both the practice and the real estate) and after paying the veterinarian(s) a fair return for their productivity. The risk of owning and operating a veterinary practice exceeds the risk of owning equities (such as the S&P 500 companies’ stock). If good quality equities return 10-12% in the long term, then the higher-risk veterinary practice should provide returns that are greater, thus 12-20%. The goal for most national corporates (combiners) is to achieve 20% profitability. They understand the risk:return relationship and so also should individual practice owners understand this relationship and appropriate returns.
  1. Plan ahead. Give yourself at least 3 years and as much as 10 years to plan for ownership transition. If relocating the facility or a major remodel is needed, then 7-10 years is needed to accommodate planning, completing the project, and getting the practice back into financial equilibrium.
  1. When hiring associates, make sure a restrictive covenant is signed as well as an employment agreement. By so doing, the practice owner can protect the goodwill value of the practice so that it may be transferred to a suitable buyer at an appropriate time.
  1. Maintain a “current” facility, with up-to-date equipment and a drug and supply inventory that is considered mainstream for modern practice. Investing at least $20K per year in updating or replacing equipment should be a part of your operating budget and plan.
  1. Consider merging with a practicing colleague. If growing the practice to a size exceeding $400-500K seems impossible, consider merging the $300K practice with another $300K practice. If physical merger occurs where one facility is utilized rather than two, costs of redundant facilities, equipment and, to some extent, staff can be eliminated.

Merger and Acquisition

Merger and acquisition (M&A) is a concept used extensively in larger businesses and has been for years. It is an emerging and useful tool in veterinary medicine. Let’s look at some of the ways in which it is applied:

  1. Strategic positioning
  2. Financial efficiencies: cash flow, earnings, utilization
  3. Quality of life issues
  4. Quality of practice issues

Strategic Positioning

Acquisition of a neighboring practice can be the strategy of a practice owner seeking to expand his/her existing practice, can be used to increase the presence of his/her practice in the community, can be used as a method to upgrade the facility, equipment and/or staff of the existing practice, and can also be used as an important step in positioning the practice for future sale.

Financial Efficiencies

Financial efficiencies can be achieved through M&A in two major ways. The first is a matter of efficiencies of scale. As practices grow from smaller ($<300K) to larger (>$600K), staff salaries drop as a percent of gross, rent expense drops as a percent of gross and equipment costs drop as a percent of gross. Total documented efficiency amounts to 4.5% ($30K in a practice grossing $670K)1.

More significant efficiencies are experienced when facilities are physically merged; redundancies are eliminated in facilities, equipment and staff. Fixed expenses are reduced by 25% resulting in overall efficiency of 7.5%. Net is increased by 5-7% ($34K to $47K in a $670K gross practice)6.

Quality of Life Issues

By merging the solo practice with another practice, the isolation of solo practice (including leadership and management) can be ended and responsibilities shared. Scheduling coverage for client service, continuing education and vacations can be coordinated and optimized for continued smooth practice operation.

Financial security is increased, as larger practices are more likely to sell. At least 10% of all practices have no buyers; most of these practices gross $300K or less. From this perspective, larger is better. In addition, larger practices sell at higher prices (as a percent of gross). Ownership succession may also occur within a larger group of veterinarians within a practice…..and added option for the exit strategy. Enhanced cash flow makes the practice sale agreement attractive for commercial lender financing.

Quality of Practice Issues

Patient care is often enhanced in a larger, merged practice as the larger practice can better afford a broader array of equipment, more and better trained staff, internal consulting among doctors and expanded professional services.

Client service is enhanced in larger, merged practice as hours can be more readily expanded, services can be added (house call or delivery services), broader array of services in the practice can mean “one-stop shopping” for the client.

The critical mass of personnel achieved in a larger, merged practice can support the development of a versatile and talented health care team. Effective staff meetings, effective training programs, enhanced benefit programs, cross training among team members and the synergy of team thinking and problem solving can be implemented and utilized.

Typical Merger Scenario: Dating, Engagement, Marriage7


The initiating practice owner(s) do their own strategic planning to determine the need and purpose for proposing a M&A transaction. They contact the neighboring practice to invite discussion. Confidentiality agreements can be exercised as appropriate. Brainstorming should sort through the advantages and disadvantages for both parties/practices. Deal breakers should also be identified in this process. At the conclusion of the exploratory exercise, a vote is taken. Proceed with a letter of intent or scuttle the deal!


Next steps include obtaining legal opinion on feasibility and best route for accomplishing the objectives. Financial feasibility should be accomplished by owners (with accountant) to determine affect on all owner doctors if merger occurs and if merger does not occur. Governance must be addressed. Who will lead? What will the organizational structure look like? What will be the distribution formula? What will the new owner benefit look like?

It’s time for another vote. Hire the preacher……..or scuttled deal?


Decisions must be made regarding form of medical records, computer system, billing system, employee pay and benefits, employee positions, authority and title. Corporate culture and values must be determined. Agreement must be reached and philosophies developed that drive the management of staff, professional practices, client service and financial management. Teambuilding must be addressed to achieve “buy-in” by key staff members, to plan and accomplish a smooth transition, to address staff redundancy, to reconcile compensation, retirement, profit sharing and other benefits. Logistics of tax, accounting, insurance, etc. must all be addressed and solutions implemented.

Legal contracts that may be necessary include: purchase and sale agreement (acquisition) or merger agreement, employment agreement for doctors and key staff by the new entity, restrictive covenants, and buy-sell agreements to be exercised as owners exit. Exits by way of death or disability can be financed through insurance product.

Practice valuation of both entities must occur to determine relative value brought to the table. This becomes the tool used in establishing the pro rata ownership in the new entity.

Costs Incurred:

Legal, accounting, facilitation and valuations: $15-30K
Upgrades: computer, phones, medical equipment
Reconciling the incompatibilities (e.g., compensation and benefits)

Clients must be notified and assured that the new paradigm will serve their interests effectively. An assembly of your best clients (advisory board or focus group), newsletter, direct mail and an open house celebration are ways in which you may choose to deliver your message to clients.


If you would like to increase the size of your practice or your presence in your community, or to enjoy greater financial efficiency and utilization of practice resources, or to enjoy improved quality of life, or to improve practice quality, the M&A strategy may be the avenue for you.

Proceed carefully through each step of dating, engagement and marriage with a vote (yes or no assessment) taken at critical stages along the way.

The result can be very gratifying and rewarding.

  1. Surveys of 3rd year veterinary students at Purdue University since 1999.
  2. The Current and Future Market for Veterinarians and Veterinary Medical Services in the United States, JAVMA, July 15, 1999
  3. Brakke Management and Behavior Study, JAVMA, August 1, 2000
  4. Data source: Simmons & Associates Great Lakes
  5. Veterinary Economics, August 2003
  6. Simmons and Associates sales database
  7. Model adapted after method developed by Dr. Richard Hoerl, medical practice merger consultant.

Date Published: August 13, 2004

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