As a manager and a consultant, I have long coached, “start prepping for sale the day you unlock the door.” Typically, this involved using a standard veterinary chart of accounts; keeping good financial, medical records, and receipts; and staying up-to-date with equipment and medical advancements, along with growing a positive culture and team longevity. Today, practice transactions have become much more complex. As consolidators and corporations become close to 50 percent of buyers, additional preparation is necessary to maximize the price practice owners can receive.
For this article, I was able to reach out to attorneys, practice brokers, lenders, and valuation specialists to ask them what red flags they have encountered in their work with buyers and sellers. I was also able to tap into some connections in corporate medicine to get their perspective. There were certainly some surprises and very interesting stories.
First of all, if you want your hospital to be attractive to a buyer—grow. The practices that have three or more associates are the most desirable for corporates. This gives the purchaser a good chance of maintaining practice revenue. Being in a growth trajectory is one of the attributes buyers look for as the value of the hospital with high multiples is often a projection of its value five years in the future.
Rural and one-to-two-doctor hospitals are struggling to find interest from most corporate groups, although David McCormick, MS, CVA, from Simmons Veterinary Practice Sales and Appraisals says doctor-to-doctor sales are still common for these smaller hospitals. The best way to succeed in a sale of a smaller hospital is to hire and grow an associate who has interest in ownership.
McCormick also noted most doctors don’t want to move to purchase a hospital, but there are many highly profitable and desirable practices available if they are willing to do so. All my resources shared the No. 1 roadblock to a successful sale is associates who will not stay post- purchase.
Attorney Mary Mongioi, a partner at Forchelli Deegan Terrana LLP, shared one practice owner failed to disclose his highest producing associate had turned in her 90-day notice prior to the sale. Once the sale was finalized, the buyer discovered she was leaving. This caused Mongioi’ s firm, which represented the buyer, to rollback a $14-million deal three months after the closing, because of the non-disclosure.
It’s important to understand that final is not “final” when fraud is involved; if the seller had engaged a veterinary-specific attorney to guide him/her instead of a local “friend,” he would have known this was a problem to solve before closing.
Practice broker Gary Ackerman, DVM, of The Ackerman Group, said associates can absolutely nix the deal by simply not agreeing to sign an employment contract with the new owner. He said it is important to make sure your associate contracts are “assignable” as a pre-sale planning strategy. Many practice owners have found by sharing some of the sale proceeds with their highly valuable associates are able to persuade them to stay with the practice.
Some buyers are also incentivizing associates by giving them earned equity in the practice or the parent company. These “golden handcuffs” are effective in keeping continuity and stabilizing the revenue, thus maintaining the value of the practice post purchase. This is an advantage to the associate as they gain great benefit when the practice profitability increases.
The practice owner who chooses to sell only a portion of the practice and continues to work can also see this windfall. Dr. Ackerman says his group keeps track of pre- and post-purchase values, and the increase in value is almost assured to increase substantially.
The second major roadblock to a sale is poor financial records. Mike Daly of First Command Bank said, as a lender, this is one of their biggest hurdles. They even refer practice owners to professional bookkeepers who will clean up their books at an average cost of $5,000 to $8,000. It is not uncommon for practice owners to fudge a little on their expenses to try to save on taxes. My CPA and CVA (certified valuation analysts) friends shared they have seen RVs, airplanes, $50,000 in farm fencing for a small animal practice, $60,000 for continuing education (his daughter’s college education), and even a $17,000 guitar written off in the books they have reviewed when doing a practice valuation.
Valuation experts from the Veterinary Valuation Council of VetPartners.org all agree they expect to find some of these. All odd expenses that can be proved will be added back to the practice’s profit by a valuation expert, as they are abnormal costs the new owner will not incur, rather they are creative tax write offs in privately held companies. They advise if you are going to write off items such as paying non-working family members (or not paying those who are working), personal house cleaning or landscaping your home, you must keep records and receipts.
However, if you have no receipts to prove these are personal rather than business expenses, then every dollar you cannot add back will lose you the multiple someone is willing to pay for your hospital. Since multiples for highly desirable hospitals have been as high as 18 times or more, every unproven dollar is costing you $18 in sale value. The experts recommend you start keeping very accurate and “clean” books at least two to three years prior to your planned sale date. Another caution is if there are too many “add backs.” The buyers feel the adjusted data is unreliable and this will certainly reduce the sale price.
Along this same vein, appraisers warn of unreported cash. This was certainly more common in prior times when clients used cash to pay. McCormick has heard as much as half a million dollars in cash taken by an owner. Still, every bit of unreported cash devalues the practice and can cost the owner five to 25 times the value of the dollars taken in lost sale value.
Another big roadblock to sale is taxes. Practice owners are often getting what Daly calls “generational money.” These are sums so large they will not only cover the practice owner’s retirement years, but also leave a significant inheritance for several generations of their family. This kind of money, though, comes with a very large tax burden unless strategies are in place to mitigate the costs.
Dr. Ackerman said if practice owners are currently considered a “C” corporation business status, the tax burden could be as much as 50 percent of the sale price. His advice is to contact an attorney and move to an “S” corporation status prior to the practice sale. He said “C” corps were very popular in the 1970s and ’80s, so older practices should look into how their company was set up and make sure it is changed.
Daly also said practice owners need to have a well-planned strategy with a financial advisor who understands these deals and can help owners reduce the taxes paid from these windfalls. Importantly, the strategy should be in place long before the closing.
Get things in writing! This even applies when selling between family members. McCormick said it “vaccinates the transaction.” In my work with practices as a consultant, I have seen “handshake” partnership agreements with vague language about decision-making responsibilities, behaviors, time commitments, medical production, business duties, etc., which have led to resentment and even a complete breakdown of the partner’s relationship and the practice’s health.
Time to let go
Selling your “practice baby” is emotional, and it is often challenging to let go if you have always been the primary decision maker. Commonly, corporate and consolidator buyers want practice owners to continue to work, especially if they produce 50 to 75 percent of the medical revenue. The typical time frame is one to two years for general practice and up to five years for specialty.
“Time to check your ego at the door,” says McCormick. The practice is no longer going to be centered around the former owner, and having a discussion with yourself about how this will feel is very important. To sell, you must be mentally ready. This sentiment was mirrored by a representative of a corporate practice group who wished to remain anonymous. He said about 20 percent of practice owners who sell to corporate are unhappy with their sale. This occurs when the corporation begins to make needed changes to protocols. These doctors thought they were mentally prepared to hand over the reins, alas the reality was more difficult than anticipated.
All my sources say it is vitally important to work with professionals. These deals are complex. Veterinarians are notoriously “do it yourselfers,” but in this instance, investing in professional guidance can add hundreds of thousands of dollars to the purchase price. Numerous pitfalls can occur, and there are many negotiation points a professional will be able to win for you. This will usually be the largest and most important transaction practice owners will have in their lifetime, and there are multitudes of ways it can be diminished or even ruined by lack of knowledge.
Buying by many corporations is slowing, per my sources. Many are braking in anticipation of a slowing economy. Others are on hold for recapitalization and to build a stronger support and infrastructure before expanding further. Multiples are also coming down, more in line with past valuations, but they are still very attractive to sellers. I advise practices interested in selling to have a professional veterinary valuation expert do an appraisal.
It is important to know where you are and where you need to go to get the price you want. Recently, a great deal of my consulting is working with practices preparing to sell because they understand maximizing their practices profitability, team retention, five-star reputation and efficiency will reap great rewards and secure a comfortable retirement when it is time.
If you would like to view a helpful webinar on practice sale, visit https://ackerman-group.com/selling-your-practice-what-you-should-know-webinar-2022.
Note: Thanks to Dr. Gary Ackerman, David McCormick, Mike Daly, Cammie Bailey, Dr. Karen Felsted, Denise Tumblin, and the Veterinary Valuation Council for their work in helping veterinarians successfully value and sell their practices, and for sharing their expertise and stories with me for this article.
Debbie Boone, BS, CVPM, Fear Free Certified, has worked in the veterinary profession for more than 35 years. She has experience in the management of small animal, mixed animal, specialty, and emergency practices. Her business, 2 Manage Vets Consulting, helps practices develop team communication and business skills, enhance patient care, improve profitability, and increase practice value. Boone strives to improve the lives of animals by using her expertise to improve workplace culture and the well-being of veterinary professionals. She lives in North Myrtle Beach, S.C., where she spends her off-time in her garden, at the beach, or on the boat.