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With the pandemic behind us, veterinarians are now faced with a myriad of other concerns, including overworked staff, having to give out raises to stay competitive, having to raise prices to offset those raises, accounting for increased costs from suppliers all while overall clinic visits are trending down. This is a recipe for any veterinarian to encounter a sleepless night or two!
It might even be enough to make you wonder, “what is my veterinary practice worth?”
Despite its challenges, the vet industry as a whole remains quite favorable in the eyes of investors. With the continued humanization of pets, the industry is poised to grow significantly over the next decade, proving itself resilient in spite of the pandemic.
You may have heard that valuations are just a simple formula:
EBITDA x Multiple = Purchase Price
There’s a bit more to it than that…let’s explore the reality behind how practice value is determined. It’s more than just a multiple.
Where to start?
Before you get into the numbers, take some time to get to know the partners of the organization you are looking to partner with. Yes, the economics are crucial to your final decision, but appreciating the long-term relationship post sale is equally important, especially as it relates to protecting the legacy & culture of your hospital. Can your potential partner help you grow? Do they have the tools and the track record to back it up? What can they offer your associates and staff as part of the partnership? Hearing this from a variety of current partners can help give you a realistic view of the fit with your team and culture. The entire partnership process can take 6-8 months to complete, so it’s best to start those conversations early.
At AmeriVet, all our practice valuations are done in complete confidence under a Non-Disclosure Agreement (NDA), so you can rest assured your information is protected. There is no cost or obligation to you at any point during the valuation process.
Some documents we will ask you to provide initially are:
- Profit & Loss Statements
- Production Reports
- Payroll Reports
These documents will help us give a foundational view of your practice performance and help us get to know you a little better.
Let’s dive into the marriage between buyer and seller, which from a valuation perspective is the relationship between what a seller’s business generates in EBITDA and what a buyer is willing to pay expressed as a multiple of that EBITDA.
It stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a common benchmark used across many industries to determine the operating cash flow of a business. This number will be different than what your accountant provides you on your profit and loss statement, so it needs to be adjusted during the valuation process.
At AmeriVet, we view this calculation as a sustainable figure that includes normal operating costs and reflects your current payroll for the practice. Through a transparent discussion, we will work with you to obtain your sustainable EBITDA calculation. Because our valuation is collaborative in nature, we can discuss any adjustments (one-time expenses, renovations, new hires, or expenses that are outside of typical margins) to get to a figure with which you are comfortable. We employ a neutral third-party accounting firm during our due diligence process to validate our calculations.
Helping practice owners become more profitable is the bedrock of what we do. For example, a highly profitable practice may have optimized their cost synergies through historical cost controls & steady growth, but could benefit from support in recruiting and mentoring to grow their EBITDA. Conversely, a practice owner may come to us with a higher Cost of Goods Sold (COGS) margin and benefit from using our corporate purchasing power to lower those costs and run a leaner business, without impacting patient care.
We’ve helped practices increase their EBITDA through margin expansion opportunities like:
- Making a price adjustment
- Increasing their service mix (adding dental for example)
- Increasing their revenue by adding clinic hours or additional staff
- Reducing their COGS (suppliers, purchasing group)
AmeriVet has a large, highly successful recruiting & operations team to help ensure your continued success and bolster your growth.
From a buyer’s perspective, there are two key variables to determining a multiple:
- What synergies and growth drivers make this a good long-term investment?
- What are the risks involved in acquiring this business?
Given the labor market of today and an ongoing veterinary shortage, much of the sensitivity around sensible acquisition depends on recruiting. There is significantly more risk in acquiring a hospital that has lower DVM replacement opportunities. This could include solo practitioners, emergency/overnight hospitals, specialty practices, or even very high producers who are difficult to replace.
Your location may also be a risk if it is in a rural area, making it difficult to attract talent, or your facility is in disrepair. Those factors will likely garner a lower multiple.
Conversely, a hospital that demonstrates consistent growth, low staff turnover, and responsible management practices generally yields multiples on the higher end. These practices generally see the opportunity for further growth by adding a partner like AmeriVet who can amplify their success.
Finally, keep in mind your multiple can be comprised of several things and is not always paid 100% in cash. You may see a portion paid in cash and a portion paid in preferred shares/seller notes and parent equity (TopCo.). It is important that you have all those options available to you.
The economy might affect both your practice profitability and the multiple you receive for it. Rising interest rates have had a dual effect on both.
On the seller’s side (EBITDA), this means less disposable income for clients and more sensitivity to price increases given inflation. It also means suppliers are passing along higher costs and staff are asking for raises to support their families. This puts downward pressure on your profit margin.
On the buyer’s side (Multiple), the rising cost of borrowing means access to debt for acquisitions becomes more costly, reducing investor returns. Many consolidators benefited greatly from cheap debt by aggregating practices quickly in hopes of selling their platforms for a big gain. This poorly thought-out strategy has resulted in several consolidators now sitting on the sidelines, unable to acquire and (more importantly) unable to invest in their existing partnership base as they struggle to control costs and stay afloat. What then becomes of their promised exit to those partners?
As you can see, it’s important to select a partner that has a clear line of sight on their recapitalization by having secure financial underpinnings and consistent acquisitive behavior in the market.
As you can see, practice valuation is about more than just a multiple. Finding the right partner to grow your EBITDA is equally important. We have been humbled by the opportunity to grow with so many talented partners and re-invest in them to provide enhanced patient care.
Our model is predicated on a joint venture where we form a true partnership together, giving us a shared ownership split with you. This way, as we help you grow the practice, you aren’t giving away all of the upside in growth to someone else. And when the AmeriVet platform is sold again in the future, your retained ownership is multiplied the same as our entire platform! In fact, our partners have had and continue to enjoy the unique opportunity to participate in AmeriVet’s platform exit multiple, which has exceeded over 20x their EBITDA. All the while, the partners continue to receive regular distributions from the growing business and their associates enjoy economic incentives for supporting for the ongoing stability of the hospital with things like profits interest and mentorship programs. A true win-win and one we would love to explore with you!
If you are intrigued and would like to discuss further, please reach out directly to me.
About the author
Andrew joined the Amerivet family in November 2022, having previously led acquisitive activity for VetStrategy in Canada (over 400 locations to date). He helped VetStrategy successfully merge with IVC Evidensia, the world’s largest veterinary consolidator with more than 1,200 hospitals in over 18 countries. Prior to that, he spent time in a similar capacity at a dental consolidator in Canada that ultimately went through an IPO to become Canada’s largest dental consolidator.
Andrew is a seasoned M&A executive with extensive experience in practice valuation, negotiation, and deal structures. His passion for the veterinary field has helped him develop many friends and contacts over the years. In his spare time, he enjoys spending time with his family, golfing, and farming on their grain farm.