Navigating the veterinary acquisition market has changed in recent years. Our friends and colleagues used to sell their hospitals to associates, now they are selling to corporations backed by private equity. Since business economics isn’t taught in veterinary school, many are forced to self-educate based on other’s experiences. We continually hear terms such as EBITDA, cap rate, multiple, recap, and equity. Without the proper education, the thought of starting the process may seem overwhelming. Contact your local TPSG representative for assistance in negotiations.
My colleague told me he received a 20X multiple for selling his clinic to a corporation.
Each corporation has different valuation metrics used to complete their quality of earnings report. This results in an array of calculations for EBITDA and the multiple paid. Some of the factors considered include employment terms, number of doctors, demographics, practice density and location.
The buying group will change my medical autonomy and the drugs I use.
In most cases this is not true. Consolidators have agreements in place with several distribution companies but allow doctors to maintain medical autonomy. Updated software is typically incorporated post-sale which improves hospital efficiencies. This allows staff to perform everyday tasks in less time.
My staff will lose their medical benefits.
The group buying your hospital has the same or better benefits. Owning multiple locations and employing more individuals provides access to improved rates. Many companies provide stipends for employees that do not meet the criteria for coverage. Additional benefits include dental, vision and retirement.
The culture of my Company will change post-sale.
You have done a great job creating a strong culture. Changing the work environment is not in the best interest of the buying group. This increases the likelihood employees leave which results in high turnover. Instead, most groups put culture at the forefront of their values. They also offer additional time off, bonus programs, increased opportunities for continuing education, and improved benefits.
My salary will change post-sale.
Corporate groups prefer to pay their doctors a percentage of production. Depending on the company you can expect 20-22%. If associate contracts are already in place, most will adopt their current pay structure, with medical director positions receiving a higher percentage and equity in the parent company.
I hear most corporate groups don’t buy real estate.
This is true with many of the consolidators. However, most have REIT’s (real estate investment trusts) they partner with to purchase the property. This allows the seller to relinquish all risk and retire comfortably. If the doctor chooses to retain the real estate, most offer five-to-ten-year leases with annual escalators. Our representatives are experts in assisting with these negotiations.
The equity they are offering has no value.
Each group has a different structure for their equity partners. Some offer common shares while others have varying degrees of stock classes. The most common forms are A, B, and C shares, with the original investors receiving preferred shares. During a recapitalization period, the parent company sells their position to another financial institution, which results in a capital event for any equity partner. The compensation structure is outlined in your subscription agreement. Hiring an experienced professional to explain your options is highly recommended.
I hear corporations change the name of my clinic.
Protecting the legacy of your hospital is important. Other than one or two companies, most keep the name of the hospital post-sale. In most instances your staff or clientele will see very little change. Notable improvements might involve interior upgrades and new equipment.
My staff will lose their jobs.
Your staff helped build your practice into what it is. Corporate groups are smart and understand the value in keeping that culture in place.
I’m responsible for hiring my replacement.
Most groups have a division dedicated to recruiting services. Having access to more capital allows them to offer signing bonuses, work flexibility, and benefits the average practitioner cannot offer. This speeds up the process for hiring additional staff or doctors.
Author: Nick Elliston, Partner @ TPSG