Today's Veterinary Business

FEB 2018

Today’s Veterinary Business provides information and resources designed to help veterinarians and office management improve the financial performance of their practices, allowing them to increase the level of patient care and client service.

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23 February/March 2018 • TODAYSVETERINARYBUSINESS.COM And even if it is true, when is it better to hold on to the business? The VetPartners Valuation Council, a group of experts on veterinary practice valuation, recently dis- cussed this question. They agreed that taking advantage of a cor- porate offer now makes sense for a specific group of owners. The group includes owners who: • Are at or near retirement age • Do not plan to work more than two or three additional years. • Do not have a private buyer in mind. • Are in declining health or have family members who are. • Are tired of the manage- ment mantle and just want to be a veterinarian. This group of owners must consider several factors in addition to the sales price. First is the re- quirement to work for several years after the sale. Typically, the smaller the practice, the longer the seller is expected to work. These owners also must evaluate the compensation and benefits package provided by the corporation. In some cases, there may be significant differences in personal production requirements, health and life insurance benefits, vacation time and other perqui- sites. Owners must understand the impact of a sale on their lifestyles. A better financial decision usu- ally involves remaining a practice owner because owners receive profits in addition to compensation for the work they do. However, the chief motivator for many hospital owners is not financial. Owners who don't plan to retire soon but who want relief from the stresses of ownership may opt to sell a majority stake to a consolidator. This option allows sellers to reduce their management responsibilities while continuing to receive a share of practice profits. Remain an Owner A sale makes less sense for a differ- ent group of owners. They: • Truly enjoy ownership. • Expect to practice for five more years or longer. Money Matters columnist Leslie A. Mamalis is the owner and senior consultant at Summit Veterinary Advisors. Learn more at www.summitveterinaryadvisors.com. • Have financially healthy practices that provide regular earnings. • Enjoy the clinical and managerial work. These owners may have a much harder time transitioning to the role of associate, relinquishing decision-making and losing the financial advantages of ownership. For owners with no immediate plans to sell but who are worried about missing a potential financial windfall, the decision is a little more complex. In a financially healthy practice, earnings should grow every year as practice revenue grows. Owners who keep their practices for an ad- ditional five years theoretically have a five times earnings return on their businesses. If the practice is sold in Year 6 for a multiple of five, the owners have effectively received a 10 times return. However, there will be years when earnings are spent on equip- ment upgrades, doctor and staff education, or unexpected repairs and the earnings are not available for the owners to withdraw. In those years, the hospital owners' return may be X, half of X, zero or even negative, meaning a cash infusion is necessary. Earnings are never guaranteed. What About the Bubble? Are there risks to passing up an offer today? Absolutely. Competitors will enter the market, a recession may occur or an owner's health may fail. Hospital owners who wish to retire in the next three to five years should consider entertaining a corporate offer now to reap the benefits of the high multiples of earnings. For hos- pital owners who plan to work for five years or longer, the rewards for selling today may be less than the earnings generated by the practice in the years before a sale. Owners who continue to operate the practice profitably will continue to receive a strong earnings stream. Years from now, the multiple may be lower, but the number being multiplied will be higher. In addition, these sellers maintain the ability to use or invest the money as they wish. For owners concerned that a consolidator will never again be interested in buying their practice, consider this: If a corporate player is interested in the hospital today and the hospital continues to prosper, in- terested corporate buyers likely will show up when the owners are ready to sell. Certain hospitals will always demand higher multiples because of their location, size, profitability or some other feature attractive to consolidators. These practices will still demand a higher multiple in the future. Great practices will always be valuable to someone. Some industry pundits predict that large multiples are here to stay. Other predictions are more tem- pered, suggesting the trend will last another 12 months at most. Almost nothing in life is a sure thing. There is no way to predict what will happen next week, let alone several years from now. But of this we are certain: Financially healthy practices are good invest- ments, now and in the long term. For owners concerned that a consolidator will never again be interested in buying their practice, consider this: If a corporate player is interested in the hospital today and the hospital continues to prosper, interested corporate buyers likely will show up when the owners are ready to sell.

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