The banker’s role in a practice acquisition
You can’t afford to skip any critical steps when buying a veterinary practice.
As the coronavirus pandemic grinds the U.S. economy to a halt, putting downward pressure on demand for pet health care services, acquisitive veterinarians should wait for conditions to stabilize. When the pandemic lifts, however, many smart acquisition opportunities will be available.
Acquiring a practice is a complex and potentially competitive process — acquirers range from private equity firms to corporate veterinary hospital systems — and the process is one that requires extensive market and financial research as well as in-depth due diligence of any potential acquisition target.
A would-be practice acquirer is wise to assemble a team of advisers, and a banker should be at the core of that team. This financial adviser should have experience in both the veterinary industry and practice acquisitions. The banker will help address vital considerations and determine the relative appeal of the practice for sale and the financial shrewdness of a potential acquisition.
Important assessments that a banker can help with include:
- Clientele and the market — the size, growth rate and outlook for both.
- Opportunities to expand the number of new patients.
- The practice’s track record on client retention.
- Any shortcomings in service, sales and pricing.
- Pending technology, staffing and infrastructure needs.
- The practice’s overhead and how it stacks up to industry standards.
- The cash flow available from the practice to service debt needed to make the acquisition.
- The buyer’s personal debt, living expenses and investment goals.
- The transition plan as the buying veterinarian enters the practice and the selling veterinarian exits.
Also important is a comprehensive study of the competition’s strategies, costs, finances and technological sophistication, as well as pricing, market share, revenues and profits, products, and customer segments.
Findings on all of these fronts will help would-be buyers determine a target practice’s immediate viability and long-term potential. From there, buyers need to assess their own resources and goals and determine if those match up well with the practice.
Closing an acquisition most likely will require a substantial loan. I recommend sitting down with a trusted banker and developing thoughtful answers to each of the following questions to ensure a buyer receives the best products and services and a clear understanding of all financial obligations:
- Does the banker have a role in the lending decisions being recommended and made?
- Are repayment schedules flexibility? What are the prepayment penalties, if any?
- Will the financial institution provide sufficient working capital as the veterinarian transitions into ownership?
- What are the loan rates? Are they fixed or floating? What is the fee structure?
- Do the terms of the loan require the buyer to conduct day-to-day banking with the lender?
- Can the banker provide introductions to other professionals, such as a CPA, attorney, insurance provider, consultant and contractor, who have experience in the animal health industry?
- Will the bank continue to support the buyer into the future with growth objectives such as relocating the practice, adding operations or equipment, or purchasing a second hospital?
- What other intangible benefits can the banker offer?
Effective communication with a banker throughout the process is critical. A veterinarian might want to ensure that the banker is accessible, consultative and an expert in the underwriting and closing process.
As one moves forward in making this big decision, consultative, engaged relationships with advisers, including a banker, are key. This can save time and money and help a veterinarian progress smoothly toward the goal of owning a practice.
John Campbell is senior vice president and business development officer with Tacoma, Washington-based Columbia Bank’s health care banking team.