Know when to fold ’em
Ideally, you want to sell your practice for maximum profit, with minimal disruption and at a time that works best for you.
Many veterinarians are confident they will find a qualified buyer for their practice. They think a large corporation will be in the market to buy the hospital when they are ready to retire. Unfortunately, some discover when positioning their practice for sale that corporations might not be interested in acquiring a veterinary practice of the owner’s size and location.
Another reality is the dearth of veterinarians looking to purchase a practice, perhaps because of credit issues or an aversion to handling the business side. The truth is, lenders who focus on lending to veterinarians realize that practitioners are excellent credit risks so long as the hospital has proven cash flow to pay the debt services. Practice assets can be pledged as collateral.
Today’s Veterinary Business interviewed these four veterinarians, who recently sold their practices:
Deborah Friedman, DVM, DACVO: Dr. Friedman sold Animal Eye Care, a specialty veterinary ophthalmology practice with two locations in the San Francisco Bay Area. At the time of the sale she was one of the two ophthalmologists working at the two locations. She sold both practices to another board-certified veterinary ophthalmologist and her husband.
Vedrana Gjivoje, DVM: Dr. Gjivoje and her husband and business partner, James Baxter, DVM, sold Bernardsville Animal Hospital, a full-service practice located in Bernardsville, New Jersey. They sold the practice to a corporation but maintain the real estate.
Jerry Harris, DVM: Dr. Harris and his wife, Lynne E. Johnson-Harris, LVT, RVT, sold Hinckley Animal Hospital, a full-service clinic located in northeast Ohio. The practice assets and the real estate were sold in two separate transactions. The buyer had been out of school about 10 years and was an associate veterinarian at a practice a few hours away. She and her husband now run the practice. The first-time practice owner worked on the financing with a bank and the Small Business Administration.
Laurel Kaddatz, DVM: Dr. Kaddatz sold Pound Ridge Veterinary Center in Westchester County, New York. Pound Ridge serves dogs, cats and small mammals such as hamsters, guinea pigs and ferrets. He partnered with a hospital management company whose business model is based on having the veterinarian serve as a partner co-owner to handle the medical aspects of the practice while the company oversees the management aspects. Dr. Kaddatz is now the medical director.
Here’s what they had to say:
How did you know it was time to sell?
Dr. Friedman: As time went on, the nonclinical duties became increasingly overwhelming, daunting, time-consuming and of diminishing interest to me. It was the best decision I ever made. No regrets.
Dr. Gjivoje: After 23 years at my current job, I couldn’t imagine myself doing the same thing for another 20 years, though it’s been a terrific run. I am tired of New Jersey winters and potholes. I want to give my kids an opportunity to experience life in another beautiful part of this country, where a drive to the beach will be 10 to 15 minutes instead of an hour and a half on a good day.
Dr. Harris: I practiced veterinary medicine for more than 40 years. I felt it was time to start relaxing.
Dr. Kaddatz: I always said I would work until I was 68. I’m getting pretty close. Although I don’t have burnout, I could feel that it’s time to decelerate.
How did you prepare to put your practice up for sale?
Dr. Friedman: I was not approached by a buyer at first, but after a few years enough people knew I was looking, so the appropriate connections could be made. When it was time to think about selling, I had the company that had been doing most of my accounting do a valuation for me. It turned out the same company had another client who was interested in the purchase.
Dr. Gjivoje: Physically, we polished it to make it glow inside and out. From a practice performance standpoint, we purposely chose to sell at a time when we were at peak performance to be able to commission the highest price. Jerry Seinfeld was our model; we wanted to go out while on top.
Dr. Harris: Several years before the sale, my wife and I met with a broker who specializes in the purchase and sale of practices. We used his suggestions to fine-tune the operations of the practice. During that process we received numerous communications from various corporate entities showing interest in purchasing our practice. After many meetings with several corporate groups it became apparent that our wants and needs did not match theirs. We reconnected with the broker and started the process.
Dr. Kaddatz: I didn’t do anything special to prepare for the sale. We updated our end-of-year financial statements to calculate EBIDTA [earnings before interest, taxes, depreciation and amortization]. Word of mouth resulted in three corporate entities approaching us, as well as a private practitioner. My associates were not interested in a full sale because they all work part time and realized that you can’t effectively manage a practice working two days a week.
How did you think the sales process would work?
Dr. Friedman: I thought it would be much easier and faster. Other than that, I didn’t have many expectations as I knew only a few other people who had gone through it. Those people were extremely helpful to me in terms of understanding the timeline and sequence. I went through four potential buyers and learned a lot on that first pass, which lasted about a year before I decided it was not the right situation for me. After that, I had a clearer, more realistic vision of my desired path.
Dr. Gjivoje: Since this was our first sale, we had no expectations. We hoped it would be smooth and seamless, which, of course, it wasn’t. It was a roller coaster ride. The broker experience was terribly disappointing. We did most of the work and the prospective private buyers were not really what we sought.
Dr. Harris: We expected a smooth and acceptable change of ownership. For the most part, it happened.
Dr. Kaddatz: Lacking prior experience, I had no expectations, although I had a timeline I thought would be appropriate. The outcome ended up about where I thought it would.
How did you determine the value of the practice?
Dr. Friedman: I hired a business consultancy, which determined the value for me and helped me set the price. There was a lot of back and forth with the first potential buyer that we were unable to resolve. With the final buyer, it was not an issue. Everything just fell into place, working out beautifully for both parties.
Dr. Gjivoje: By a multiple of current EBIDTA. Some buyers disagreed, some agreed.
Dr. Harris: We connected with a local commercial Realtor to determine property value. The broker determined the practice value after we shared profit and loss statements and year-end numbers.
Dr. Kaddatz: The value in today’s practice is based on EBIDTA. Then determine an agreeable multiple.
Were you comfortable handling your part of the sales process?
Dr. Friedman: I relied heavily on the professionals I hired to assist me: a veterinary consultant, a veterinary industry attorney, my CPA, my brother, who is an attorney, and another California attorney for details on California law. Under their superb guidance I was as comfortable as I could have hoped to be in what is an arduous process.
Dr. Gjivoje: Yes. I have a supersavvy partner and a phenomenal attorney, so we didn’t need anything more. We were a great triumvirate. Also, we had attended numerous NAVC conference lectures on succession planning, especially ones by Daren Osborne out of Canada. They proved helpful when it came time to implement.
Dr. Harris: There were and are so many moving pieces to a sale that more communication with the buyer during the process would have helped both of us have a smooth transition.
Dr. Kaddatz: I was totally comfortable on our side as most of the financials were furnished by our accountant and we had a very capable lawyer.
What significant surprises or special challenges did you encounter?
Dr. Friedman: There were daily challenges, turns and twists in the road, ways in which my particular circumstances did not match up with the normal way things are handled. For example, I was dealing with two separate practices in different counties with different landlords, different lease lengths, different staff, different equipment. One big challenge was continuing to be a full-time veterinarian while juggling the long phone calls, extra desk work and negotiations. Another challenge was how expensive the process was. And that the timetable was not of my making. Everything took way longer than expected.
Dr. Gjivoje: A broker sent us candidates who lacked a strong financial foundation and expected us to hold a large note as part of the sale. That note would be secondary and subordinate to the first bank note, and we were uncomfortable with that. Also, it became clear along the way that the broker just wanted us to sell, even if it was not in our best interest financially. We stopped working with the broker and shifted our focus to the corporate companies on the advice of our stellar attorney.
Dr. Harris: It goes back to communication with the buyer during the process. For example, helping her get established with her accounts. The process took longer than expected.
Dr. Kaddatz: My main challenge was and is having all our vendor contracts and payments transferred to the new company’s accounts. We also needed to form a new corporate entity for the medical side of the practice while they set up a corporate entity in New York for the management company.
How did you prepare your staff and your clients for the change?
Dr. Friedman: The members of my staff were of enormous help and very supportive in the few years preceding the sale. I informed a few fairly early in the process that this change was coming. The rest found out a month or so beforehand. They were naturally concerned about how the transition would alter their lives, but as we constructed it, it was smooth enough that not too much changed right away. Gradually, a lot of changes happened but in a natural, organic way.
Dr. Gjivoje: We kept them apprised all along. We wanted the staff to know that we value and respect them enough to keep them duly informed, that we have their backs and best interest in mind, and that they can be comfortable and trust us in the process. It went a long way in keeping the stress and anxiety level down on a day-to-day basis. We wanted them to know that it wasn’t just about us, but about all of us, so including them in the conversation was hugely important. We run a practice known for open lines of communication, mutual respect and appreciation. We couldn’t run it without the support and cooperation of our outstanding staff.
Dr. Harris: The staff knew of my wishes to retire and adjusted well to the changes. Clients were not made aware of anything until the sale actually closed.
Dr. Kaddatz: Once our contracts were signed, we held a staff meeting to tell everyone what was happening. The doctors knew ahead of time, as individual contracts needed to be negotiated to maintain the professional staffing. Interestingly, the new contracts were, in many of the details, more generous than the ones we had with the other doctors.
What advice do you have for other veterinarians who are considering selling their practice?
Dr. Friedman: Hiring experts is essential. The money I spent on professionals meant that the process was easier on me and that I could have confidence in the day-to-day decisions I had to make. Lastly, it takes far longer than you think it will; don’t wait to get the ball rolling.
Dr. Gjivoje: Consider all your options: private, corporate, buy-in and buy-out. Pick a great attorney who has veterinary experience and moxie. Give yourself plenty of time, so start a few years in advance of the desired sale date. Don’t sell yourself short. Sell when you are at the top of the mountain. Beware of broker agreements, and if you are going to use one, have your attorney approve the agreement before you sign it.
Dr. Harris: With a private sale, have an open line of communication with the buyer as the sale process progresses. Many of the administrative tasks could have been handled ahead of time. Buyers need to be aware of unique regulations in the state where the practice is located. In Ohio, the state pharmacy board requires veterinarians to have a license to prescribe and dispense drugs. Our buyer could have applied for this before closing to avoid our having accounting issues as we continued to do this role for her.
Dr. Kaddatz: The main reason we chose the company we did was we felt it was the best deal for ourselves, our staff and our community. We felt good that our clients would not see any change in the way cases are handled. There was no change to the signage or letterhead, and we continue to be a community-based practice. Depending on how selling veterinarians want to withdraw from practice life, they need to decide about how this is done so the practice and the clients won’t suffer.
Judy Gray is president of CEOonCall in Tallahassee, Florida. She served as interim CEO of the North American Veterinary Community in 2012 and 2013.