Leslie A. Mamalis
MBA, MSIT, CVA (Emeritus)
Leslie A. Mamalis is the senior consultant at Summit Veterinary Advisors and the firm’s former owner. She provides practice valuations, profitability assessments, feasibility analyses, and financial consulting to veterinary specialists and general practices. She is co-chair of the VetPartners Valuation Council. Learn more at summitveterinaryadvisors.comRead Articles Written by Leslie A. Mamalis
The corporate buying frenzy spurred by historically low interest rates and a generation of veterinary hospital owners flirting with retirement is largely behind us. The corporate sales market isn’t gone, but it slowed significantly, and prices fell. All this makes selling a minority share in a practice to an ownership-minded associate veterinarian a competitive option today. However, what each party wants isn’t always the same. Let’s look at the transaction from their perspectives.
Should an Associate Become an Owner?
Succession planning is the most common reason for selling partial interest in an independent practice to an associate veterinarian. A valued associate who already has relationships with the hospital, its clients and staff can be an ideal buyer.
One common mistake of sellers is waiting too long to discuss ownership with associates. The second is extending an offer but not following up with the sale. Associates interested in ownership dislike having carrots dangled in front of them. Too many miss out on buying in because the practice owner chose a corporate suitor.
The best associates might leave if another ownership opportunity comes along. By selling a piece now, you can lock in a valued associate rather than risk losing the doctor to your empty promises and a competitor.
For associates, becoming a practice owner is a unique financial opportunity that any veterinarian should strongly consider, but it comes with increased responsibility and risk. Understanding both is a critical part of the process if you are interested in ownership.
Associates didn’t spend four years in veterinary school learning to run a company, but to be successful hospital owners, they need leadership qualities and an interest in business. If ownership appeals to you, a long transition can help before you take on the entire role. By buying a portion now, you can work with the current owner to develop your leadership style and learn the responsibilities needed to maintain and grow a successful practice. You can gradually accept new tasks as your experienced partner serves as a mentor. A steady transition significantly reduces the relative risk of becoming a practice owner.
Many potential buyers think their educational debt prevents them from getting outside financing. That isn’t the case, especially when the buyer works with a veterinary-specific lender. Financing is available if a buyer has no bankruptcies and the lender determines that the purchase price is reasonable. Don’t let money be the deciding factor in your decision.
What About Seller Financing?
Seller financing is an option if the owner doesn’t need all the proceeds immediately. Essentially, such a transaction works as an installment sale in which the owner receives regular principal and interest payments. The seller also might avoid significant capital gains taxes. Because every situation is unique, consult financial and tax advisers.
In addition, the seller should consider charging a higher interest rate than a bank would demand. After all, the owner is taking on more risk than a bank. The seller has a single note reflecting a significant investment, whereas a bank has a diversified portfolio. Practice owners who choose this route shouldn’t download an online promissory note template. Instead, hire an attorney to ensure you’re protected if the buyer defaults on the loan.
How Much Should Be Sold?
The answer, in this case, is where the interests of the owner and associate can differ. From a purely financial perspective, selling a small percentage of the practice is in the owner’s best interest. By remaining a majority owner, the seller continues to operate the practice as desired and retains most of the earnings. But, on the other hand, if the seller is financing the deal and the buyer doesn’t make a down payment, there is no “new money” for the seller.
More importantly, selling a minority stake, whether 5% or 45%, comes at a price. Almost always, the business’s value to a minority buyer is lower than it would be to a majority or 100% buyer. Why? Because a minority buyer must live with how the business operates and can’t make sweeping changes.
In contrast, majority owners can change anything, from distributors to employee benefits to the services offered. They control operations and even the profit level. Such control translates to a higher purchase price.
Sellers are better off giving up a small piece initially since that portion will command the lowest price. However, would it make sense to wait until you’re ready to sell the entire practice? The decision is up to you. Getting a lower price now for a minor share could secure a buyer for the remainder when you’re ready to exit. In the meantime, you could solidify a succession plan and ensure a smooth transition. You’ll also see to it that the practice you built continues to operate.
From the associate’s perspective, if your portion of the profits can help finance the purchase, why not obtain as much as possible? The answer, in a word, is risk. What happens if profits decline? What if the practice needs to buy new equipment or make substantial repairs? You’ll still have loan payments, and if you purchased a 40% share, you might need to come up with thousands of dollars personally for several months to cover the sudden expenses. How long could you sustain it? By buying 10%, for example, any shortfall is smaller. While you might wish to buy as much of the practice as possible, be aware of the potential downsides.
Should an Associate Get a Discount?
Does an associate’s presence in the practice and the time spent generating revenue entitle the doctor to a discounted purchase price? I hear that question quite a bit, especially from buyers. Their thinking is that since they helped build the business, the practice wouldn’t be worth as much without them, so they desire a discount.
The questioners don’t understand that while they might have helped grow the practice, their paychecks were never at risk. They didn’t worry that COVID might close the business permanently, struggle to cover the mortgage payment or fear that a client who tripped in the parking lot might sue. They weren’t in the clinic on nights and weekends doing miscellaneous after-hours chores. They weren’t called away from vacation because pipes burst. In short, they bore none of the risk associated with owning the business. If an associate’s compensation was fair, meaning it reflected the local going rate, the doctor hasn’t earned a discount.
By introducing efficiencies and implementing economies of scale, practice consolidators and venture capitalists discovered they could make a lot of money quickly. However, as interest rates rose, private-equity firms grappled with converting their current investments into something more lucrative. As borrowing became more expensive, achieving greater returns became more complex.
While the corporate sales bubble might have burst, with fewer offers and lower prices, the opportunity to sell all or part of your hospital to an associate or another veterinarian is alive and well. Shouldn’t the wealth from practice ownership once more belong to veterinarians?
A census of veterinary practice consolidators found 13 companies owning fewer than 100 hospitals each. The list, compiled by Veterinary Integration Solutions, is at bit.ly/3xaXSdo.