Buyer Articles

• Corporates are continuing to expand.  Not only in the U.S. and Canada, but this corporate buyer has begun acquiring practices in Australia and New Zealand.
• Some corporates have begun to do de novo practices.  They are filling the gaps where they don’t have ownership of a practice with a startup practice.  If you can’t buy it, build it!
• The DVM retention rate for the industry is 62%.  A particular corporate claimed to retain DVMs at a rate of 82.5%.  They said it’s due to how they treat the DVM and staff leaving everything as close to the same as possible. They also give the owners a piece of the pie.
• There currently is a shortage of DVM associates. They are putting a heavy effort towards recruiting DVMs at Veterinary Schools as well as the general public.
• This corporate has three commitments – Wellness Plans, Dentistry, and Fear-Free Clinics.
• They expect the current acquisition trend to continue for the next three to five years.
• Valuations are different among the various corporate buyers.  Their add-back for DVM salaries is 20%.  Another corporate buyer uses 22%.  That can make a big difference in the purchase price on a large practice. Another example is adding back an office manager salary.  That can vary significantly amongst corporate buyers.  These are just two of ten examples of the differences they provided.
• Valuations have gone up over the past 5 years.  Five years ago, they were buying practices at 4x to 5x EBITDA.  They are now acquiring practices at a broader range of 6x to 9x EBITDA.
• They believe valuations are currently at their high peak with the expectation that they will start tapering back down to the 4x to 5x EBITDA range they saw five years ago.
• General Veterinary Practices that are in the sights of corporate acquisition teams represent 50% of all General Veterinary Practices.  Corporates currently own 30% of all of these practices.  The expectation is that once total corporate ownership hits 50%, the acquisitions will taper off dramatically.  Corporates then may turn to specialty clinics.  Note, we’re already seeing this in the marketplace.  They also may focus on de novo practices.

In summary, the presentation confirmed what our thoughts have been:

1. Corporates are here to stay.
2. Corporate ownership will continue to grow.
3. There are some good corporate buyers who treat their staff and DVMs well and there are others that do not.
4. Corporates will go the de novo route when they can’t find a practice in an area they want to have a concentration.
5. Valuations will begin to trend down in the not too distant future.

The number of corporate buyers in the market and the supply of practices corporates want all play into this.  Whether good or bad, the corporate veterinary practice is here for the long haul.

This is just meant as an educational document and we are not promoting this or any other corporate buyer. ​

• Corporates are continuing to expand.  Not only in the U.S. and Canada, but this corporate buyer has begun acquiring practices in Australia and New Zealand.
• Some corporates have begun to do de novo practices.  They are filling the gaps where they don’t have ownership of a practice with a startup practice.  If you can’t buy it, build it!
• The DVM retention rate for the industry is 62%.  A particular corporate claimed to retain DVMs at a rate of 82.5%.  They said it’s due to how they treat the DVM and staff leaving everything as close to the same as possible. They also give the owners a piece of the pie.
• There currently is a shortage of DVM associates. They are putting a heavy effort towards recruiting DVMs at Veterinary Schools as well as the general public.
• This corporate has three commitments – Wellness Plans, Dentistry, and Fear-Free Clinics.
• They expect the current acquisition trend to continue for the next three to five years.
• Valuations are different among the various corporate buyers.  Their add-back for DVM salaries is 20%.  Another corporate buyer uses 22%.  That can make a big difference in the purchase price on a large practice. Another example is adding back an office manager salary.  That can vary significantly amongst corporate buyers.  These are just two of ten examples of the differences they provided.
• Valuations have gone up over the past 5 years.  Five years ago, they were buying practices at 4x to 5x EBITDA.  They are now acquiring practices at a broader range of 6x to 9x EBITDA.
• They believe valuations are currently at their high peak with the expectation that they will start tapering back down to the 4x to 5x EBITDA range they saw five years ago.
• General Veterinary Practices that are in the sights of corporate acquisition teams represent 50% of all General Veterinary Practices.  Corporates currently own 30% of all of these practices.  The expectation is that once total corporate ownership hits 50%, the acquisitions will taper off dramatically.  Corporates then may turn to specialty clinics.  Note, we’re already seeing this in the marketplace.  They also may focus on de novo practices.

In summary, the presentation confirmed what our thoughts have been:

1. Corporates are here to stay.
2. Corporate ownership will continue to grow.
3. There are some good corporate buyers who treat their staff and DVMs well and there are others that do not.
4. Corporates will go the de novo route when they can’t find a practice in an area they want to have a concentration.
5. Valuations will begin to trend down in the not too distant future.

The number of corporate buyers in the market and the supply of practices corporates want all play into this.  Whether good or bad, the corporate veterinary practice is here for the long haul.

This is just meant as an educational document and we are not promoting this or any other corporate buyer. ​

So, where are we now?  In an article I wrote for the Washington State Academy of General Dentists called The Perfect Transition Storm, I explain that we’re experiencing an anomaly in the practice transition market.  I have been working with dentists since 2004 helping them transition into or out of a practice.  There have been times when interest rates are good, but there are not many buyers.  There have been times when the economy was doing well, but not many sellers selling their practices.  But, in the past almost 15 years, I have never seen a time when everything aligned so well. Here’s how this adds up:

1.  The transition market is still a sellers’ market.  There are not many “good” practices on the market.  Good practices are producing over $600,000 per year with 65% or less overhead and at least 10 to 20 new patients per month.
2. Banks love dentists.  The default rate is below .0125% for dental practices.  More and more, banks have been seeking to lend to dentists to buy practices.  Recent offers from some banks include 1.78% interest rate for the first two years adjusting to 4.9% for 10 years after that.  The average rate currently is 5.125% on a 10-year term loan.
3. The economy is strong.  Many dentists I talk to tell me that they are busy.  Patients are employed and either has the funds or have insurance to get theirs and their family’s dentistry done.
4. Competition for the good practices is up.  We are starting to see corporate practices such as Heartland come into the Northwest and other markets seeking out practices grossing over $800,000 in collections.  Small group practices are also out there looking for good practices.  We also have solo buyers looking to acquire their first practice.
5. Practices values are up due to demand for good practices.  A typical practice may sell for 70% to 75% of collections in an average market.  We’re now selling practices for 5% to 10% higher, mainly due to demand.

Mesh this all together and you get a formula for a good transition market.  There’s high demand for good practices.  Interest rates are low.  Practice values are above normal ranges.  If you are thinking about selling within the next 3 to 5 years, it would be prudent to sit down with your financial advisor, broker, or other advisor to take a look at your situation.  Timing can be everything and good markets don’t last forever.  We would be happy to buy you a cup of coffee and discuss your situation and help put a plan in place to make sure you are in the best position for when it’s time to transition. Contact us today! 877-866-6053.

When you get a copy of the lease, you or your advisor should contact the landlord or property manager.  Be sure the seller has informed the landlord that they are selling the practice first.  If there is a short time left on the lease, the landlord may be willing to do an extension on the lease.  You can put conditions on the extension that can include getting a tenant improvement credit to cover new paint, carpet, etc., free rent for a few months, lower rent, etc.,  I’ve even had a situation where the landlord loaned money to the tenant to completely remodel the practice.

Remember that everything is negotiable.  Don’t automatically assume the lease is set and you cannot change anything.  At the same time, know how to negotiate.  If you go for a home run right off the bat, you may turn off the landlord and they won’t be willing to negotiate.  If you’re working with a broker, it’s best to let them handle the negotiating.  They’re the experts and can save you thousands if done right.

There are a few things you should be wary of when buying a practice.  These are not necessarily deal breakers, but things to bring up and analyze with your team when you are buying a practice.

1. ALL THE TREATMENT IS DONE – You can run an unscheduled or untreated treatment plan report that should give you an idea of treatment on the books.  You can also look at the number of true active patients and compare that to the annual collections to see if there is potential treatment.   If annual collections are $500,000 and there are 1,500 active patients, there’s a good chance there’s work to be done.  If annual collections are $500,000 and there are 400 active patients, start asking questions.
2. OVERPAID STAFF – Annual staff salaries typically run around 20 to 25% of the annual collections.  When you get up to the 35 to 40% area, you are in for some bad news for the staff.  An older practice with long-tenured staff may have dental assistants who get annual salary increases and now their making $30/hr.  The same with hygienists.  Or, they are receiving an incredible benefits package of health insurance, retirement plan, gym memberships etc.,  This can be cured, but if you plan on keeping the staff, be prepared for a discussion on reducing benefits and/or pay.
3. OUT OF CONTROL COLLECTIONS – You can typically tell how good of a job the front desk is doing by looking at the accounts receivable balances.  The total amount should not be above 125% of your monthly collections (adjusted for insurance discounts).  The insurance aging report should be pretty clean with only small dollar amounts in any of the aging buckets.  If the aging balance is too high, or the insurance aging is high, you will either need to retrain the front desk or hire a replacement in the future.
4. SECRETIVE SELLER – If you are asking for reports or questions from the seller and they are giving you run around answers, you may want to think about moving on.  If the tax returns do not match to the annual collections reports, something funny is going on.  You should expect straight and quick answers, unless the seller is away on vacation or overly busy.
5. EQUIPMENT NOT WORKING – I am surprised how buyers don’t have someone go through and make sure all of the equipment isn’t working.  You would hate to go in on your first day and have equipment not functioning.  The equipment supply companies will typically come out at no charge and go through your equipment to make sure it’s working.  If it looks old and in disrepair, it will give you a good peace of mind to have it checked out.

All of these red flags can be fixed, so they are not deal breakers.  But, if you do run across any of these red flags, be sure to have your team of experts, CPA, consultant, equipment rep, etc., dig a little deeper and make sure you are getting what you think you are getting.