Despite living in a very turbulent economic period, the corporate groups are continuing to consolidate with new practices, while the franchises – in spite of closing down a number of sites – are still looking to open up more in different areas, often within their stores.
If you are one of the remaining 35% of small animal practices and 50% of mixed practices* that are still independent, what does the future hold for those thinking of selling?
Substantial increase
When the corporate practices started buying practices in volume about 10 years ago, the price obtained for the goodwill was often between 70% and 90% of turnover; during the past 10 years this increased substantially – sometimes reaching more than 200% of sales.
The rationale behind this was to obtain as much of the market share in as short a time as possible. Having reached about 65% of all small animal and about half of mixed practices, a period of consolidation is occurring and the corporates are becoming far more selective in the type, size and location of practices they are looking to acquire, and the price they are prepared to pay.
The high prices paid in the past two years have probably peaked, except for the most desirable units.
So, what are they looking for when approaching a practice and why does such a difference exist in the prices paid for different practices?
Major players
The major players are still Independent Vetcare (IVC), CVS, VetPartners, Medivet and Linnaeus – all have different requirements, but also some common requirements.
The make-up of these is CVS and Vets4Pets are stock market listed, and have to disclose a large amount of information to explain to shareholders the rationale behind any profit changes. IVC, VetPartners, Linnaeus and Medivet are all private equity owned, and only need to report to the investors. They still, however, have to return financial reports to Companies House, as with every other company in the UK.
So, what are the plus points the consolidators are looking for when they wish to make an approach for a practice?
Fee income
Certainly, most are now only looking to go after the larger practices with minimum turnovers between £700,000 and £1 million. Their experience has shown the smaller units tend to be to be less profitable, take up a lot of management time, and the purchase costs (such as legal fees and due diligence) are often much higher as a percentage of price paid, so paying over the odds for these is no longer viable.
The main players will be looking to acquire at least a three-vet unit. Some of the corporates will consider practices with turnover lower than £700,000, but this may be reflected in the price paid. This leaves an opening for smaller independent consolidators to buy the practices that do not fall into this category, as the corporates may well concentrate on the higher-earning units.
Maintainable profits
Strong financials that are well presented are essential to get the best price. A maintainable profit to turnover of 20% or more is the ideal in these high-value practices.
The maintainable profit is not the same as the net profit – even in incorporated practices – and it must be calculated in a consistent and acceptable way, taking into account all of the possible variables and including a forensic analysis of the accounts. Less profitable practices – often making less than 8% of turnover – are unlikely to be of interest unless their location or turnover matches a need by the corporate.
Remember these per cent values are based on incorporated practices. Sole trader and partnerships will have to make additional allowances from their accounts to allow them to produce comparable figures to the incorporated practices. Many UK practices still produce very low and even negative maintainable profits; these are often lifestyle practices. They may still have nominal value to some interested party, but are unlikely to attract corporate buyers.
Stable fully staffed practices
This is an essential factor if you are looking to get the best price. Within the corporates, between 6% and 10% of veterinary staff are locums. This figure is higher in general practice, which is estimated to be running at 12%.
The corporate buyer will be looking for a vet able to take on the management of the practice; in most cases, the buyer will expect this to be the owner. For stability, the corporate buyer may require a minimum contract of 12 months and if the owner shows a desire to stay on longer as a career, this will certainly be in the seller’s favour. Corporates may also delay part-payment and make it dependent on maintaining the practice’s financial performance.
When making a decision on any offer, the owner should look at the whole package. The capital payment for the practice, the timing of the payment, the tax consequences of how the offer is made, the terms offered to get the deal through, and a salary – albeit less than he or she earned when self-employed, but combined with a high lump sum for the practice with only 10% tax on the proceeds – is worth putting up with for a few years.
Other staff members, who have been there for a least two or three years, gives the corporate buyer a practice where the staff is stable, which, with the employment situation as it is at the moment, can be a real selling point.
It is a buyer’s market at the moment – and with less competition between the potential purchasers to pay excessive prices, they can afford to be more selective, while a seller who wants to get paid and simply walk away could easily lose the sale.
Practice type
Small animal practices are still the preferred option for buyers, but mixed practices are still attracting interest from some of the corporates. Purely equine practices tend to be the most difficult to sell.
Location
Like they say: location, location, location – most of the corporates are happy to buy throughout the UK, but still want to buy units that are in well-populated areas, with good demographics for pet ownership and spending power.
Usually, location and being a high turnover to profit practice goes hand in hand.
Property
Corporates require premises that have room to expand and good parking. A secure lease is essential – and if a third-party landlord is involved, get him or her onside at the beginning and find out what he or she is looking for if a new tenant takes over. The rising costs of purchases may make some of the corporates look to open greenfield sites in a location of their choosing. Practices with multiple branches around a central hub may get a higher return than a single site unit if the system works efficiently.
Honesty and transparency
This gives confidence to a buyer. For the deal to go through, a good professional relationship is required between the seller, the buyer and the broker.
It is vital owners employ a competent team of experienced professionals, which should include a lawyer and accountant. Owners also need to ensure they have a level playing field, as the purchasers will have done this many times before – this team will provide the support required to take the transaction through to completion.
Maximise return
Getting everything right would be the perfect scenario; however, business is not like that. Good practices are still getting very good returns when selling, and even the smaller units may well be of interest if they can tick most of the boxes.
Expecting the corporate buyers to pay over the odds will no longer be an option, but good, realistic prices are still available. To maximise what they have, owners must present their practices well to increase the chances of maximising return.
*Author’s estimate
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