WHAT CORPORATES ARE LOOKING FOR WHEN BUYING A PRACTICE 24-03-2019

WHAT CORPORATES ARE LOOKING FOR WHEN BUYING 24-03-2019

FOR SALE

Despite living in very turbulent economic period, the corporate practices are continuing to consolidate with new practices and 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 30% of practices which are still independent, what does the future hold for those who are thinking of selling?

When the corporate practices started purchasing practices in volume around 10 years ago, the price obtained for the goodwill was often 70-90% of turnover, over the last 10 years this increased substantially sometimes reaching 200% plus of sales. The rationale behind this was to obtain as much of the market share in as shorter time as possible. Now having reached 65% of all SA and probably 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 that 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 is there such a difference in the prices paid for different practices?

The major players are still IVC, CVS, VetPartners, Medivet and Linnaeus all having different requirements but also some common requirements. (Vets4pets have not been a consolidator and acquiring practices has never really been in their plans).

The makeup of these is CVS and Vet4pets 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 they 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 – £1000k. 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 (legal fees, due diligence etc) are often much higher as a % 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 3- vet unit. Some of the corporates will consider practices with less that £700k turnover, but this may be reflected in the price paid. This leaves an opening for smaller independent consolidators to purchase the practices that do not fall into this category as the corporates may well concentrate on the higher earning units.

“Whilst we are always happy to hear from all types of veterinary practices, we tend to purchase practices with at least three full-time vets and that normally means a turnover of over £600k or more. . Keith Chandler Independent vet Care Ltd

We tend to look at each practice individually, on a case by case basis, because each practice is unique. This means we are happy to look at any practice. Arnold Levey CEO Medivet Ltd

Maintainable profits-

Strong financials which are well presented are essential to get the best price. A maintainable profit to turnover of 20% plus is the ideal in these high value practices (HV20 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 (Low volume LV8 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 % values are based upon 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. There are still many UK practices that produce very low and even negative maintainable profits, these are often life style 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 6-10% of veterinary staff are locums. This figure is higher in general practice which is estimated to be running at 12% plus. The corporate buyer will be looking for a vet able to take on the management of the practice, in most cases they will expect this to be the owner. For stability they may require a minimum contract of 12 months and if they show 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 upon maintaining the practices 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 offer, to get the deal through and a salary, albeit less than they 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 are 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, and 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.

“Independent Vetcare is always delighted to explore the purchase of any practice & of any type. Although, in broad terms we prefer practices which have a good companion-animal element, we do believe there’s a tremendous future for good quality mixed practices in our group.”. Keith Chandler IVC

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Location.

Like they say location, location, most of the corporates are happy to purchase 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 usually goes hand in hand.

Property-

They require premises that have room to expand have good parking . A secure lease is essential and if a third-party landlord is involved get them onside at the beginning and find out what they are 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.

Honestly and transparency- gives confidence to a buyer. For the deal to go through you need to have a good professional relationship between the seller, the buyer and the broker.

It is vital that you employ a competent team of experienced professionals which should
include your lawyer and accountant. You need to ensure you have a level playing field as
the purchasers will have done this many time before and your team will provide the support you need to take the transaction through to completion.

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. Try to maximise what you have and if it is presented well you will increase your chances of maximising your return.

To speak to Malcolm, call 0793 921 6174