M&A Considerations During COVID-19: Selling or Buying a Veterinary Practice
Posted on September 11, 2020
Veterinary Practice Mergers and Acquisitions (M&A) in the Midst of COVID-19 (Coronavirus)
A unique set of factors is driving M&A activity in the veterinarian services marketplace during the COVID-19 pandemic. Many practice owners who were “on the fence” about transacting have now been called to action by the recent COVID-19 pandemic. The reasons we hear most often include:
- A potential administration / tax policy change;
- Mental stress;
- Competition to recruit new veterinarians & technicians;
- Current valuation levels at or near record highs (and their sustainability); and
- The pressures of competing with the consolidators.
Private equity, attracted to the fragmented nature and recession resilience of the industry, have been steadily investing in larger “platform companies” over the last several years and are hungry to consummate acquisitions. Additionally, industry revenues are withstanding the effects of the COVID-19 pandemic. According to data from VetSuccess, revenues for the month of August are up nearly 14% year over year, based on data from their practice customers. We believe industry acquisition activity will remain robust for the foreseeable future as interested sellers seek a large pool of acquisition hungry buyers. It’s important for sellers to understand the components of what is driving value in this environment.
Positive Veterinary Industry Performance During COVID-19
According to VetSuccess, performance since the beginning of the COVID-19 pandemic has been remarkably positive. After an initial dip during the onset of the pandemic, revenues have steadily increased, comparing favorably to prior year. From March thru August 2020, they reported that revenues nationwide, increased 5.8% from the comparable period in 2019. Here is a month by month analysis:
Year-Over-Year Change in Revenue (March – August 2020)
Figure 1: Source: VetSuccess
Buyer Universe & Transaction Types
Keiter Advisors is tracking 36 private equity backed and strategic veterinarian practice acquirors. A detailed list of these platforms is found in Exhibit A. These acquirors have been uniquely impacted during the COVID-19 pandemic and it is important for a seller to conduct “reverse diligence” on a buyer to make sure they are viable, able to make acquisitions and can close in a timely manner.
Each of these acquirors has a distinct strategy. The following types of
transactions are the most common:
- Owner sells the practice and receives a majority of cash at closing but takes some of the purchase price and “rolls it over” into the stock of the buyer
- Owner sells the practice and receives all cash at closing
- Owner enters into a joint venture arrangement with a partner to build out additional practice locations, reducing the amount of capital a practice owner needs to invest to grow.
Key Considerations in How to Value a Veterinary Practice Today – Beyond EBITDA
Buyers certainly have their own sensitivities when determining value. Most sellers are very familiar with the concept of EBITDA, or earnings before interest, taxes, depreciation and amortization. In addition to this metric, we also see the following items consistently referred to by most of the acquirors we have worked with:
- Performance During COVID-19 Pandemic. A careful review of monthly (or weekly) performance during COVID-19 is common for buyers to evaluate. The stronger the performance, the more confident a buyer is regarding value.
- Number, Quality and Commitment of Practitioners. Most acquirors will also focus on practices with at least 2 veterinarians. Generally, the larger the number of providers, the more value. Also, a DVMs tenure, experience, production and compensation will be considered. Is all of the production concentrated in one or two DVMs? How are DVMs compensated? Are they under any type of contract? What are the terms, such as non-compete and non-solicit? All of these are important factors when analyzing the ability to get associate veterinarians to “sign on” with the buyer.
- Gross Profit Margin Levels. Gross profit margin tells a buyer a lot about a practice. The level of fee schedules (too high/too low/just right), the mix of business (services/meds/inventory) and their opportunities post closing to improve profitability and revenue.
- Control of Practice Locations & Ability to Expand. A common refrain we hear from buyers is the length of time that a practice owner controls their current location. Most acquirors prefer not to purchase real estate, opting instead to lease. Generally, buyers like to have at least 10 years worth of “control” at a location. For leased locations, this doesn’t mean a term of 10 years, but also would include any options. Also, if it’s a good location with ability to control the site through options, is there an ability to expand? More control, flexibility and ability to expand good locations generally results in a better story and potentially a better value.
- Health Benefits. A buyer may have “negative synergy” meaning to replicate the same level of benefits a practice receives would cost more. Thinking about an acceptable level of benefits going forward and how this might impact retention of employees is important to evaluate prior to going to market. Positioning this from a financial and qualitative perspective are important things to think through.
- Lab Services Agreements. Always a hot button, a buyer will want to understand agreements with lab service providers – the length of the commitment, are there any ancillary equipment leases attached, the assignment and consent provisions and other important contract details.
- The level of adjustments / normalization items to EBITDA. It certainly is common to have some adjustments or addbacks to EBITDA. These can include items such as above market compensation for the owner(s), personal expenses and one-time/extraordinary items are all fair game for negotiation. Making this list unreasonably long can dissuade a professional buyer and result in a lower valuation or no transaction at all.
If we can be helpful to you, please call us – we are happy to have a confidential conversation with you regarding the acquisition market and your situation. We would be delighted to help.
We are pleased to have had the ability to assist Mechanicsville Animal Hospital in its sale to NVA, Inc. The transaction closed at the end of August 2020.
About Keiter Advisors
Keiter Advisors is a full-service transaction advisory group serving companies in middle market M&A transactions and financing. KA is recognized as the national leader in assisting owners to:
- Buy or sell foodservice distribution, meat processing and produce companies
- Plan and execute transition strategies, including family buy out initiatives and third party sale
- Examine the profitability of their business and develop viable improvement programs
- Renegotiate existing financing arrangements and secure new lenders
|Matt Austin||Carroll Hurst||Scott Zickefoose||Alec Kendall|
|Managing Director||Director||Senior Manager||Associate|
|(804) 307-5661||(804) 273-6204||(804) 273-6253||(804) 433-4185|
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