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Attention veterinary practice owners: Buyers are lined up
If you've been afraid to sell, consider this: In most regions, consultants and brokers report a backlog of buyers waiting for veterinary practices. And some are growing sick of the wait.
The percentage of veterinarians who aspire to ownership dropped from 53 percent in 2006 to only 30 percent in 2012, according to the dvm360 State of the Profession survey. But in this case, numbers may not tell the whole story. Consultants and brokers agree that this still amounts to plenty of potential buyers in the market ready to purchase practices—if practices meet their criteria.
"I don't know that there is a decrease in those who want to own," says David McCormick, MS, of Simmons & Associates, a national veterinary practice sales firm. "I think that there are more veterinarians overall. So, the percentage of veterinarians who are future owners is going down, but that's because the number of associates is going up. Those who see themselves as future owners are out there. So for current practice owners, there are buyers."
Gary Glassman, CPA, a partner with Burzenski & Co. in East Haven, Conn., agrees with the sentiment: "Right now, I see more buyers in the marketplace than there are sellers."
In fact, Glassman says he sees some potential buyers becoming frustrated because they can't find practices to purchase. When practices represented by brokers come on the market, Glassman has seen several cases where sellers receive multiple bids. "It's really a seller's marketplace, especially for practices that are being marketed by brokers," he says.
Glassman is also seeing more transactions in which the seller receives full asking price. "And this is happening because there's an abundance of buyers out there," he says.
While there are buyers ready to purchase practices in most areas, several trends are defining the market, from buyers wanting to purchase practices in desirable areas to a growing group of female owners who want to purchase and operate practices on their own terms. More alarmingly, when potential buyers can't find practices to purchase in the right places, some are opting for startups—a trend that could oversaturate the market.
Between a rock and retirement
While an abundance of buyers sounds like a good thing, it may also signal a dangerous standoff in the marketplace. Some owners have been reluctant to sell, waiting for the economy to recover and improve their retirement outlook. But buyers are getting impatient.
"Sellers have been hesitant because of their own financial status and ability to retire and get enough for their practice," Glassman says. "So if they're scared about anything, it's developing a good enough sales price for them to meet their own economic requirements through years of retirement."
Glassman, who offers personal financial planning for sellers, says those who retire at age 65 will typically live to be 90. So their financial plans need to consider how much money they need from the sale to sustain their accustomed lifestyle for the next 25 years. And in some cases, sellers simply can't afford to retire yet.
Some of this, Glassman says, is because "no-lo practices" (no-value/low-value) still exist in the marketplace. "It's still extremely important for sellers coming to the marketplace to understand what their practices are truly worth," he says. "Do your valuation far enough in advance to be sure you're going to get the money you need to retire after you've paid the taxes from the sale."
Tom McFerson, CPA, ABV, is a partner with Gatto McFerson CPAs in Santa Monica, Calif. He's also seen some practice owners hesitating to sell because they're looking for more money going into retirement. However, as the stock market has come around, retirement plans are healthier, he says, and personal portfolios are stronger. There are also signs the real estate market and the veterinary industry are coming around.
"There's definitely more activity in the last year as opposed to the prior three or four years," McFerson says. "Interest rates are still good, and the economy feels better."
Location, location, location
Instead of asking what buyers are looking for, the question might be, where are they looking? "The No. 1 driver for a buyer today is where the practice is located," McCormick says. "Historically, future owners would go anywhere for a practice. Now they're already settled, and that's where they want to practice. Or they want to buy a practice in a specific location."
In these cases, he says, location isn't about the good vs. bad side of the tracks, or a rural vs. urban locale. It's more based on whether someone wants to go there. This can make the difference between a practice that sells in a few months and a practice that sells in a few years. McCormick says it's as simple—and as complicated—as finding the person who wants to live where the practice is located.
"For folks planning their exit, if they're not in the place where future owners statistically want to be, they may need to plan their exit as if it will take two or three years to find the next owners," McCormick says.
The key point to remember, McCormick says, is that unlike residential real estate, time on the market doesn't decrease practice value. The value is driven by the return on ownership. "So as long as you keep the practice healthy, the value doesn't drop," he says. "In the market right now there are fewer choices. More practice owners are keeping their practices a little longer because their retirement or the practice took a beating. So they're not selling."
But now is a good time for sellers, McCormick says, because there are a lot of buyers, depending on where a practice is located. "Practice owners need to first make sure they've got enough energy once their practice goes on the market to keep it going and keep it healthy," he says.
The women and ownership myth
If there's one myth that Dave Gerber, DVM, AVA, a broker with Simmons & Associates, is ready to squelch, it's the idea that women won't buy practices. He says data from his region shows women do opt to own.
"We are finding that women have a slightly lower interest in ownership than men, and that might be partly because they have another full-time job to do when they get home," Gerber says. "But still, more than half of the transactions we're doing in the Northwest now are to women. And that's a huge thing."
From 2006 to 2012 in the Northwest region, which covers the states of Oregon, Washington, Idaho and Alaska, buyers were 36 percent men, 57 percent women, 6 percent married couples and 1 percent corporations, Gerber says.
National data offers more evidence that women veterinarians are nearly as interested in ownership today as their male counterparts. The 2012 dvm360 State of the Profession Survey shows 27 percent of women and 32 percent of men saying that veterinary practice ownership is one of their aspirations.
"I've been involved in a handful of transactions with working mothers who want to own practices in such a way as to form partnerships," Glassman says. "So you get two working mothers who are trying to split their time between home and work who will jointly own a practice and run it as a single-doctor practice, splitting the time there. There are creative and innovative ways to find practice ownership for those who are struggling with life balance issues."
The trouble with startups
In a market where buyers overwhelm sellers, buyers are growing impatient, Glassman and Gerber both say. A shortage of practices to buy coupled with a lending community willing to finance startups could offer another avenue for frustrated buyers. Glassman says he knows a lender who financed nearly 60 startups in the New York area in 2012.
"You only see that number because those are potential buyers who have no practice to purchase," he says. "The marketplace is looking at those startups as an alternative. And banks are willing to lend."
Gerber says he thinks that could potentially dilute the market. "It's not a healthy thing," he says. In areas where the market is already covered, a new veterinary practice coming in could make a significant impact.
"Buyers are frustrated," Glassman says. "And when buyers can't find practices to purchase, if they have that ownership or entrepreneurial drive, they'll consider a startup."
This trend could serve as a cautionary tale for sellers who've been trying to time the market just right. "If you're thinking of retirement, don't delay too long, because there are some other factors out there that could potentially hurt your value even more," Gerber says.
The economy in the crystal ball
Despite the economic challenges of the last few years, these consultants say 2012 showed progress, and they remain optimistic about the opportunities 2013 will bring.
"From my own perspective, it's a very interesting marketplace. We're headed into a wind stream that should bring a lot of sellers to the table, because of all of the baby boomers retiring," Glassman says. "If we could get by some of these tentative governmental issues going on right now in Congress, it will steady out the marketplace. We may find more sellers coming back to the table."
Gerber agrees. "I think things are going to improve, not just in the veterinary world, but all over," he says. But as times change, veterinarians will need to change with them. For example, savvy consumers may push for advanced technology such as digital radiography, he says. While this can be cost-prohibitive for small one-doctor practices, it may lead to collaborative efforts such as separate practices coming together to build a central hospital that they own and operate together.
"I worked for a practice like this out of college," Gerber says. "It was more like the human model. In that hospital, we did all of the x-rays, all the surgeries, all emergencies and central buying of products. But it was owned by these individual practices. And we should see more of that. It makes a ton of sense."
In fact, Gerber says, while he still sees a lot of one-doctor practices, they're becoming less and less common. And two- to three-doctor practices are often more profitable and more efficient than giant practices. He also sees an increasing trend of buyers buying into practices and sharing partnerships instead of buying the whole practice.
McFerson agrees that associate buy-ins are coming back. This offers advantages for both buyers and sellers, he says. It gives sellers a chance to sell the practice over three or four years, which can improve cash flow and put them in a better position to retire. For example, they might choose to sell 40 percent now and still own 60 percent, which would still offer the benefit of profit from the practice for those years. It can be a good approach for buyers, too, because it decreases their risks, allowing them to baby step into ownership with the benefit of a partner.
"The environment's pretty good," McFerson says. "Who's to say it's going to get any better? Who's to say it's going to get any worse? It's hard to say. It just feels like the numbers are better all the way around."
McCormick says it's tricky business trying to time the market. Instead, it's better to focus on a practice's features and understand the variables that influence how fast it will sell, including location and practice profitability. "The market is very healthy," he says. "There are buyers out there for small practices and large practices. Just remember, national trends are not relevant to any individual practices. You need to talk to your local broker to get an idea in your part of the state. You should value your practice to get an idea of what kind of timeline fits your practice, so when you enact your exit, your practice is at an appropriate value and you have the energy to keep it going. Because the buyers are there."
Portia Stewart is a freelance writer in Lenexa, Kan.