There is an incredible flurry of private equity corporations buying veterinary practices across all species. Every day there seems to be a press release that another practice has been sold to a corporate aggregator of practices. The purchase amounts seem to be exceptionally high and many veterinary practice owners wonder if they should jump in and be part of the free for all of the seemingly high valuations placed on practices. The reality is that the high numbers they throw around seem lucrative don’t necessarily lead to a pot of gold. In fact, we argue that unless you are needing to sell in the very near future because you are ready to retire or just want out and don’t have anyone to buy your practice selling now to private equity amounts to selling your practice at a discount.
One of the ways that private equity companies make a lot of money is to follow the time-honoured formula of buying at a low price and selling high. One of the common ways they do this is to buy individual practices at a multiple of EBITDA that is in the mid to high single digits. EBITDA stands for earnings before interest taxes depreciation and amortization. In affect they are buying the future cash flows of a business. When they have accumulated enough practices into a single group that combined multiple will often be double the initial purchase price. For example, if they buy a practice with an EBITDA of $300,000, they may pay 6 times EBITDA, but when they sell to another larger private equity group, they will sell the combined value at 12 times the EBITDA multiple. The higher valuation is related to decrease risk because ensuring cash flow is less risky across many practices than just one or two.
They also buy practices at a current value that is lower than what the practice is worth over a long period of time. Consider the scenario where you sell your practice now. Let’s say for example your practice is valued at $2.5 million. Not a bad sum really. They will ask you to stay on for 2-3 years to help with the transition to the new owners. For the three years, you will get a veterinary salary, but afterwards, you are living on the proceeds from your sale. You may get a 5-7% return on your investment if you are lucky, but you will also begin to draw down on your nest egg for living expenses. Not a bad life if you are entering your golden years. A just reward for all of the years being a vet is to have 20-30 years with your spouse doing whatever you want to do.
Now imagine you are 55 or younger and you have many years ahead of you. Is selling now the best option? I can say that there are very few scenarios that make sense to sell now. You will make more money by holding on for several years and reap the real value of your practice. The math is simple. Collect your vet salary. Collect the annual profit in your business, Work on your business a bit more, we can all find 1 or 2 percentage points of profitability and then sell to your associate, or a corporate group when you really want to retire. Even if you sell in 10 years at a lower multiple than you do now you will reap the benefits by waiting.
Here is what math tells us. If we compare selling now for around $2 million and selling in 10 years for $1.5 million you could end up with about $3 million more in 10 years by holding on to your business than selling now. Your annual profit and salary over the 10 years plus the ultimate sale more than covers your return if you sell now. We have looked at practices that have been offered 15 times EBITDA, and even they make more money by selling in 10 years at a much lower multiple of EBITDA.
Here is the uncomfortable question we have to ask ourselves when PE comes knocking on our doors. If they are in the business of making money what about our practices do they like? The simple answer is that they are buying low and selling high. Why are we giving away the value of our businesses? Sure, if you are about to retire and can sell to one of these groups you would be a fool not to take it. But if your career has a longer horizon it is much more profitable to hold on and reap your rewards down the road. Ask yourself would you like $2,000,000 now or $5,000,000 in 10 years.
Warren Buffet states “Investing is laying out money now to get more money back in the future”. If you own your own business, you just need to invest time to get more money in the future. Your business is working for you to maximize your investment. Just like rolling a snowball – it just keeps getting bigger and bigger.
If the differences between what you can sell your practice for now and the value, you would have in 10 years seem too good to be true contact us and we can walk you through our Sell versus Keep Analysis Tool.