Evaluating Veterinary Practice Sale Experts

Hiring experts to help shepherd you through the sale of your veterinary hospital is a great idea on paper, particularly if you expect to entertain offers from private equity-backed veterinary services corporates. Private-equity-backed corporates are built to complete many acquisitions each year.  The purchase of your practice will not be their first rodeo, though it may be yours.  Hiring experts for your team can level the playing field.  

The reality is quite messier. The level of professionalism and quality varies greatly from one expert to the next.  Some offer a great sales pitch, but a sub-standard service.  Someone who worked for your peer may not be right for you.  The right experts advocate on your behalf and always put your needs before their own.  The wrong experts use your deal to line their own pockets.  A valid second-order question might be, how do I get the benefits of hiring veterinary practice sales experts when I sell my practice without exposing myself to the downside risk? The answer lies in people and incentives.

1. Intro to Corporate Development

There are thousands of professionals in every industry across many functions whose trade is related to acquiring or selling assets, including veterinary businesses and clinics. These professionals include lawyers, accountants, brokers, etc. In veterinary services, these Corporate Development professionals work on the “buy side,” the “sell side,” or both.

Many professionals on the “buy-side” work for or with companies that acquire veterinary practices from independent owners. Buy-side professionals include 3rd parties such as specialized attorneys and accountants, as well as employees of the corporate buyers. Third-party attorneys and accountants tend to focus on business acquisitions, sometimes in the veterinary industry, particularly. Almost all corporate buyers have a team of business development professionals solely focused on sourcing and closing veterinary practice purchases.

Professionals on the “sell-side” work for brokers, legal firms, and / or veterinary practices. Some attorneys and brokers make a living exclusively representing veterinary practice owners. Since it is not common for the seller, a veterinary practice owner, to have employees dedicated to helping sell veterinary practices, the practice owner will need to hire at least some 3rd party experts to complete the sale of his veterinary practice.   The buyer who has approached you may seem to have your interests in mind, but that is not the case until the transition process is over and the deal closes. Everything that happens before that point can transfer value from your pocket to theirs. Hiring the right team of experts protects you.

2. Team Play

If you match up the typical “buy-side” team members on a practice sale to the typical “sell-side” team members, you can see how the buy-side team might be deeper and purpose-built. Both teams have an attorney. The buy-side team will have accountants focused on practice acquisitions, and the sell-side team will have its business CPA and bookkeeper, whose experience in representing business sellers may be deep or shallow. The sell-side team may have a broker or other intermediary but will also include the owner of the selling animal hospital and any individuals employed by the practice owner who will help with the practice sale. The buy-side team will include multiple corporate development professionals employed by the buyer performing various tasks– more specialists.

Assuming the practice owner is not a corporate development specialist, the broker or financial advisor intermediary (FIA) for the sell-side client will have to compensate for any blind spots the seller’s CPA and attorney may have and, combined with the practice owner's efforts, perform any tasks on the sell side that a team of employed specialists performs on the buy side.

To fill these blind spots effectively, your FIA or broker, attorney, and CPA will, collectively, need various skills and experience. A career solely in sales, law, or real-estate brokerage is likely not enough to equip a person to be effective in this role. Those few individuals with all that is required to be effective don’t work for free and may have more lucrative opportunities in “big law,” private equity, or Wall Street.

Corporate development is, at best, a technology-facilitated service. People of all experience levels and across a variety of functional areas participate in the process of buying or selling a veterinary practice. It should be obvious, but it is desirable to hire people who are trustworthy and competent to work for you. Facts: Not everyone is.

The challenge of selling or buying a small business is closer to the challenge of selling a large business than it is to selling residential or commercial property. One reason is the employees. Employees with diverse dreams, aspirations, and motivations do not impact the value of a real estate asset. Most of the time, you can sell a property to the highest bidder at the highest sales price, and everyone walks away happy regardless of what happens next. This is not the case with a business that employs people, mainly where people are the key assets.

Competence in corporate development is borne through experience, or “reps,” as well as real-world exposure to various businesses and strategic business topics. To successfully address and respond to all the issues that can impact a practice transition, one should be deeply familiar with all manner of financial, legal, accounting, and operational topics. Finally, one needs to be a good communicator, including having the ability to influence.

In addition to competence, you want your experts to be honest, “straight shooters.” Your experts may need to tell you things you do not want to hear.

3. Who are you Hiring?

Because very few individuals have the necessary skills to see a practice sale or purchase through from end to end, corporate development on both the buy-side and sell-side tends to be compartmentalized. For instance, specific individuals reel in the prospects; others do accounting due diligence and operational /medical diligence, while others still negotiate key business terms or draft the paperwork. A compartmentalized team approach can be effective, but it requires the corporate buyer, law firm, broker, or consultant to carry additional overhead – i.e., salaries - that must be paid regardless of deal volume.

On the buy side, the overhead can be sustained by the cash flow generated by the practices that have been acquired. A portfolio of practices provides recurring cash flow to support recurring salaries within corporate development.

On the sell side, no portfolio of practices provides long-term recurring cash flow. There is only another closed deal. Compartmentalizing corporate development on the sell side only works when there is sufficient deal volume to support it. Combine this fact with the reality that professionals who are high quality may have more lucrative opportunities and you can see the quality of individuals can degrade quickly at a “firm” specializing in one or more components of sell-side corporate development for small businesses like veterinary service providers.

Compartmentalization can also make sell-side brokerage less effective. When soliciting offers from multiple parties, giving each party the same message is important. It is also important to know what each party has been told. If the individuals working on your deal are only in the details of some aspect of the process (i.e., calculating your EBITDA or communicating with potential buyers), you may make mistakes in what you communicate. The risks are easiest to manage with a small team, with every individual participating in all client meetings or calls.

A business brokerage firm may only have one or two individuals at the firm who have all the skills you want in an advisor. While having many employees focused on different functions may help the brokerage firm prosecute a greater volume of deals, it’s unclear whether this creates a better service for the DVM Owner client.

You want the most experienced and “best” the firm has to offer focused on your deal. You don’t want her supervising someone else; you want her involved in the details of your deal. Practically, this is impossible as deal volume increases unless your practice is very special. For this reason, I would suggest you be very careful about hiring a “firm.”  Make sure you are hiring individuals; the “firm” should be a secondary consideration.

4. Incentives - Intro

People respond to financial incentives.  Sometimes, the response is conscious, but it can also be unconscious.  While a professional may have a sterling reputation and strong moral compass (not always the case), they may still, on the margin, act in accordance with their financial incentives.  This should be no surprise.  The longer I live, the more I am astounded at what people will do for money.

Ideally, you want the incentives driving the professionals you hire to be perfectly aligned with your own.  Perfect alignment is the only way to ensure someone will always be working to your benefit (as opposed to their own).  Perfect alignment, however, is not always possible.  However, thoroughly understanding the incentives that drive the professionals you hire will help you to better contextualize the advice you receive and understand the right questions to ask to keep everyone honest.    

5. Incentives – Hourly Professionals

On your veterinary practice sales team, you will employ a lawyer and, most likely, a CPA.  Most lawyers and CPAs charge by the billable hour.  The more time they spend on the project, the more they get paid.  The bill is due regardless of whether you consummate a deal.  The risks to you of this incentive structure should be obvious.  

The lawyer’s job is to help negotiate the deal documents that dictate the particulars of your practice sale.  Within this mandate are thousands of ways to create billable hours and little to encourage efficiency.  While most lawyers who charge by the billable hour will tell you that they don’t make work to create more billable hours, the incentives do not foster efficiency because more hours equals a larger paycheck.  I have seen this arrangement cause outsized and surprisingly large expenses for practice sellers in many cases.

If you hire professionals who charge by the hour, you must actively manage their work activities to protect yourself.  Here are my recommendations for best practice:

a) Due diligence - Make sure you check references and hire someone you believe is trustworthy and competent.  Competence is born through experience, so make sure your lawyer or CPA has closed veterinary practice sales.  If they have not, find someone who has, or be sure to pair that lawyer with a high quality broker or FIA who can keep them on track  

b) Vigilance - Make sure to periodically request a tally of billable hours committed.  Keep a close eye on where the bill is relative to what the lawyer or CPA told you they initially thought the project would cost.  If you are not near closing, and the bill is approaching the total, ask what can be done to be more efficient in the future.  I recommend this approach instead of arguing over hours already billed because you do not want to harm your relationship with your attorney in the middle of a deal unless you feel you must fire them.  Better to keep a close eye on the bill and work with your attorney to be more efficient in the future.  

c) Process – Be careful about what you ask your lawyer or CPA to do.  You hire a lawyer to negotiate legal terms and review deal documents.  Keep them confined to this narrow mandate as much as possible.  It would be best not to ask them to negotiate business terms or market your practice.  Asking hourly professionals to take on roles outside of their expertise is a surefire way to increase your transaction expenses without increasing the quality of the service received.

6. Incentives – Project Fee

Some attorneys will charge a certain dollar value for working on a project.  This fee arrangement has the benefit of encouraging efficiency but may also encourage corner-cutting.  If you hire an attorney under this arrangement, make sure they have a strong track record of completing the kind of transaction you are hiring them to complete – a veterinary practice sale.  Conduct your due diligence on the professional and stay involved.  

7. Incentives – Success based

Some professionals (including brokers and FIAs) charge a large fee at the close of the deal, but only if the deal is closed. Generally, the fee charged is a percent of the consideration received, though more sophisticated arrangements exist.

These success-based professionals are more aligned with their clients than hourly professionals. If the success-based professional cannot find and close a deal the client likes, the client will not need to pay the success fee. These professionals are incentivized to find and close a deal that meets the client's needs.  

However, some success-based fee arrangements provide better alignment than others.  The most common fee arrangement is a flat fee %.  For example, a broker may charge a fee equal to 10% of the consideration received.  Compare this to a fee arrangement wherein the intermediary charges 5% of the consideration received up to a performance hurdle and 12% thereafter.  The second arrangement can provide a greater incentive to find you a great deal than the first arrangement.  Even so, these arrangements offer much better alignment between professional and client than a billable hours arrangement.  In general, if the broker does well, so do you.  

In general, the alignment is better, but also remember that brokers or FIAs who are employees at large firms are expected to complete multiple deals per year.  On the margin, a professional who has a quota or has a bonus related to the number of transactions they complete may be more likely to rush and cut corners than a broker or FIA who has no quota and owns the business himself.  Every bad outcome harms the Broker or FIA’s Firm’s reputation.  The individual responsible can move to a different firm, while the owner cannot.  

You can and should ask your success-based professional to handle various tasks to help complete a deal.  These professionals are incentivized to get to a closed deal, so they should be willing to help you in myriad ways.  Effectively, since the success-based professional is paid when a deal closes, this extra help costs you nothing extra.  In addition to marketing your practice and interacting with potential buyers, the most effective intermediaries can also “quarterback” your deal by triaging work streams among your legal team and CPA.  This last piece is an underappreciated part of how an effective, success-based intermediary can save you money, particularly on legal bills.  

8. Hiring for Quality with Success-Based Professionals

There are many reasons to hire a high-quality, success-based veterinary practice broker or FIA.  However, quality is not required to make a living as a broker or FIA. In the veterinary services market, there are many good buyers for any high-quality practice.  Finding a deal for such a practice isn’t particularly difficult.  Combine this dynamic with the fact that success fees are high, and you are left with an over-supply of brokers and other intermediaries who can “help” you find a deal, but will fail to find you a great deal.  

Here are some ways you can increase your odds of hiring a high-quality, success-based intermediary:

1. Hire an individual, not the firm.  As explained above, creating a profitable business in veterinary brokerage generally requires processing a high volume of deals.  Processing a high volume of deals without the aid of technology requires a compartmentalized approach.  Make sure you know who will be working on your deal, what part they will play, and what experience they have in closing veterinary practice sales.  The firm's track record is much less important than the track record of the individuals who will be working for you.  You should confirm whatever you are told by checking with references that have been provided.  

2. Carefully review the engagement letter.  You want to be clear on what the intermediary will do for you and how they will charge a fee.  In many veterinary services transactions, non-cash consideration is involved, such as an equity stake in a JV entity or the acquiring corporation.  Make sure you know precisely how your intermediary will value that stake and how their fees will be assessed.  The approaches taken in the market vary.  Some intermediaries value the equity stake at the value the consolidators provide, while others do their own valuation work.  Some intermediaries will require you to pay a fee on the value of the stake at close, others will require you to defer that portion of the fee until you liquidate your stake.  Each arrangement creates different incentives for the intermediary that may no longer align with your own.  Make sure you understand the proposal and then consider the incentives that are created.  

3. Understand how your intermediary will work with your attorney.  The seller has the most deal leverage before signing a Letter of Intent.  In addition, the more active role your intermediary can take in negotiating the business terms of the deal (and the applicable deal documents) after the Letter of Intent is signed, the more efficient your attorney can be.  Make sure your intermediary is familiar with the deal documents and ask them explicitly when they involve an attorney in the deal process.  

4. Ask your intermediary whether they will set a “list” price for your practice.  Generally, this is a sub-optimal way to sell a small business.  A “list” price is one opinion of the value of the business.  Buyers will have their own opinions, which may materially diverge from the list price.  Setting a list price can result in a sub-optimal outcome.  

5. Hire based on track record, experience and your read on the individuals who will be working for you.  Do not hire based on an broker or FIA’s indication of value.  Often, a DVM Owner's first interaction with a potential broker is asking the broker to value the practice.  Brokers understand that clients erroneously put a lot of stock into this valuation.  This valuation means very little since it is just one person’s opinion based on the information provided.  Choosing one broker over another based on their opinion of your practice’s value doesn’t make sense.