The Evolution of Veterinary Practice Brokerage

Brokerage has been around for decades, likely centuries.   Real estate brokerage, which nearly everyone above a certain age will have had some interaction sub-specialty of brokerage.  Real estate brokers list the property and advertise it to aggregate potential buyers to see who is willing to pay the offered price.  Or, engage in one-off negotiations to see which buyer will pay the highest price.  In any brokerage service, the level of research and financial analysis that the broker performs to assist the buyers in understanding the opportunity may vary, as will the skill and/or experience of the individual broker.  There are firms of brokers that seek to inculcate best practice or capitalize on pooled marketing resources, but the quality of individual broker remains of paramount importance.  

Almost everywhere, brokers are paid a commission proportional to the deal value.  The commission is paid when the deal closes.  The commission, or success fee, creates incentives that are different than if the broker were paid by the hour, as most legal and accounting professionals are.  Some of these incentives align with the client’s goals, some do not.  

Incentives Matter:  

One such aligned incentive is that the success fee incentivizes the broker to do work that will facilitate the close of the deal, even if this work is extraordinary, or outside of the scope of a normal deal process.  Examples from my own personal experience have included creating equipment / asset lists by reviewing scanned receipts, speaking to banks about financing an associate’s purchase of the practice, and negotiating key provisions in legal documents.  If a broker can competently complete these kinds of projects, they offer great value to the client, who pays nothing directly for extra work.  If a lawyer, or accountant is required to complete these projects, the client will pay an hourly rate.  These projects can add up over the course of an engagement.  A good broker can be safe set of hands to handle all the work that falls outside of the specific expertise of your lawyer or CPA.  

One misaligned incentive in brokerage is that the success fee requires a closed deal to become a cash commission.  On the face of things, this is good for the client, since the client can walk away from a deal at nearly any point without creating a major obligation to their broker (not so with an expert you have agreed to pay by the billable hour). However, on the margin, this can incentivize brokers to look for the quick and easy deal instead of the best deal.  Real-estate brokers were (still are) the worst offenders.  Once reason things got so bad in real-estate brokerage is that the trade group had so much power.  It was simply not possible to hire a broker under an engagement agreement outside of the standard, which created severe mis-incentives for buyer agent and client.  Business brokerage, of which veterinary practice brokers are a sub-specialty, can offer more flexible fee structures to clients.

A second misaligned incentive, which is shared to some extent by lawyers who work on transactions, is that there is very little repeat business.  A veterinary practice owner does not typically get the opportunity to sell the same business twice.  Though they may own more than one business, each practice is unique and the market conditions change.  As a result, it is difficult for the seller who is selling their unique business to know whether they have been well, or ill served by their broker and lawyer.  This situation provides more opportunity to deliver sub-standard service and still get paid and lauded.  Some clients may never realize that their broker did not perform well.  Whether a broker actively chooses to take short-cuts or not, is once again, dependent on the individual broker.  It is possible that a broker inside of a firm will be watched over so that they cannot take egregious short-cuts.  It is also possible that the expectations for production set by the firm create the pressure that begets the short-cuts.

Veterinary practice brokerage differs from business brokerage in most other industries for at least one important reason.  When selling a veterinary practice of a certain size, there is a relatively small number or potential buyers.  For most veterinary practices of a certain size the buyer most willing and able to pay the highest price will be a corporate buyer.  Since the corporate universe is ~50 parties (of which at least 28 are regular acquirors), the pool of potential buyers is limited, to the extent the seller is looking to discover the market clearing price.  A bakery, for instance, may have 100s or 1,000s of potential buyers.  For most brokers, the process of identifying potential buyers for a multi-DVM practice is no more difficult than making a few phone calls to the “usual” crowd.   What’s more, the buyers in this usual crowd have all bought practices before, in some cases many.  They have all the resources to quickly size up targets, drive the diligence process and negotiate legal documents which they draft.  All of this makes the minimum requirement to earn a fee brokering a veterinary practice sale very minimum indeed.   Since the client won’t get another chance to sell the same practice if the client chooses to close brokered a deal, the client will have no obvious, systematic way to compare his broker’s performance to what another broker could have done with the same engagement in the same market.  

In my opinion, these issues lead to the following problems for clients of veterinary practice brokers

1) Quality is hard to determine, particularly before a broker has been engaged

2) Quality varies greatly from individual broker to individual broker even, sometimes, within the same firm.  

Since quality matters greatly to the seller’s (client’s) outcome, hiring the right broker is a very important decision indeed.    

Not Hiring a Broker is Sub-Optimal

If a parallel universe existed, a seller could pay the same commission rate in the same market but achieve wildly different outcomes.  In one case, the commission, though a larger $ amount may be the best investment the owner has ever made, in the other, with a lower $ commission, a dead-weight loss.  

It’s no surprise that veterinary practice brokers, in general, do not have seem to be trusted by the veterinary seller community.  With corporate buyers doing their own aggressive outreach, it’s no surprise that many veterinary practice owners chose to forgo the services of a broker.  

However, choosing to forgo hiring an effective broker  is far from optimal.  There are numerous reasons hiring a good broker is an excellent financial decision.  Many business owners are shrewd enough to know when they are out of their depth.  It is my experience that the veterinary practice owners who do not hire brokers seem to be unsophisticated in the very subject matter in which a good broker is an expert in.  Most reckon that their lawyer or CPA adds sufficient expertise.  There are many excellent lawyers with a sole focus on business sales, but even these professionals will not have the market insight or expertise in financial analysis and business marketing that a good broker will have.  

Really good business sale (called mergers and acquisitions) lawyers know and enjoy structuring tax efficient deals and transaction risk mitigation.  They are hired for their expertise in these areas.  The ones who become really good, spend all of their time working on transactions in this capacity.  Therefore, if your lawyer is also marketing your practice and compiling your financials, (or is supervising someone who is) they are not as focused on the legal and tax issues applicable to veterinary practice buyers and sellers. It’s a dual mandate, that like any, can cause that neither role is performed as well as could be.  T

A good veterinary practice broker will have a huge impact on your potential for success:  

- A good broker will properly describe your business, including key sources of value, and put it on the radar of a broad group of potential buyers.  While it may be tempting to think that any interested buyers would have reached out already, this is far from true.  

- A good broker can also “see around corners” to keep a client from doing something that might damage his business prospects in a deal, or if a deal falls away.  One important example of this concerns your staff.  If you are going to sell, you will have to inform your staff about the sale.  Doing so improperly may damage your business.  Good brokers prevent these kinds of mistakes.  

- A good broker is a trusted hand for executing the heavy lift that a sale process is.  Since the work is included in the price, the client who hires a broker can apply more focus to running the business than one who does not hire a broker.  

- A very good broker, will be able to advocate for your legal and business interests and negotiate all business aspects of the deal.  It may be tempting to rely on your lawyer but this is sub-optimal.  Generally, the business people who determine the business terms under which the practice will be purchased prefer to negotiate with non-lawyers.  If the client’s lawyer is charged with negotiating business terms, the buyer’s lawyer will have to be involved.  This can become an intermediary-to-intermediary negotiation as opposed to a principal-to-principal negotiation.  Such negotiations are rarely efficient and seldom set the stage for a good partnership.

- Finally, a very good broker will be able to evaluate the differences among offers you receive and present them to you in a way that they can be easily compared.  Not all corporate equity is the same and not all JV equity is the same.  Being able to identify and explain the different drivers of value in this kind of consideration requires considerable experience with high stakes financial analysis.    

- A good broker will also perform substantial financial analysis, including a calculation of Normalized EBITDA.  It is critical for the practice seller to have their own perspective on Normalized EBITDA.  If the seller does not, he cannot form a perspective on what his practice might be worth without relying on a buyer’s calculation.  This presents an attractive opening for buyers to capture value.  

I could go on and on.  A good broker can level the playing field, though as suggested before, competence varies.

Ultimately, the decision made by many veterinary practice sellers to forgo the services of a good broker has transferred $BNs of value directly into the pockets of private equity owners.  A practice sale is, in many respects, a zero-sum negotiation.  Any value not captured by the seller, accrues to the buyer, and the buyers know, through experience, how to capture that value.  Buyers have the experience to identify and capitalize on the openings they see to capture value.  While potential buyers may pretend to be on the side of the seller, they are not, until the deal closes.  Until the deal closes, there are many ways the buyer can capture value through their experience and by manipulating the trust and rapport they might have built with the seller.  

Fixing Brokerage

What compelled me to leave wall street investment banking, to work in veterinary services brokerage was the knowledge that veterinary practice brokers were poorly serving their clients and that this fact was resulting in hard-working veterinary practice owners losing what was their due.  I believed that the brokerage service was in need of an upgrade and that an upgrade was possible using technology and process.

Brokerage, today, is a high touch professional service, as is legal work and accounting work.  Large professional services companies (i.e. E&Y) in some sectors invest heavily in technology so that the service their people perform can be of uniform (hopefully high) quality across the company.  And still, even at these large companies, the quality of the professional service provided to a client greatly depends on the individuals the client hires.  The quality of practice brokerage service a seller may receive today is dependent on the individual broker he hires and the process that broker uses, no matter, whether that broker is a part of a firm.  Hire a broker who is under too much pressure to close deals, or inexperienced, or not motivated, and your outcome is more likely to be poor even if the process is decent.  Hire someone who has integrity, experience and is motivated, and your outcome is more likely to be good, unless the broker’s process is poor.    

While you can never fully take the professional from professional services, you can equip brokers with a good process and provide guardrails that ensure the process is run without short-cuts.  At VetValue we are creating, and will operate, a cloud-based veterinary practice sale marketplace designed to do just this.  This is no mere listing site.  We are building a two sided market-place in which we can move both sellers and potential buyers through a standardized “process” of price discovery, diligence and documentation.  The standardized, rigorous process is meant to establish a base line for quality that is less dependent on the people who provide the brokerage services.  

The process we are building into our market-place is borne from our own experience in selling $1Bn+ of veterinary practices in a high quality way.  This process offers greater transparency to both buyers and sellers, lower transaction fees for sellers and the most efficient and useful financial analysis available to either buyers or sellers.  

What’s more, building our process into our marketplace will allow us to bring our fees to levels that are well below what any other good veterinary practice broker charges without diminishing the level of service provided.  We will also offer different service levels so the service can be more useful to a range of sellers.

The VetValue Connect Marketplace is coming in 2025.  We’re extremely excited about what this will mean for veterinary practice sellers