My Recent Experience with a Veterinary Practice Broker
Many veterinarians don’t hire a broker when they decide it is time to sell their veterinary practice. There are likely a lot of reasons for this. Are they good reasons? Can’t say. One thing I can say is that it is difficult to determine a good broker from a bad broker before you have already committed. Furthermore, if you have never sold or purchased a business, you may not have any idea that you were poorly served even after the deal has closed. Ignorance is bliss, they say. When you’ve sold your business in a bad deal because your broker was sub-par, ignorance is also expensive.
I recently looked into buying a veterinary practice that was represented by a “veterinary broker”. After signing a quite sparse NDA with no non-solicit agreement, I was sent a template marketing book which included annual, but not year-to-date, financials as well as some facts on the business and facility. The book also contained a count of staff by position, the service mix and an estimate of the value of the inventory and equipment. Several pages in the marketing document were devoted to the derivation of the business valuation from the financials provided, including certain adjustments to the as-reported profit. At this point I was not given any instructions for how or when to submit an offer for the business, though I was told I could meet with the owner and visit the location.
I deduced that the practice had been listed and was being shown to buyers who expressed interest, though I knew not whether any of them were close to an offer, or how long any of them had had with the diligence materials.
After reviewing the materials provided, I had, naturally, many questions and requests. The marketing book contained a number of useful facts concerning the facility and business operation, but there were many more I would need before being able to understand what the business was worth to me. Goodwill, or value ascribed to non-tangible assets, can be a substantial portion of the value of a veterinary practice, and really any service business that employs people. If the practice comes with a well-equipped, high functioning team, there is substantial value in the practice for me (and to many other buyers). However, to understand this value, requires one to learn a lot about the team. In this area, the marketing documents and information provided were inadequate.
For instance, while the marketing book contained an employee count by position, a more useful measure is full-time equivalents by position. To learn this, I needed something that told me the hours each employee worked. Therefore, I asked for, and ultimately received, a payroll register in pdf form. Though I had not signed a non-solicit, the register told me the hours each employee had worked over a period and the gross wages they had received. For the DVMs, I also needed to know their production. To answer this question I received a read-out from the Pims system showing invoices and sales by period. In pdf, the document required a fair amount of data entry to be useful, but it had the information I sought. Next, I wanted to understand the PNL and adjustments. Fundamentally, I needed to understand what profit this business could generate in my hands. To this end, I asked for, but did not receive the general ledger or accounting journal. I was doing some casual work on the opportunity when I learned the practice had signed an LOI with someone else.
It occurred to me that any buyer would likely need the information I was asking for to present an offer with any seriousness. I wondered why the information was not already prepared and part of the initial package. To be fair, I was probably not a great buyer of this business, though if the broker knew that, or thought, that he didn’t show it. One fairly obvious reason I was not a great buyer was because in this state one must be a DVM to own a veterinary practice, something the broker never brought up though he knew I was not a DVM.
As this broker was probably charging the seller a standard 5 to 10%, I’m not taking a leap when I say the seller was poorly served by the broker. Here’s why I think this way.
1. A business, any business, is complicated. To understand a business, you need a lot of hard facts. The book I saw and the follow-up materials were a small subset of the facts I would need to present a firm and strong bid. Though I was provided information for some of my follow-ups, the information was not prepared or thoughtfully presented in a way I could use it – almost as if no one anticipated that a buyer would use it. Some of my requests for information were ignored, though the requests were reasonable in my estimation. In the absence of the facts I needed to present a firm bid, my options were to present an aspirational bid and be prepared to walk it down later after the seller was “pregnant”. Or submit an offer that was likely already low enough to give me enough cushion for bad findings in diligence. Any other potential buyer with limited information would likely see their options the same way to the detriment of the seller.
2. The people on the team create the value in the goodwill assets in a veterinary business. Either the agent was not accustomed to people asking for information about how people were paid, what they did, the hours they worked and what they generated in revenue at this stage in the process, or he was unprepared. The information I received along these lines was scattershot and never prepared for the purpose of delivering facts to a potential buyer.
3. With a business sale, setting a list price can be limiting. The purpose, it seems, of providing one is to set the sellers expectations and set the broker up for an easy deal if someone reaches the list price. In a real-estate auction, a list price can bring buyers in to incite some competitive bidding. The difference between selling real-estate and a business is that there are many publicly available comps for most real-estate purchases. There are very few for business purchases since there are fewer transactions, the results are not public, and the businesses themselves are less like to each other. Setting a list price offers very little value to the seller in a business sale.
4. I was never told when I needed to present a bid buy, nor was it clear that I had substantially the same information on which to bid as any other party. The client does not benefit from such a loose process. A process with no definitive start or end, allows anyone with a head start an advantage. When potential buyers are given different information, access to information or access to sellers, fewer buyers are likely to take the opportunity seriously. Running a process that does not have these characteristics is more achievable when the field of potential buyers is limited and known before the practice is brought to market. Had I been given time, I might have been able to present a bid that was more attractive than the LOI the seller accepted. As the process was run, I never even got a chance to bid. This is clearly something that poorly serves the seller.
If you take anything away from this, it should be that while all brokers charge fees that are comparable, the quality of service can differ greatly.