Canada’s veterinary market is rapidly changing as it continues to undergo consolidation by corporate investors. Practices are being acquired or merged by these big groups, which form larger entities to gain economies of scale and improve profit margins.

Ten years ago, there were two main corporate consolidators in Canada: Associated Veterinary Clinics and VetStrategy. Together, they owned approximately 40 practices, representing roughly one per cent of all Canadian clinics (with Associated Veterinary Clinics owning the majority).

Fast forward to today, where there are several corporate consolidators actively purchasing practices in multiple provinces across the Great White North. Together, these groups now own about 13 per cent of the country’s veterinary practices. Compare this to the United Kingdom and the United States where corporately owned practices comprise approximately 50 per cent and 20 per cent of the total number, respectively.

However, while corporate consolidators may own a smaller percentage of practices in Canada, their market share in terms of revenue is much higher, as they have spent years buying up the biggest and best practices.

To fuel their growth strategies, most consolidators partner with private equity firms, which typically invest with a three- to seven-year timeline. These firms provide the financing to help grow a business rapidly with the goal of selling their investment for a much greater return down the road. The changeover in a corporate consolidator’s private equity partner can have a significant impact on its acquisition criteria and the prices it is willing to pay.

In Canada, we are likely to see more entrants into the consolidator market, considering the increased interest from at least one of the more than 40 consolidators in the U.S., Further, in some geographic regions, private veterinarians have begun to build their own ‘mini empires’ by way of multi-clinic ownership. These owners may choose to take the next step in the consolidation process and partner with a private equity firm to further expand their stronghold. Larger consolidators have the opportunity to grow rapidly by acquiring smaller consolidators, and this chance for a buy-out maybe be the goal of these smaller consolidators from inception. Merging, however, is common, and public offerings might soon become a possibility again—indeed, it is an evolving industry.

Pricing trends

When it comes to purchasing, prices paid by corporate consolidators tend to be consistently greater than a practice owner could receive from a private buyer. For many years, however, the prices paid by consolidators in Canada appear to be less favourable when compared to those in the U.S.

That said, recent trends have demonstrated offers for Canadian clinics are becoming more in line with the U.S. market when a desired practice meets a corporation’s acquisition criteria. Increased competition and aggressive growth strategies have brought about this change and, with it, a more educated seller.

Prior to the pandemic, there was talk of a corporate price bubble (meaning, these higher-priced offers could not be maintained and would soon decrease). While the early stages of the pandemic saw several consolidators put offers on hold, the market largely returned to ‘normal’ by the fall of 2020. In 2021, consolidators are once again actively pursuing desirable practices with very attractive purchase offers.

Looking at the U.K., staff shortages have, notably, impacted the market for CVS Group, Britain’s largest publicly traded veterinary corporation, with news reports stating the consolidator’s acquisitions had “slowed to a trickle amid a shortage of skilled labour and high veterinary practice valuations.”¹

Canada has experienced similar staffing challenges—and its corporate buyers are paying attention. Indeed, some consolidators are passing on practices that are otherwise desirable out of concern for their geographic location (and the accompanying challenge of bringing veterinarians to the area). This reduced interest frequently translates into lower purchase offers.

What is involved in pricing?

Determining a practice’s value and purchase price is a truly complex process involving significant due diligence and many financial and operational calculations. In short, it is time consuming for both seller and purchaser.

The following is a simplistic overview of the final two components involved in calculating a practice’s purchase price:

1) Adjusted earnings

This reflects the true earning capacity of the practice under normal operations (calculated as operational revenue less operational expenses). These earnings are referred to as ‘adjusted,’ as they are determined from a practice’s financial statements, which are frequently modified to better represent the practice’s economic reality. Key adjustments often include a restatement of owner’s compensation to fair market wages and assignment of a fair market rent when the same owner owns the real estate and the practice.

2) Multiple of earnings

As this author has observed through her experience as a practice valuator and practice broker, purchase offers are most commonly in the range of three to more than 13 times adjusted earnings (with higher multiples being associated with corporate consolidators and lower multiples with private purchases). It is only the most strategic owners that have commanded a multiple in excess of this range.

A practice owner should not assume a consolidator’s offer price is better simply because the multiple offered is higher; rather, this is dependent on the adjusted earnings calculation—and rarely do two corporate consolidators arrive at the same adjusted earnings level in their calculations.

For example, to determine an offer price, ‘Corporate Buyer A’ might find an adjusted earnings level of $290,000 and offer a multiple of nine. Meanwhile, ‘Corporate Buyer B’ might arrive at an adjusted earnings level of $250,000 and offer a multiple of 10. In this example, the lower multiple results in the highest price to the practice owner.

Finally, one should realize the highest price at first glance may not be the best deal in terms of dollars. There are many factors to consider when evaluating an offer, including working capital requirements, earnouts, holdbacks, post-sale employment agreements, equipment leases, referral lab agreements, real estate leases, and more. All of these factors require careful consideration before a practice owner can effectively understand the impact that will be had on post-transaction seller obligations and on final proceeds from the sale. Some consolidators, for example, will not take over equipment leases and/or referral lab obligations. In some cases, settling these long-terms contracts can cost sellers more than $100,000.

Choosing your buyer

Ideally, a practice owner will have multiple options when choosing a buyer; however, options to a seller could be more limited when a particular practice does not meet the acquisition criteria for consolidators. Remember the phrase, ‘location, location, location’? This has proven to be true in the veterinary practice sales market. There are areas across Canada (including entire provinces and territories) that simply do not meet the geographic criteria for consolidators.

Additionally, interest is not evergreen. Many corporates will cast a wide net initially, then transition to a more focused geographic strategy as they acquire more practices. It is an unfortunate reality that some profitable practices will close their doors because they cannot find a buyer, nor associates to work in the practice, and the owner needs to retire.

Seller beware

It has become increasingly important for practice owners to carefully read all contracts (e.g. buying groups, lab agreements, etc.) prior to signing an agreement.

Recently, this author and her associates learned some contracts signed by Canadian veterinarians in the normal course of business contain, in very fine print, the phrase, ‘right of first refusal.’ While at first glance, the company requiring the right of first refusal (ROFR) may not appear to be in the business of buying practices and the phrase may appear to be relatively innocuous; however, a ROFR has significant implications for practice owners.

Indeed, this terminology means an owner has a contractual obligation to offer their practice to the company that inserted the phrase into a contract should they receive a purchase offer from a third party.

For example, if you are a practice owner and an associate offers to purchase your business, you cannot simply accept and sell your practice to them. You must, instead, present the offer to the ROFR company and ask if it would like to make the purchase. Usually, the wording in the contract is such that the business with the ROFR in place must meet or exceed the offer price presented. Your associate may put in another higher offer, but the company with the ROFR will always be in control by having the right of first refusal.

The scenario is the same if corporate consolidators make you an offer. If you have, with another business, a signed contract with an ROFR in place, any offers you receive from a consolidator cannot be accepted without first giving the contracted company the right of first refusal. And, frankly, the incentive for a corporate consolidator to put an offer in on a practice it knows has an ROFR is simply not there. Ensuring you have a lawyer review all contracts in advance of signing is the best way to avoid this pitfall and others.

If you are a practice owner considering a sale to a corporate consolidator, there are a number of additional factors to consider, including:

1) The offer details—not just price, but working capital obligations, earnouts, holdbacks, etc.

2) The culture post-acquisition and philosophy—some consolidators are relatively hands-off and some move to rebrand upon acquisition.

3) Your continued role—how long will you have to work post-acquisition? What will that role look like?

4) Your ownership—will you be able to remain a partner? Are you required to remain a partner?

5) Your team—will your associate(s) be able to buy-in?

Keep in mind, as well, your current purchaser may be acquired themselves, merged with another company, or taken public.

The truth is, when it comes to buy-outs, they are all largely the same, yet quite different.

Elizabeth Bellavance, DVM, MBA, is a certified exit planning advisor with the Exit Planning Institute and is a Simmons & Associates’ practice valuator and practice broker representative. She can be contacted at 519-383-4438.

References

¹ “British veterinary practice chain CVS shuffles management.” VIN News Service. https://news.vin.com/default.aspx?pid=210&Id=9384510. Retrieved 6 April, 2021.