Valuations for veterinary practices are at an all-time high. Corporate groups are throwing everything but the kitchen sink into offers hoping to seal the deal and acquire you. It might seem as though things could not possibly get any better for sellers. Yet the data suggests a LOT of value (both financial and non-financial) is still being left on the table in most transactions for practices. Why? Well, it has to do with that darn statistical phenomenon known as sampling bias and how most sellers lose out because of it.
What is sampling bias? Well, if you are selling your house and Buyer A and Buyer B both bid $300,000, is that a good price? It is if Buyers C through Z all would bid $250,000, but not if they would all bid $400,000. A sample set that misrepresents the true market can impair judgments made about the market (for your practice). Expanding the universe of buyer bids creates clarity, and that clarity has immense value to a seller. Even in instances where a seller doesn’t want to accept the highest bid, knowing the bids of more buyers enhances the precision of the value, which aids your decision-making.
How does sampling bias inform us of the four types of veterinary practice owners looking to sell their businesses? It all has to do with the number of bids they are soliciting before accepting an offer.
1. “Mr. Nice Guy” (~10% of Sellers)
If there is one type of seller you DO NOT want to be, it is this one. “Mr. Nice Guy” is the seller that brings unbridled tears of joy to acquisition executives at the Corporate groups, and costs you a lot of well-deserved money in the process. Effectively, this type of seller does not run a competitive process soliciting bids from multiple prospective buyers before deciding who to sell to. This situation typically transpires after an acquisitions executive elevates above mere “acquaintance” to some level of informal “advisor” status with the practice owner. Then, when the owner decides it is time to sell, they get one bid from their new friend, trust that it is a fair one, and sign a Letter of Intent with that group.
Whether you realize it or not, prospective buyers spend an inordinate amount of time trying to ferret out how competitive of a process a seller is running. Seemingly innocent questions they ask can give away that you aren’t fully aware of the true market value for your practice. When that happens, you get lowball offers. If there is one sin nearly every acquisitions executive will commit with sellers, it is the sin of omission. Unless you ask for something in an offer, it will not be willingly offered, including a market price.
There is also a reason many acquisitions people at the Corporate groups are ex-distribution and pharma reps – they are assumed to have pre-existing relationships with practice owners that can be leveraged in this way. The biggest potential win for a Corporate is purchasing a practice at a discount to market value. Don’t be this type of seller; you’re doing buyers a favor at your expense.
2. The Do-It-Yourselfer (~75% of Sellers)
The most common approach to selling a practice starts with a seller either performing some casual research on their own for a few minutes or relying on prior interactions with buyers to put together a small group (typically 3-4 prospective buyers). This becomes the “universe” they engage with and solicit bids from. In most cases, the seller isn’t all that interested in pitting the bidders against each other, so they take the “best” offer from those initial bids and sign a Letter of Intent to sell the practice. Relatively quick. Largely hassle-free. Done.
Why do so many veterinary practice owners go this route?
- Time – it can take a long time to research all of the potential buyers out there
- Awareness – most practice owners don’t realize how many potential buyers there are for their practice. Long gone are the days when that number was mere single digits.
- Simplicity – managing conversations with more than 3-4 prospective buyers can be truly exhausting.
The major shortcoming of this approach, however, is that it consistently leads to undervaluation by failing to incorporate all possible bids. In such a strong seller’s market (such as the one the industry is currently in), there are two objectives every seller should strive to meet: understand the complete range of valuations in the market and decide what attributes are most important in an acquiring company. Only engaging with a few potential buyers results in an incomplete search that fails to yield definitive answers to either question. Since demand for practices is so high at present, sellers that know how high the market can go on valuation and know exactly what they want from a buyer can negotiate their way to an exceptional deal. They can have their cake and eat it too.
3. Sasquatch (~1% of Sellers)
Does this type of seller exist? Acquisition executives tell tales of having seen one, but those sightings are largely unconfirmed. Sasquatch is a mythical seller who defies the laws of time and space to be a full-time practice owner, and somehow finds the time to also run a full, exhaustive, robust selling process. This seller collects all of their pertinent financial records beforehand and has them ready to go for prospective buyers. This seller researches the 50+ groups buying veterinary practices, interviews all of them before whittling their list of potential suitors to a more manageable 10-12, and solicits bids from all of them. This seller is not averse to negotiating and aggressively does so with ALL of their preferred Corporate groups to find the “perfect” deal.
Gretel’s Broker team estimates that it would take an individual practice owner between 150-250 hours to accomplish this. Most practice owners don’t have that kind of free time, self-confidence, and/or expertise. Perhaps that is why Sasquatch is so rare.
4. The CEO (~15% of Sellers)
Delegation is perhaps the most important skill any CEO can possess. No one can be an expert in everything. (Yes, I realize the cruel irony of that last statement given that most of you are GPs who are expected to be experts in everything!) Yet, very few practice owners choose to rely on a professional practice broker in this industry. Only an estimated 8% of homeowners choose to sell their house without the help of a Realtor, yet in veterinary medicine, roughly 85% of practice owners choose to go it alone. However, if you ask any ex-practice owner who employed a broker whether they received a better deal in the end, the near-universal response is an overwhelming yes. “Better” deal is not only defined in monetary terms either; elements of employment contracts, building lease agreements, staff bonus plans, etc. are typically all stronger when negotiated by an emotionally impartial professional who has seen it all before and knows what to ask for in an offer.
In general, Corporate groups dislike brokered deals the most because they level the playing field and can mute the benefit of a Corporate’s pre-existing relationships with practice owners. It is these relationships and the emotional subjectivity that comes along with them, that the groups typically like to exploit through one-sided deal terms when acquiring practices.
Why don’t more practice owners use brokers? It is commonly due to an aversion to paying commissions. At face value, that can seem plausible, though the sophistication gap between the industry’s savviest brokers (shameless plug: Gretel is one of them) and individual practice owners continues to widen as offer terms get more exotic, actually enhancing the return-on-investment the professional brings. The dilemma is analogous to tiling a bathroom floor: many people could do the job themselves, but there is little denying that a professional does a much better job at it.
How a veterinary practice broker could help…
One of a veterinary practice broker’s activities is to survey the entire market to understand which prospective buyers are interested in the practice. This eliminates all sampling bias from the process. Additionally, a strong broker will manage the entire selling process on behalf of a seller, saving the practice owner a lot of time while also frequently arriving at a set of more preferential deal terms for the seller. A true win-win scenario.