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 letters of intent from private equity backed veterinary services corporates. The right expert will advocate on your behalf and always put your needs before their own.
The reality is quite messier. VIS has created a run down on some of the pitfalls a veterinarian might encounter when hiring a broker or lawyer turned financial expert. A second order question for practice owner might be, when I do choose to sell my practice, how do I get the myriad benefits of hiring an expert team in veterinary practice sales without exposing myself to the downside risk? The answer lies in people and incentives. First some background, then we’ll cover people. Incentives will be in part 3.
Corporate development is, at best (what we strive for at VetValue), 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 trust-worthy 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 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, particularly one where the people are the key assets.
Competence in corporate development is borne through experience, or “reps” as well as through real-world exposure to a wide variety of 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 topics, legal topics, accounting topics 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 expert may need to tell you things you do not want to hear.
Assessing competence with respect to veterinary practice sales in an attorney, broker, consultant or CPA can be difficult for DVM practice owners. They tend not to have a large circle of trusted contacts who work in these fields. They may have contacts who have sold their practices and hired one expert party or another. Who’s to say that such a contact did a good job at selling their practice? I wouldn’t trust someone who has limited experience buyer or selling practices to know a truly good deal.
Any corporate development professional you may hire should provide references. Without a doubt you should avail yourself of anyone who has gone through the sale process and is willing to speak with you. You always learn something with these discussions. Any corporate development professional will have a track record that speaks to the quantity of deals done. Sometimes the quality can be determined as well.
Quantity is not the same as quality in this case. You want experts who can deliver great deals. Doing many deals does not always equate to doing great deals. A metric of quality for a broker or consultant might be something like on average our we have secured additional value of 4x what our clients have paid to us in transaction fees. For a lawyer a metric of quality could be anecdotal such as “I recently helped a client through this complicated issue and drafted this tight set of provisions.”
There’s no scientific way of choosing the advisor that is right for you. If any two have a similar high quality track record, glowing references and seem competent you may need to go with your gut. You can protect your downside by focusing on the incentives (which we’ll cover in a later installment).
5. Who are you Hiring?
Because very few individuals have all of the necessary skills to see a practice sale or purchase through from end to end, corporate development tends to be compartmentalized. Certain individuals reel-in the prospects, others do accounting due diligence, others operational /medical diligence while others still negotiate key business terms or draft the paper-work. A compartmentalized team approach can be effective, but it requires the corporate buyer, law firm, broker or consultant to carry additional over-head, salaries that will need to be paid regardless of deal volume.
On the buy-side, the over-head can be sustained by the cash flow coming from practices that have been acquired. A portfolio of practices provides recurring cash flow to support recurring salaries within corporate development.
On the sell-side, there is no portfolio of practices that 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 opportunities on wall-street, or on the buy-side 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 it is important to give each party the same message. It is also important to know what each party has been told. If the individuals working on your deal are only in the details on 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 focused may only have one or two individuals at the firm who have all the skills you want in an advisor. While having a number of employees focused on different functions may help the brokerage firm itself prosecute a greater volume of deals, it’s not clear that 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, very special.