[EP 274] Unraveling the Intricacies of Medical and Veterinary Practice Sales

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Intro [00:00:00]:

Ladies and gentlemen, good evening. Are you ready? Okay, here we go. You’re listening to The Deal Room podcast. Join us as we bring you the inside scoop on business, sales and acquisitions, get across trends in the area and hear the industry’s best recount their real life tips, traps and experiences. Now here’s your host, Joanna Oakey.

Joanna [00:00:24]:

Hi, it’s Joanna Oakey here, and welcome back to The Deal Room podcast, a podcast proudly brought to you by our commercial legal practice Aspect Legal.

Now, today we are back with an episode that’s part of our State of the Market series, where experts in a particular industry or field of practice join us to give us the latest and greatest on what’s happening now. In this episode, which is part one of a two-part series, we’re focusing on the field of medical and veterinary practice sales with guests Chris Babich and Paolo Lencioni. And these two are absolute specialists in each of their fields. So Chris is a specialist in the medical field. He is a business broker in the field of medical and GPs. And Paolo is an expert in veterinary practices and dealing with veterinary practices. So Chris, Paolo and I discuss in this episode the similarities and the differences between business models in the medical and veterinary sectors and what they’re seeing in the market right now.

Joanna [00:01:36]:

So now, without further ado, let’s get into it.

Joanna [00:01:41]:

Paolo and Chris, welcome to The Deal Room podcast.

Chris & Paolo [00:01:46]:

Pleasure to have us.

Joanna [00:01:47]:

So good to have you both. I’m really looking forward to this, and the reason why I’m looking so forward to it is I’m always infinitely interested in business and we do a lot of work in the health space. So that means sort of medical, dental, veterinary, allied health. But the concept often is from an external perspective, that the business models are very similar to each other. And indeed, the more and more work we do in each of these sectors, the more and more I realise how different they really are. I believe there are similarities, and some of that relates to perhaps the passion for patients and that technician side of what our founders and owners are doing. But for business models themselves, I’m always fascinated at how different they are.

Joanna [00:02:38]:

So I thought, of course, let’s bring along the two experts in each of the different fields of different types of these spaces. And maybe I’ll just throw it over to each of you now just to give us like 1 second background of the fields that you’re in and your experience from it. And then we’re going to drill right into this topic area. So Paolo, maybe throwing to you, maybe if you just give our listeners that two second intro to who you are and what you do right here.

Paulo [00:03:08]:

I’m Paulo Lencioni. I’m one of the founding members of an accounting firm, APL Accountants, who specialized for the last 14 years or so in the veterinary space. We’ve recently, recently started working in the dental space also and for my sons, I used to be a veterinary surgeon. And then I found veterinary science too exciting, so I became an accountant, basically. That’s it.

Joanna [00:03:28]:

I love it. That is like the best history ever. That’s fantastic. And Chris, how about you?

Chris [00:03:38]:

Well, I’m Chris Babich, obviously. I’ve been around for 42 years in the same industry dealing specifically with doctors in terms of practice, sales, valuations and locum recruitment. Permanent recruitment of GPs mostly. Do GPs, do some specialists? Look, I enjoy the work. As I say to all my doctors, I’m on a constant working holiday. So they say, are you ever going to be away? I said, no, I’m on a constant working holiday.

Joanna [00:04:05]:

Maybe Paolo, give us just a snapshot of what do you think makes veterinary practice businesses, veterinary businesses, sort of different to other types of businesses that you see in the market. And of course, you, as you say, do a bit of work in dental as well. So what are the things that you think are sort of key and interesting about veterinary businesses?

Paolo [00:04:30]:

Yeah. Okay. So from the veterinary perspective, one of the things that makes a veterinary business a good business to have is that it’s very low risk in terms of insolvency. Once you’ve established a veterinary practice and you’ve established a team there and you’ve established a good location, those things, particularly location, planning,g consent, for example, for a veterinary practice is significantly harder to get than it is for the other medical industries. So that has inherent value already and creates a barrier to entry for competitors, for example. So from that perspective, the businesses are quite solid and it’s very rare that we see a privately owned and privately owned is the key word here. Not corporately owned, but privately owned veterinary practice go under. So that’s kind of, I think, what makes it important.

Paolo [00:05:21]:

And the other thing I noted when we were working with dentists and vets is the key person dependency aspect of veterinary practice isn’t as prevalent as it may be as it is in dental, for example. I don’t know what it’s like in GP practice and I’ll delve into some of the reasons around that later on, maybe, but that kind of makes them easier to sell in a sense, because you don’t have to worry that much about Oakey person dependency. But then I think the rest of it, when you compare any medically based industry, like whether it’s a GP, a dentist or a vet, versus something else like a restaurant, or another type of business like that, I think the risk component is significantly lower in medical space than it is in other businesses, because you know what you’re getting. The workflows and processes are fairly similar and there’s consistency around people who work in them. Even the buyer is going to be a doctor or a dentist or a vet. So effectively they’ll have the skills to do those particular jobs. So I think that just makes it safer. So in Europe, in the UK, the corporatization of veteran practices hit 70% to 80%.

Paolo [00:06:27]:

In Australia, it’s currently only sitting at about 20% tops. I have a very strong belief that when you’re dealing in a service-based profession, or particularly an ethical profession, the shareholding or the ownership of that business really needs to be in the hands of people who know something about that business. So I don’t care in the veterinary space if it’s a veterinary nurse or a veterinarian, or a veterinary practice manager who’s been a veterinary practice manager for years and years and years. But as soon as that model changes, it’s a recipe for disaster for patient care, because once the decision-making is taken away from the medicos and given to someone who knows nothing about the medical industry, then decisions get made that of questionable ethics. Fortunately, in the Australian veterinary space for our clients, because we only service privately held veterinary practices, we won’t touch a corporate. Fortunately for us, the best thing that can happen to one of our clients is if their best competitor gets bought out by corporate. Because the attrition rate of customers from a corporate veterinary practice is significant, and generally between five to seven years after acquisition, the customer base has normally leached out to a point that that practice is normally about a quarter the size of what it was seven years ago. And I can say that as a fact because I was actually involved.

Paolo [00:07:54]:

I mean, we will help our clients. If our clients want to sell as a succession plan to a corporate, we do it. And in the initial major acquisition of corporate veterinary practices that happened about ten years ago, we were quite heavily involved in quite a few practices, selling out those practices. Some of them, the premises, is now standing vacant. So the business owner who sold his business to that particular corporate and was hoping to get passive income in retirement as a landlord to a purpose built veterinary hospital, now has a vacant practice. And what happens then is they just put in younger vets as tenants, as a startup, and within six months that practice is booming again. Now that’s a message to me. Under corporate hands it went under, and then after six to twelve months under private ownership, again it booms.

Paolo [00:08:37]:

It tells me something very, very special about how that works. So there is corporatization happening. We are vehemently against it, and we actually have put processes in place across our firm to facilitate easier buy-ins for younger vets into bigger practices. And that’s made a big impact on the amount of corporate sales now that’s happening in the veterinary space, because we believe for the future of professionals working in that industry and the industry itself, and for patient care, the decision-making has to stay within the hands of those professionals.

Chris [00:09:08]:

It’s interesting you say that, because the only conclusion I can make for that is that people obviously care more about their pets than they do about themselves, because the corporate sector is very well and alive and going very strong in the medical field. So I don’t know, I think a lot of things you said there were to do with service I don’t quite understand, because the service is individually provided by the doctor, by the vet, to the patient. Right. So if that continues, the, that particular level of satisfaction should still be there. So the attrition must be obviously because the actual vets are not happy with the corporate management.

Paolo [00:10:05]:

I think this highlights one of the key differences between GP practices and veterinary practices. In a veterinary practice, a veterinarian does not necessarily, if I’m working in a veterinary practice as a vet, I do not act independently as a contractor in that practice. There are rules and there will be standards of care applied across that whole veterinary practice that I have to adhere to. The reason being, and this will be one of the key differences, this actually segues really well into the key differences of the two businesses. In a veterinary practice, if the pet owner takes a pet into that veterinary practice, they will have a preferred bed, but they will not necessarily always see the same bed. Even if, as much as that veterinary practice may try to assist in doing that, it certainly will not be the case. And the main reason for that is a veterinary practice has a pharmacy, it has a radiography facility, it has hospitalization, it has critical care, and it has sterile operating theater and unsterile operating theater. So the professionals in that business are actually rostered on a rotation and they will work in all those areas of the business.

Paolo [00:11:13]:

So their consulting room work will only be a part of what they do. And therefore for consistency across that business, you have to apply standards of care so that if I see a patient that another clinician saw two weeks ago with, say, a skin complaint, my approach to treating that is going to be fairly similar because I’m picking up someone else’s case. So because of that mechanic in the veterinary industry, then if a corporate takes over, they will change their standards of care. And very often under corporatization, there’s a degree of supply chain control. So they’ll have preferred medication, preferred products, and certain things that they want that practice to achieve, like wellness plans or subscription plans, which not every clinician is comfortable with. So yes, what happens invariably, and we’ve actually seen in a couple of recent corporate cells, there’s been six clinician practices and within four months of corporate ownership, it’s down to two. And they can’t recruit another staff member because the medicos do not like their standards of care dictated to them by someone with an MBA, for example.

Break [00:12:20]:

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Joanna [00:12:47]:

And there is an interesting flip side to all of this as well, which is the valuation side of these relevant businesses, which I have been over time, astounded by the difference in the two, the valuation approaches of both of these types of businesses. Can we talk a little bit about that and maybe even talk a bit about multiples?

Chris [00:13:17]:

Well look, what happens is that, and I’m not sure what happens with veterinary practices in terms of size, but the majority, and again, the buyer profile is going to be an important factor here. And I’m not sure that again applies to veterinary practices. But in the medical field, the majority of buyers that we have are overseas trained doctors. They’re the ambitious ones. The local homegrown people really are more interested in working for someone, being contractors and just working there, doing their hours, going home, getting paid, end of story. And that’s it. So because of that, there are certain restrictions in terms of those particular buyers where they can buy, where they can’t, because they’ve got to all have access to Medicare as opposed to veterinary practice. Doctors are underpinned, their income is underpinned through Medicare, whether they like, they don’t like, whether they think it hasn’t caught up with inflation or whatever, they’re still underpinned by Medicare.

Chris [00:14:30]:

If you’ve got a pulse and if you look after your patients, you can’t lose. You got to make a living. Might not be as good as the guy down the road is doing a private billing situation, but he’ll still be all right. But look, so, in effect, what happens is that the major buyers are looking for bigger practices, so they’re looking at a practice that returns them a profit. Most of those practices that do that have to have a turnover of at least one annum, because when you look at all the cost factors on practices these days, and the two greatest really are rental and doctors. Now, the doctors, as contractors, are getting paid anywhere from 65% up to 75% in that range, most common being 65 to 70, depending on the fee structure, et cetera. So if you look at that, you look at the rent, that already takes up quite a bit of cost. And then, of course, then you’re looking for staffing as well.

Chris [00:15:44]:

It depends on staffing rate, how big of a practice, but we’re normally expecting a profit from those practices in the vicinity of around as low as three to as high as 15% of turnover. You’re EBITDA right now. Paolo is aware of what I’m talking about. Anyway, it’s real profit with all the. And backs and all the other goodies. Now, with that in mind, and you wanted to know about multiples. The sort of multiples we’re getting at the moment in sales are usually between three to four. That’s the sort of multiples.

Chris [00:16:25]:

And they will vary depending on many factors that we normally, when we do evaluation, we do analysis, a lot of those factors come in. The bigger risk factors are things like security of tenure. Is the property being sold as well? What sort of lease are they going to get? The big factors also, in terms of risk of the doctors maintaining doctors, will they stay on? What about the principal? Are the principals willing to work on because they’re the anchor doctors? And if the principals stay, in most cases, the other doctors will stay as well. It’s very important not to upset the apple cart. In the good old days, used to have buyers come in and they go, I don’t like this, I don’t like this. I’ll get rid of this person, I’ll change this. And they lost business, they lost doctors, they lost staff, but now they realize that what they’re buying is actually working. Otherwise they wouldn’t buy it.

Chris [00:17:24]:

So why change it? Just build on it. See areas of improving it. And those areas are normally to do with additional allied health, additional services, specialised clinics. So you got to look at all those factors when you’re working out what sort of a, what sort of asking price you’re going to have and what’s your actual sales price going to be. But it normally falls into that three to four times EBITDA in terms of calculations and in terms of what you see in the marketplace. But your main buyers are your overseas-trained doctors. The hardest practice to sell is a solo practice. The easiest ones are the multi-doctor practices.

Chris [00:18:10]:

You think, you know, they’ve got a lot of costs. They’re sitting somewhere in Westfield, they’re paying enormous rents, but they’re generating a good profit. And it’s an ongoing business and it’s not going to fail if you just get into it, do it right, you keep everything as is. You’re going to do well. And those practices have done very, very well after takeover. So depends on where you go. Does that explain it a little?

Chris [00:18:34]:

That’s brilliant, Chris. I absolutely love it.

Paolo [00:18:37]:

Got a question for you. Chris Weber, three, two, four times multiplier. Is there normally an earn out clause associated with that?

Chris [00:18:43]:

That’s an interesting point because that comes into the element of terms and conditions of sales. So what we try and do, firstly, we try and have a very simple 10% on exchange, 90% on completion in four to six weeks time, nothing more. Thank you very much. Right. But as prices get higher, there are smaller corporates as well that go for these earn out clauses and all sorts of stuff, claw back conditions and they can become quite onerous. I always say to my doctor, I said, look, there’s the price and there’s the terms and conditions. So the price might to vary quite a bit if your terms and conditions again in a year. I mean, I’ve had some doctors with incredible terms and conditions. They still expect the top price and it’s very hard to achieve.

Joanna [00:19:49]:

Well, that’s it for this episode of The Deal Room podcast. We hope you’re now primed for your next deal with these pointers and have enjoyed these fascinating insights. Now, if you’d like more information about this topic, then head over to our website @thedealroompodcast.com, where you’ll be able to download a transcript of this episode as well as access any contact details and any other additional information we referred to in today’s podcast.

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Joanna [00:20:53]:

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See you next time, ladies and gentlemen.

Outro [00:21:22]:

That will conclude this evening’s entertainment. Thanks for listening to The Deal Room podcast. To find out more about this episode and other episodes in the series, check out the show notes or head over to our website @ thedealroompodcast.com.au.