[EP 276] 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?

Intro [00:00:03]:

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 Okie.

Intro [00:00:24]:

Hi, it’s Joanna Okie 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 our state of the market series, and we are joined by two experts in the fields of medical and veterinary practice sales, Chris Babbage and Paolo Lencioni for part two of our two part series on this unique sector. Now, part one is in the show notes if you missed it, so just click there to head back to that episode. But in this episode, part two, we dig into some of the differences in valuations, earnouts and other unique aspects of medical and veterinary practices when it comes to exits and acquisitions and of course, valuations. So here we go with part two with Chris and Paolo.

Chris Babich [00:01:20]:

I always say to my doctor, I said, look, there’s the price and there’s the terms and conditions, right? So the price might vary quite a bit if your terms and conditions are going to be. I’ve had some doctors with incredible terms and conditions, they still expect the top price and it’s very hard to achieve.

Joanna Oakey [00:01:42]:

But can I ask, Chris, if you’d have a stab in the dark of the medical practices selling at the higher of your multiples, what proportion of them are some sort of structured deal? So an earn out or something that’s contingent on the future operation of the business?

Chris Babich [00:02:05]:

Well, I don’t have that. So I don’t know what other brokers do, but I just don’t have that. I’ve got some that I’ve sold and actually some that I’ve got in the pipeline at the moment where they’re getting 70% of the agreed on price up front and the balance of 30% after twelve months, subject to maintaining the same profit margin. I’ve got that, but it’s rare in most cases where individual buyers are buying, it’s just straight out 10%, 90%.

Paolo Lencioni [00:02:52]:

So when we look at multipliers and stuff, I look at walk in, walk out sales and when I look at EBITDA. So just for kind of where we get this from and where we get our averages from is we also work as cfos effectively for about 100 veterinary practices where we do interim reporting for them. So the EBITDA base is across the clients we work hands on, which does run at a higher profit margin than the general veterinary industry. But our average client runs at an EBITDA of about 19.419.5 from the veterinary associations. Generally, the accepted average EBITDA for a veterinary practice is around 14 13%, which actually isn’t that bad either. So then when we come down to multipliers for walk in walk out sales, we would normally be applying a four to 5.3 times multiplier on a veterinary practice on that EBITDA jar. So from the sale perspective, the value perspective of the veterinary business, my feeling would be that it would probably come in at a higher value because of that. When we’re looking at things, we actually see quite a few with earn out clauses, never from a private buy sell, but because of the corporate activity.

Paolo Lencioni [00:04:12]:

If a corporate is purchasing a veterinary practice, they will not purchase a veterinary practice without an earn out clause. And generally they want a two to three year earn out clause now from the business owner, where they pay 80% upfront and the 20% residual is based on certain KPIs for the next two to three years. And the last one we had a corporate purchase paid a nine times multiplier. However, when you actually look at the opportunity cost, when you understand that the profitability of a veterinary practice is over 20%, generally, like in this type of practice, it was when you actually look at the opportunity cost of the business owner actually staying there for an additional three years, and nine times multiply actually equates to five times multiply. Because what will happen then is they will stay there an additional three years as an employee, and as an employee, they don’t get the residual profits anymore, which are significant, which means actually it all comes out in the wash. An earn out clause is just a very cleverly packaged way of saying we can offer you a higher multiplier, but when we actually worked it out financially, you know, better rules. The interesting thing though is that veterinarians generally, the accepted wage for a veterinary surgeon is significantly lower than it is for a dentist. And I’m presuming it’s significantly lower than it is for a GP.

Paolo Lencioni [00:05:25]:

So when we do commercial owners wage adjustments, when you’re paying your experienced veterinary surgeons, and what the owner expects to take home as a wage before profit, is significantly lower. Because vets don’t get paid on percentage of output, they get paid a wage. And the reason behind that is for every veterinarian, you need to have two to three support staff, nurses, veterinary technicians, et cetera. So it’s very much more of a team based environment. And your experienced veterinary surgeon will probably take home between 140 and $160,000 panel. I know your experienced dentist is very often on the high two hundred s to three hundred s, and I don’t know what a GP is, so that’s my question.

Joanna Oakey [00:06:07]:

Over to you, Chris. What’s a GP?

Chris Babich [00:06:09]:

Well, the annual billings that an individual doctor does could be anywhere as low as 300 to anywhere as high as 600,000.

Chris Babich [00:06:21]:

I’ve had extremes. I did one particular sale valuation and.

Chris Babich [00:06:26]:

The a sale following of a GP who was doing a million dollar turnover per year.

Chris Babich [00:06:35]:

It’s the sort of thing you see.

Chris Babich [00:06:36]:

With specialists without a problem, but with gps. And the first question I ask when I see a GP turning over more than $600,000 a year, I say, are you being investigated by Medicare? No.

Chris Babich [00:06:53]:

I mean, that’s a fair question. Medicare investigating you or investigating one of your doctors? In fact, that’s some of the questions.

Chris Babich [00:07:01]:

I ask when I do my evaluations. In the whole lineup of information I need.

Chris Babich [00:07:06]:

Are you being investigated?

Chris Babich [00:07:07]:

If you’re starving, have you done the right thing in terms of your entitlements? Anyway? So the long and short of it is.

Chris Babich [00:07:19]:

On the average, I think you probably find the average GP turns over about $400 to $150,000 a year.

Chris Babich [00:07:26]:

Now, in terms of the salaries they.

Chris Babich [00:07:28]:

Take, it depends on where they’re working.

Chris Babich [00:07:30]:

Because in some practices they might be getting 65%, in other practices they might.

Chris Babich [00:07:37]:

Be getting up to 75%.

Chris Babich [00:07:39]:

So let’s say if you average 70% of that, that’s pretty much the sort of remuneration that they’re getting.

Chris Babich [00:07:45]:

When I say remuneration, I’m talking about.

Chris Babich [00:07:47]:

Contract fee affects the actual revenue earners. Or is it more of a. More of a team effort?

Paolo Lencioni [00:07:55]:

It is much more of a team effort. I mean, the key person is always a veterinarian, but you can displace a lot of the work to your nurses and a lot of the other stuff, there’s certain basic procedures nurses are allowed to do. They can make certain recommendations to customers. A lot of practices are running nurse consultations, so it is definitely more of a team effort. And there’s also then the ability to use backup house surgical facilities, echo radiology facilities. There’s a dispensary in a veterinary practice, so they dispense their own medications. So obviously the turnover from a veterinary surgeon can be a lot higher than that for a GP, because a GP generally doesn’t dispense their own medications and things like that, I kind of know what they earn. So the average veterinary surgeon as of 2023 figures this year, across our customer base, actually grosses around $635,000 a year.

Paolo Lencioni [00:08:44]:

Our top performers, average veterinary surgeon will gross around, will gross close to a million, probably in the high 900,000. There’s only a handful of those. However, in dentistry, it’s very, very interesting. In dentistry, most of the privately held dental practices we’ve been looking at, there’s only a handful of them. The practice owner will gross in excess of a million dollars, but the employed dentist in that practice will be grossing around the $600,000 mark. And the way the dental contractor thing is generally structured, it’s around 35% of growth to stay around bigger. It’s such that those dentists are earning in number to $200,000. And I think that is where the human condition comes into play in Australia, with your marginal tax rates and things, I think if you don’t own a business, there’s very little incentive for you to work much harder than that.

Paolo Lencioni [00:09:37]:

And a lot of the feedback I’m getting from the dental practices we’re working with is, gee, my dentists get to this particular gross, and I just can’t get them to do anymore. They just want to go on holiday all the time. And I think that’s kind of where it’s at. You have that condition where once you get to that rate, there’s very little incentive as a non business owner to work much harder. So it’s just interesting around that that’s where the GPs are sitting on borderline, that’s where the dentists are vet, actually earned less than that as an employee, which actually takes me to the next thing. I think that’s why there’s this much higher incentive in the veterinary industry to own a veterinary practice.

Chris Babich [00:10:13]:

May I ask Capalo, what are the setup costs? You mentioned there’s a lot of startups.

Paolo Lencioni [00:10:18]:

Yeah.

Paolo Lencioni [00:10:18]:

So the first stage is actually getting planning consent to actually get a property that council will approve a veterinary practice for is difficult then with that, if you’re going to be a startup practice, we work on a fit out cost, which has now over the last three years, doubled. Used to be able to fully fit out a bare bones startup veterinary practice for about $450,000. You’re looking at about $800,000 now put out to expenses, and that’ll probably work for you. If you do really well, it’ll keep you going for about three years, and if you’ve done really well, then you’re going to have to extend and expand. So that’s kind of the cost. So what is it for gps?

Chris Babich [00:10:59]:

Can I just ask you other accreditation costs, does the veterinary practice have to.

Chris Babich [00:11:03]:

Have some form of accreditation?

Paolo Lencioni [00:11:05]:

Yeah, the have to be.

Chris Babich [00:11:07]:

What are the costs involved in that?

Paolo Lencioni [00:11:09]:

The accreditation costs aren’t expensive, but they do have to be accredited by the board of that particular state.

Paolo Lencioni [00:11:15]:

When they open up, we want to hear about medical.

Paolo Lencioni [00:11:18]:

Tell us about the fit out cost. And I’m also interested, have they gone up extortionately in the last three or four years?

Chris Babich [00:11:24]:

But the costs have gone up significantly. It will cost you anywhere from what.

Paolo Lencioni [00:11:29]:

I understand, anywhere from around $3,000 a.

Chris Babich [00:11:33]:

Square meter just to fit the place out.

Paolo Lencioni [00:11:36]:

Then you’ve got accreditation costs because if.

Chris Babich [00:11:38]:

You want access to your practice, incentive.

Paolo Lencioni [00:11:41]:

Payments, nurse incentive payments and all these.

Chris Babich [00:11:43]:

Other bits and pieces the government pays.

Paolo Lencioni [00:11:47]:

You need to be accredited. So you need to be accredited for.

Chris Babich [00:11:50]:

New South Wales by the GPA or Agpal. AGPA. And that costs the best part of six, seven, $8,000 just to do that.

Paolo Lencioni [00:12:00]:

And then you want to become a GPU training practice. You’ve got to have further accreditation requirements.

Chris Babich [00:12:06]:

And again that goes in over and over and over. So there’s a lot.

Paolo Lencioni [00:12:12]:

So really I’ve always said to my.

Chris Babich [00:12:14]:

Doctors that to be honest with you, it’s better to buy a practice because.

Paolo Lencioni [00:12:20]:

If you’re going to spend 600, 700,000.

Chris Babich [00:12:22]:

Plus just fitting a place out, you.

Paolo Lencioni [00:12:24]:

Might as well get something that really.

Chris Babich [00:12:25]:

Is going to give you a cash flow. Already has doctors there because you’ve got to find it.

Chris Babich [00:12:30]:

It’s going to take you two or three years to break to even reach break even point.

Paolo Lencioni [00:12:34]:

I fully agree with you, like the best buyers in my view, in the veterinary industry, and I presume it will be similar for gps, is actually finding a practice that’s located in a really good area where the retiring clinician has significantly under serviced the existing customer base because you buy them at a discount and then all you have to do, I mean we’ve had cases like this where the practice has doubled its turnover under new ownership in six months. Okay, so those are the good buyers. The problem is in the last five or six years they haven’t existed. So do you still have that? Do you have issues around ability to raise finance for a single individual? Do they have to buy this multiples? How does that actually roll in the GP industry?

Chris Babich [00:13:19]:

I’ve never had a problem with a doctor getting financed from Medfin by irrespective of price.

Chris Babich [00:13:28]:

Now and I think the reason is, I think you mentioned previously that the risk factors for the lender is so little. That’s why Medfin won’t lend to a non medical professional. They won’t unless that person is associated in a partnership format with a doctor.

Paolo Lencioni [00:13:52]:

I guess the answer there, so that answers my question is I think the medical lenders see veterinary practices a higher risk and actually limit their lending more to veterinary practices they would to a GP practice. Which kind of explains why we’re seeing more startups, because that individual who just doesn’t want to go into partnership with someone else, and certainly the access to a practice that they can buy on their own these days is very limited. And I think that’s been the big catalyst for startup veteran practices. Whereas with GPs, if they’ve got access to finance, why would like if you apply a standard future maintainable earnings valuation properly to a business, the whole point of it is that if the purchaser buys for the said price, they will have enough money to service their debt and have residual profit to take home. So really the amount of the money isn’t the problem, the size of the business isn’t the problem. If it’s got that return, you’ll be able to service your debt. The question is that valuation methodology assumes the business will carry on performing at that level for the next few years.

Joanna Oakey [00:14:52]:

Is there anything that you’ve seen in this discussion that you think, do you know what this is an insight or something useful for our industry? I guess. Paolo, for Chris, anything in the medical space that you’ve seen that might be interesting as a reflection on veterinary practice or Chris, the other way around, I’ll.

Chris Babich [00:15:09]:

Be absolutely honest with you, I think that from what I’ve heard of the veterinary scene, I think the doctors are doing okay. And in terms of reflection or anything.

Chris Babich [00:15:26]:

That could be used from the veterinary.

Chris Babich [00:15:28]:

Space, I don’t know.

Chris Babich [00:15:31]:

I think where the veterinary space is going to have a big advantage is.

Chris Babich [00:15:34]:

This whole idea of payroll tax, because.

Chris Babich [00:15:38]:

That’S going to hit the medical profession.

Chris Babich [00:15:41]:

In a big way. And yet the veterinary space has already.

Chris Babich [00:15:45]:

Got it under control because they’re employing all their vets.

Chris Babich [00:15:50]:

So there is no concern there.

Chris Babich [00:15:53]:

I presume the veterinary practices are paying.

Chris Babich [00:15:56]:

Payroll tax, whereas the doctors are getting all their doctors, their main expense, under contractors, self employed. So if you’re going to learn anything from that, I gather, why not just employ your doctors?

Chris Babich [00:16:16]:

Let’s go for the obvious. That’s going to happen anyway.

Joanna Oakey [00:16:19]:

Yeah, it’s an interesting thing about the medical space, but I think and I’ll let you sort of rebut that and your own insights in a moment. Paolo. But I feel like just anecdotally, what I see in the different practices that we deal with sales, I have to say we’ve had quite a number of medical practices that have just had to close their doors because they have not had a financial model that has meant they’ve had something to sell. Either close the doors or someone has come on board, but instead of buy, they’ve just sort of given them a nominal amount.

Paolo Lencioni [00:17:03]:

We have valued practices that are literally worth nothing. And in those instances, yes, it’s going to be a token value that that practice gets purchased. So it does happen in the veterinary industry. They probably just don’t cross your doorstep as a lawyer, because contractually, I don’t know what happens there, but generally we have had somewhere, it’s just been a token value. We have to count. Because once a practice is actually like, once you’ve done all the adjustments and it’s basically either running at under 2% EBITDA or actually running at a loss, you can no longer apply future maintainable earnings valuation. You have to do a basic plant equipment valuation, apply a token value to the customer base, and see whether or.

Paolo Lencioni [00:17:40]:

Not it can be solved.

Paolo Lencioni [00:17:41]:

I actually think we always run the risk of thinking we know everything. And I actually love speaking to people who work in these other similar industries because I think there’s a lot we can learn from each other. I think there’s a lot veterinarians could learn from dentists and gps. Where veterinary practices are extremely weak is in their efficiency and organization around. Juggling many balls, particularly around the consulting room. Like the biggest bottleneck in veterinary practice is their consulting room. We’ve established this through our KPI set. Looking at workflows in veterinary practice, it’s surprising.

Paolo Lencioni [00:18:15]:

And then I look at how doctors and dentists work, and they are absolute rock stars at managing that appointment scheduler. Absolute rock stars. That appointment scheduler is full. And I must say the gps are being to run to time, the dentists are being to run to time. So they are absolutely awesome at doing that kind of stuff. And it’s sad to see that the profitability there isn’t quite as high as of every industry. They might not have as many ancillary services and things. It might be that the government intervention actually has something to do with that.

Paolo Lencioni [00:18:45]:

But I think to have a room with doctors, dentists and vets, brainstorming is a very useful because there’s stuff that I call it cross pollination. Like the professions haven’t mixed enough, and the fact that they don’t compete with each other is a fantastic, fantastic forum for them to share.

Paolo Lencioni [00:19:04]:

Deal.

Joanna Oakey [00:19:05]:

All right, look, this has been incredibly interesting, but unfortunately we’ve run out of time. I just want to say a huge thank you, Paolo and Chris, for coming on today.

Chris Babich [00:19:16]:

Thank you very much.

Joanna Oakey [00:19:18]:

Oh, my absolute pleasure. Now, can we just make a call out for each of you? And we’ll put, of course, in our show notes how our listeners can get in contact.

Paolo Lencioni [00:19:28]:

Go to our website, aplaccountants.com au. There’s a contact us page there and just go in there, type what you want, and we actually respond to our.

Chris Babich [00:19:42]:

Contact us form within 24 hours.

Joanna Oakey [00:19:45]:

I love that you say we actually respond to our contact. Good on you. Okay. I love it.

Chris Babich [00:19:52]:

If anyone wants to get in touch with me, they can give me a call directly.

Chris Babich [00:19:58]:

I’m on a working holiday.

Paolo Lencioni [00:20:08]:

They can Google Babich medicos

Chris Babich [00:20:14]:

All my information will come up on there.

Joanna Oakey [00:20:16]:

I just have to say a huge thank you. So insightful. I really enjoyed that.

Paolo Lencioni [00:20:22]:

Thank you for having me. Thank you, Paulo.

Intro [00:20:25]:

Thanks, Chris, for sharing. I really enjoyed that. I’ve learned a lot from that.

Chris Babich [00:20:30]:

Thank you. So have I. So have I. It’s most interesting.

Intro [00:20:34]:

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 [email protected], 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. Now, if you’d like to get in contact with our guests today and the services they offer, you can go ahead and check out our show notes for a link right through to them and their details. You can also book in directly with our legal sales at aspect Legal. If you’d like to soundboard your next steps, discuss a legal question, or find out more how we can assist, whether that’s with buying or selling a business, or perhaps somewhere in between. Now don’t forget to subscribe to the Deal Room podcast on your favorite podcast player to get notifications whenever a new episode is out. We’d also love to hear your feedback, so please leave us a review and rating.

Joanna [00:21:42]:

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Outro [00:22:06]:

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.