Who Will Buy Your
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Practice?
Who Will Buy Your
A survey shows that associates and practice owners have different perceptions about practice ownership.
A
t the 2016 AAEP Convention in Orlando, this author reported on findings from a survey of AAEP listserv members conducted in late 2014. A series of questions was used to try to determine why equine practice owners commonly experience difficulty finding associates interested in buying an ownership interest when the current practice owner(s) wish to sell shares. As
By Amy L. Grice, VMD, MBA I commented, not having an appropriate successor complicates the exit strategies of owners, as the most successful buyer is generally one that is already well-established within the practice. I noted the following findings from the survey: • A strong majority (82%) of associates responded that they were interested in practice ownership as a partner or shareholder. Only 18% indicated no interest. Small group (2-6 veterinar-
ians) associates were somewhat more interested in ownership (84%) than large group (7 or more veterinarians) associates (76%). (See Figure 1.) • Despite a strong interest in practice ownership among associates, they are not generally well-informed about practice finances. It was considerably less likely that associates at large practices were privy to their practices’ financial data. (See Figure 2.) • Similarly, understanding the path to
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SOME THINGS PROMISE MORE THAN THEY DELIVER. Big one-shot combination vaccines may save time. But it can be at the expense of the horse’s immune response. A study showed that vaccinating with WEST NILE-INNOVATOR® and FLUVAC INNOVATOR® generated four times the immune response to West Nile virus than that produced by a big one-shot combination vaccine.1 For an increased immune response, give WEST NILE-INNOVATOR and FLUVAC INNOVATOR. After all, what you could save is a lot more important than time. Visit FourTimesMore.com.
Cortese V, Hankins K, Holland R, Syvrud K. Serologic responses of West Nile virus seronegative mature horses to West Nile virus vaccines. J Equine Vet Sci. 2013;33:1101-1105. All trademarks are the property of Zoetis Services LLC or a related company or a licensor unless otherwise noted. © 2016 Zoetis Services LLC. All rights reserved. GEQ-00180
1
Figure 1. % of Associates Interested in Practice Ownership
Figure 1. % of associates interested in practice ownership
No
partnership/ownership was more likely among small practice associates than those employed at large practices. Importantly, 31% of small practice associates and 58% of large practice associates did not have any understanding of the path to becoming an owner or partner in the practice. (See Figure 3.) • Associates also displayed little confidence that they would be offered partnership or ownership of shares. Fewer than 20% were either “very confident” or “confident” in an offer, and there was much less confidence among associates employed at large practices than at small. (See Figure 4.) • Both small practice and large practice associates more often chose “practice culture” (48%) and “price” (47%) as “very important” or “important” than other factors related to their lack of confidence, followed closely by “financial feasibility” (45%). (See Figure 5.) • Perhaps most importantly, when adding “extremely unlikely,” “very unlikely” and “unlikely” to stay in current position responses, 56% of large practice associates and 67% of small practice associates indicated that they are likely to leave their current position if their desire for a stake in the practice is not met. (See Figure 6.) • When group practice owners were asked about their desire to sell an ownership interest in their practice to one or more of their associates, large group practice owner respondents were much more likely to desire to sell shares or take on a partner (93%) than small group practice owners (59%). (See Figure 7.) • While a majority of all group practice owners indicated a wish to sell shares or add partners, only about half of those who indicated this desire had a degree of confidence that they would be successful in completing the transaction. (See Figure 8.) • Owner respondents were given an
Yes
24% 76%
Large Group 16%
84%
Small Group
0% 0
20% 0.2
40% 0.4
60% 0.6
80% 0.8
100% 1
Figure 2. Does your practice share practice financial information with you?
Figure 2. Does your practice share practice financial information with you? No
42%
11% 37%
25%
Yes, a little
Large practice associates
16%
Yes, some
Small practice associates
36% 5%
Yes, very much
28%
0% 0
10% 0.1
20% 0.2
30% 0.3
40% 0.4
50% 0.5
Figure 3. Do you understand the path to partnership/ownership of
Figure 3. Do you understand the path toshares? partnership/ownership of shares? 58%
No
31% 37%
Yes, a little
31% 5%
Yes, some
Large Practice Associates
25%
Small Practice Associates
0
Yes, very much
14%
0% 0
10% 1
%
0%
20% 2
0%
30% 3
0%
40% 4
0%
50% 5
0%
60% 6
0%
Figure 4. H ow confident are you that partnership or ownership of shares Figure 4. How confident are you that partnership or ownership of shares will be will be offered to you? offered to you? 47%
Not confident
42%
Hopeful
28% 5%
Confident
Large Practice Associates
14%
Small Practice Associates
10%
Very confident
37%
17%
0% 0%
10 10% %
20 20% %
30 30% %
40 40% %
50 50% %
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Figure 5. How important have the following factors been in decreasing your
in being offered or ownership of shares? Figureconfidence 5. How important have partnership the following factors been in decreasing your confidence in being offered partnership or ownership of shares? % answering "Important" or "Very Important"
opportunity to share their reasons for their confidence or lack of confidence through an open-ended qualitative question. Responses fell into three general categories: 1) p erception that associates/younger generations of veterinarians are not interested in ownership 2) concern that practice ownership is not affordable due to student loans held by many veterinarians 3) d ifficulty in establishing value of practice that is acceptable to both parties In my report, I noted that many practice owners have made the sale of their practice equity a key component of their retirement planning. Failure to be able to harvest these assets can have serious financial ramifications for these practitioners’ retirement portfolios.
Communication Needed
The results of this survey demonstrate a clear lack of communication between associates and owners. The majority of associate respondents are interested in acquisition of shares; the seriousness of this desire is borne out by the high numbers that intend to leave the practice where they are currently employed if they are not given the opportunity to buy into the business. Meanwhile, many practice owners have the perception that associates are not interested in ownership. Difficulties in selling shares in a practice can flow from a lack of communication, frequent turnover of associates or trouble in establishing a practice value that motivates both the seller and the buyer to make a transaction. This discordance can be bridged by education and communication. Communication about the path to ownership is essential in order for associates to understand expectations. Here are some questions that could be discussed: • Will an invitation to become a partner or shareholder follow achieving a
26%
%Transfer of client loyalty (goodwill)
47%
Price
45%
%Financial feasibility (affordability)
48%
Practice culture 34%
Generational issues
0% 0%
10% 10
20% 20
%
30% 30
%
40% 40
%
50% 50
%
%
Figure 6. If you are not offered partnership or ownership of shares in the Figure 6. If you are not offered partnership or ownership of shares in the next next several years, what is the likelihood of you staying in your several years, what is the likelihood of you staying in your current position? current position? 0 Extremely unlikely
Large Practice Associates
22%
Small Practice Associates
17% 17%
Very unlikely
39%
Unlikely
28% 33%
Likely
17% 11% 11%
Very likely 0
Extremely likely
0 0%
6%
0.0 5%
0.1 10%
5
0.1 15% 5
0.2 20%
0.2 25%
0.3 30%
5
0.3 35%
5
0.4 40%
Figure 7. or sell ownership shares in the Figure 7. Do you desire to offer partnership Do you desire to offer partnership or sell ownership shares in the future to one or more of your associates? future to one or more of your associates?
7% Large Group Practice Owners
93% No
41% Small Group Practice Owners
Yes
59%
0% 0
20% 0.2
40% 0.4
60% 0.6
80% 0.8
100% 1
Figure 8.
How confident are you that you will be successful in selling ownership shares or Figure 8. H ow confident are you that you will be successful in selling ownerpartnership to one or more of your associates? ship shares or partnership to one or more of your associates? Pessimistic
7%
Not confident
14% 14% 14%
Not sure
23% 21%
Confident 7%
Very confident Extremely confident
10% 0.1
Small Group Practice Owners
23%
20% 0.2
Large Group Practice Owners
27%
14%
0
0% 0
39%
30% 0.3
40% 0.4
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specific gross revenue figure, demonstrating certain work behaviors, being employed for a certain number of years or bringing in a certain amount of new business? • If an associate achieves those things, but is not well-liked personally by the practice owner, will this prevent an offer of shares? • Will the owner communicate clearly if ownership is not—and never will be—an option, based on certain behaviors or personality traits that have been observed in the associate? • If partnership is offered, what is the process? • How is the value of the practice determined? • Will the financing be inside or outside the practice? • Will a down payment typically be required? Associates that do not understand the process of becoming an owner might seem to have no interest, but they might in fact think that their employers are not interested in selling, since they have not been engaged in conversation about it. Bringing an associate into an equity position is ideally a multi-year process that includes financial and business management education. This includes sharing increasing amounts of financial data and beginning to delegate some management tasks. Communicating the mechanics of the valuation and purchase of shares early in the process will allow more thoughtful deliberation. The results of the survey show that this approach is rarely followed. If more communication about the path to ownership occurred, perhaps even more associates would be interested.
didates and to be disappointed in the young veterinarians they meet. While it is a fact of the times we live in that dual-career couples frequently must move for a spouse’s promotion, success in retaining associates also requires a number of elements: • having a clear mission and vision for the practice •u nderstanding partner values so one can hire in alignment with them •h aving a practice culture that is appealing to new hires and in alignment with their values •u nderstanding generational and gender differences in younger veterinarians •b eing committed to associates’ professional development Throughout the ages, each generation has struggled to understand the perspectives of the generation following it. Society changes, and as a result, the values that children absorb from the world around them change along with it. If a practice’s culture is inflexible and leaves no room for new ideas and approaches, it should be no surprise that members of a generation with different life goals will opt out and seek a different home for their careers. It is important to remember that mature practice owners and new veterinarians seeking positions as associates both share many of the same goals.
Establishing Practice Value
Establishing the value of the practice in order to buy or sell shares can be fraught with emotion, but in fact, it is simply mathematical. Many, if not most, equine practices are valued by the Discounted Earnings or Cash Flow Method, which is based on the principle that the total value of a business is the present value of Finding the Right Person its projected future earnings. As I said at the convention, it is not unThe net present value for the sum of common for practice owners to feel like the projected earnings is determined by they simply can’t find the right canusing an appropriate discount rate. The
worth of a business is almost entirely made up of its ability to produce cash (profit). A buyer is essentially purchasing a future stream of income. The value of tangible assets is mostly in what cash they help produce for the practice, as the fair market value of used equipment is quite low in the veterinary industry. In many negotiations, the practice owner has an inflated idea of the worth of the practice, and this might discourage an associate who is a potential partner. When selling shares, the return on ownership should service the debt to purchase it, leaving the buyer’s income for effort as a veterinarian intact. In other words, the new owner should be paid for being an owner (share of profit) as well as for being a veterinarian (return on effort). The “ownership” portion should be allocated to servicing the debt to purchase the shares, while the remaining “veterinarian” portion is utilized as income. Thus, the buyer’s educational debt will have no bearing on the ability to purchase shares if the practice is properly priced. Bringing associates wanting to buy shares together with owners wanting to sell shares should be successful if these tenets are followed by both parties: • regular and transparent communication of professional goals, from the earliest stages of an associate’s career • establishment of an inclusive, positive, flexible and vibrant practice culture • realistic valuation of practice worth that embraces the need for a willing buyer and willing seller As William Ward said, “The pessimist complains about the wind. The optimist expects it to change. The realist adjusts the sail.” Some of the material in this article was previously published in the 2016 AAEP Proceedings and is used here with permission.
BROUGHT TO YOU BY
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EquiManagement.com
Practice?
Who Will Buy Your
A survey shows that associates and practice owners have different perceptions about practice ownership.
A
t the 2016 AAEP Convention in Orlando, this author reported on findings from a survey of AAEP listserv members conducted in late 2014. A series of questions was used to try to determine why equine practice owners commonly experience difficulty finding associates interested in buying an ownership interest when the current practice owner(s) wish to sell shares. As
By Amy L. Grice, VMD, MBA I commented, not having an appropriate successor complicates the exit strategies of owners, as the most successful buyer is generally one that is already well-established within the practice. I noted the following findings from the survey: • A strong majority (82%) of associates responded that they were interested in practice ownership as a partner or shareholder. Only 18% indicated no interest. Small group (2-6 veterinar-
ians) associates were somewhat more interested in ownership (84%) than large group (7 or more veterinarians) associates (76%). (See Figure 1.) • Despite a strong interest in practice ownership among associates, they are not generally well-informed about practice finances. It was considerably less likely that associates at large practices were privy to their practices’ financial data. (See Figure 2.) • Similarly, understanding the path to
BROUGHT TO YOU BY
1 2016 AAEP Convention Business
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SOME THINGS PROMISE MORE THAN THEY DELIVER. Big one-shot combination vaccines may save time. But it can be at the expense of the horse’s immune response. A study showed that vaccinating with WEST NILE-INNOVATOR® and FLUVAC INNOVATOR® generated four times the immune response to West Nile virus than that produced by a big one-shot combination vaccine.1 For an increased immune response, give WEST NILE-INNOVATOR and FLUVAC INNOVATOR. After all, what you could save is a lot more important than time. Visit FourTimesMore.com.
Cortese V, Hankins K, Holland R, Syvrud K. Serologic responses of West Nile virus seronegative mature horses to West Nile virus vaccines. J Equine Vet Sci. 2013;33:1101-1105. All trademarks are the property of Zoetis Services LLC or a related company or a licensor unless otherwise noted. © 2016 Zoetis Services LLC. All rights reserved. GEQ-00180
1
Figure 1. % of Associates Interested in Practice Ownership
Figure 1. % of associates interested in practice ownership
No
partnership/ownership was more likely among small practice associates than those employed at large practices. Importantly, 31% of small practice associates and 58% of large practice associates did not have any understanding of the path to becoming an owner or partner in the practice. (See Figure 3.) • Associates also displayed little confidence that they would be offered partnership or ownership of shares. Fewer than 20% were either “very confident” or “confident” in an offer, and there was much less confidence among associates employed at large practices than at small. (See Figure 4.) • Both small practice and large practice associates more often chose “practice culture” (48%) and “price” (47%) as “very important” or “important” than other factors related to their lack of confidence, followed closely by “financial feasibility” (45%). (See Figure 5.) • Perhaps most importantly, when adding “extremely unlikely,” “very unlikely” and “unlikely” to stay in current position responses, 56% of large practice associates and 67% of small practice associates indicated that they are likely to leave their current position if their desire for a stake in the practice is not met. (See Figure 6.) • When group practice owners were asked about their desire to sell an ownership interest in their practice to one or more of their associates, large group practice owner respondents were much more likely to desire to sell shares or take on a partner (93%) than small group practice owners (59%). (See Figure 7.) • While a majority of all group practice owners indicated a wish to sell shares or add partners, only about half of those who indicated this desire had a degree of confidence that they would be successful in completing the transaction. (See Figure 8.) • Owner respondents were given an
Yes
24% 76%
Large Group 16%
84%
Small Group
0% 0
20% 0.2
40% 0.4
60% 0.6
80% 0.8
100% 1
Figure 2. Does your practice share practice financial information with you?
Figure 2. Does your practice share practice financial information with you? No
42%
11% 37%
25%
Yes, a little
Large practice associates
16%
Yes, some
Small practice associates
36% 5%
Yes, very much
28%
0% 0
10% 0.1
20% 0.2
30% 0.3
40% 0.4
50% 0.5
Figure 3. Do you understand the path to partnership/ownership of
Figure 3. Do you understand the path toshares? partnership/ownership of shares? 58%
No
31% 37%
Yes, a little
31% 5%
Yes, some
Large Practice Associates
25%
Small Practice Associates
0
Yes, very much
14%
0% 0
10% 1
%
0%
20% 2
0%
30% 3
0%
40% 4
0%
50% 5
0%
60% 6
0%
Figure 4. H ow confident are you that partnership or ownership of shares Figure 4. How confident are you that partnership or ownership of shares will be will be offered to you? offered to you? 47%
Not confident
42%
Hopeful
28% 5%
Confident
Large Practice Associates
14%
Small Practice Associates
10%
Very confident
37%
17%
0% 0%
10 10% %
20 20% %
30 30% %
40 40% %
50 50% %
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Figure 5. How important have the following factors been in decreasing your
in being offered or ownership of shares? Figureconfidence 5. How important have partnership the following factors been in decreasing your confidence in being offered partnership or ownership of shares? % answering "Important" or "Very Important"
opportunity to share their reasons for their confidence or lack of confidence through an open-ended qualitative question. Responses fell into three general categories: 1) p erception that associates/younger generations of veterinarians are not interested in ownership 2) concern that practice ownership is not affordable due to student loans held by many veterinarians 3) d ifficulty in establishing value of practice that is acceptable to both parties In my report, I noted that many practice owners have made the sale of their practice equity a key component of their retirement planning. Failure to be able to harvest these assets can have serious financial ramifications for these practitioners’ retirement portfolios.
Communication Needed
The results of this survey demonstrate a clear lack of communication between associates and owners. The majority of associate respondents are interested in acquisition of shares; the seriousness of this desire is borne out by the high numbers that intend to leave the practice where they are currently employed if they are not given the opportunity to buy into the business. Meanwhile, many practice owners have the perception that associates are not interested in ownership. Difficulties in selling shares in a practice can flow from a lack of communication, frequent turnover of associates or trouble in establishing a practice value that motivates both the seller and the buyer to make a transaction. This discordance can be bridged by education and communication. Communication about the path to ownership is essential in order for associates to understand expectations. Here are some questions that could be discussed: • Will an invitation to become a partner or shareholder follow achieving a
26%
%Transfer of client loyalty (goodwill)
47%
Price
45%
%Financial feasibility (affordability)
48%
Practice culture 34%
Generational issues
0% 0%
10% 10
20% 20
%
30% 30
%
40% 40
%
50% 50
%
%
Figure 6. If you are not offered partnership or ownership of shares in the Figure 6. If you are not offered partnership or ownership of shares in the next next several years, what is the likelihood of you staying in your several years, what is the likelihood of you staying in your current position? current position? 0 Extremely unlikely
Large Practice Associates
22%
Small Practice Associates
17% 17%
Very unlikely
39%
Unlikely
28% 33%
Likely
17% 11% 11%
Very likely 0
Extremely likely
0 0%
6%
0.0 5%
0.1 10%
5
0.1 15% 5
0.2 20%
0.2 25%
0.3 30%
5
0.3 35%
5
0.4 40%
Figure 7. or sell ownership shares in the Figure 7. Do you desire to offer partnership Do you desire to offer partnership or sell ownership shares in the future to one or more of your associates? future to one or more of your associates?
7% Large Group Practice Owners
93% No
41% Small Group Practice Owners
Yes
59%
0% 0
20% 0.2
40% 0.4
60% 0.6
80% 0.8
100% 1
Figure 8.
How confident are you that you will be successful in selling ownership shares or Figure 8. H ow confident are you that you will be successful in selling ownerpartnership to one or more of your associates? ship shares or partnership to one or more of your associates? Pessimistic
7%
Not confident
14% 14% 14%
Not sure
23% 21%
Confident 7%
Very confident Extremely confident
10% 0.1
Small Group Practice Owners
23%
20% 0.2
Large Group Practice Owners
27%
14%
0
0% 0
39%
30% 0.3
40% 0.4
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specific gross revenue figure, demonstrating certain work behaviors, being employed for a certain number of years or bringing in a certain amount of new business? • If an associate achieves those things, but is not well-liked personally by the practice owner, will this prevent an offer of shares? • Will the owner communicate clearly if ownership is not—and never will be—an option, based on certain behaviors or personality traits that have been observed in the associate? • If partnership is offered, what is the process? • How is the value of the practice determined? • Will the financing be inside or outside the practice? • Will a down payment typically be required? Associates that do not understand the process of becoming an owner might seem to have no interest, but they might in fact think that their employers are not interested in selling, since they have not been engaged in conversation about it. Bringing an associate into an equity position is ideally a multi-year process that includes financial and business management education. This includes sharing increasing amounts of financial data and beginning to delegate some management tasks. Communicating the mechanics of the valuation and purchase of shares early in the process will allow more thoughtful deliberation. The results of the survey show that this approach is rarely followed. If more communication about the path to ownership occurred, perhaps even more associates would be interested.
didates and to be disappointed in the young veterinarians they meet. While it is a fact of the times we live in that dual-career couples frequently must move for a spouse’s promotion, success in retaining associates also requires a number of elements: • having a clear mission and vision for the practice •u nderstanding partner values so one can hire in alignment with them •h aving a practice culture that is appealing to new hires and in alignment with their values •u nderstanding generational and gender differences in younger veterinarians •b eing committed to associates’ professional development Throughout the ages, each generation has struggled to understand the perspectives of the generation following it. Society changes, and as a result, the values that children absorb from the world around them change along with it. If a practice’s culture is inflexible and leaves no room for new ideas and approaches, it should be no surprise that members of a generation with different life goals will opt out and seek a different home for their careers. It is important to remember that mature practice owners and new veterinarians seeking positions as associates both share many of the same goals.
Establishing Practice Value
Establishing the value of the practice in order to buy or sell shares can be fraught with emotion, but in fact, it is simply mathematical. Many, if not most, equine practices are valued by the Discounted Earnings or Cash Flow Method, which is based on the principle that the total value of a business is the present value of Finding the Right Person its projected future earnings. As I said at the convention, it is not unThe net present value for the sum of common for practice owners to feel like the projected earnings is determined by they simply can’t find the right canusing an appropriate discount rate. The
worth of a business is almost entirely made up of its ability to produce cash (profit). A buyer is essentially purchasing a future stream of income. The value of tangible assets is mostly in what cash they help produce for the practice, as the fair market value of used equipment is quite low in the veterinary industry. In many negotiations, the practice owner has an inflated idea of the worth of the practice, and this might discourage an associate who is a potential partner. When selling shares, the return on ownership should service the debt to purchase it, leaving the buyer’s income for effort as a veterinarian intact. In other words, the new owner should be paid for being an owner (share of profit) as well as for being a veterinarian (return on effort). The “ownership” portion should be allocated to servicing the debt to purchase the shares, while the remaining “veterinarian” portion is utilized as income. Thus, the buyer’s educational debt will have no bearing on the ability to purchase shares if the practice is properly priced. Bringing associates wanting to buy shares together with owners wanting to sell shares should be successful if these tenets are followed by both parties: • regular and transparent communication of professional goals, from the earliest stages of an associate’s career • establishment of an inclusive, positive, flexible and vibrant practice culture • realistic valuation of practice worth that embraces the need for a willing buyer and willing seller As William Ward said, “The pessimist complains about the wind. The optimist expects it to change. The realist adjusts the sail.” Some of the material in this article was previously published in the 2016 AAEP Proceedings and is used here with permission.
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