Vetrinary Ownership Lifecycle Canada
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Vetrinary Ownership Lifecycle Canada



If you own a vetrinary clinic in Canada, there are several questions and tools you should consider to help you determine if you should sell your practice.

If you own a vetrinary clinic in Canada, there are several questions and tools you should consider to help you determine if you should sell your practice.



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Vetrinary Ownership Lifecycle Canada Vetrinary Ownership Lifecycle Canada Presentation Transcript

  • Working Draft Last Modified 21/01/2009 8:27:07 PM Eastern Standard TimePrinted Clinic ownership and management CONFIDENTIAL series The ownership life cycle 2010 Document Date This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.
  • A bit about usWe’re family and friends. We’re building a business to reflect the values webelieve in. It is a family business, and we believe that if the needs of our staff,clients and patients are taken care of, the finances take care of themselves.Michelle Cutler, DVM and Bernie Caplan, DVM Karen Allen, DVM Jon Shell, MBAOrin Litman, MBA Jon was a small businessMichelle is an OVC ‟00 grad, where she An OVC ‟77 graduate, A WCV graduate, Karen operator for several yearsco-founded Global Vets. In addition to Bernie‟s Annex Animal owned Mill Creek Animal before getting an MBA.being a co-founder of VetStrategy, Hospital has been a fixture Hospital since 1996 before Following graduate school,Michelle is a practicing vet at McLean in his neighbourhood for 30 joining forces with he was an associate withAnimal Hospital.. years. He has participated Vetstrategy. Karen has been international consultancyOrin, a scientist by training, spent in the ownership of other actively involved in the McKinsey & Companymost of his career with Katz group, clinics, and is a founding AbVMA and facilitates before helping to foundhelping to grow their pharmacy director of VetStrategy. thorough and critical review VetStrategy n in Ontario. He received his In addition to being a of current research to Jon focuses his time onMBA before helping to found clinician at Annex, Bernie ensure our vets have access clinic operations as well asVetStrategy in 2006. Most of Orin‟s focuses his time on to information they need to administration. Many oftime is spent on development and veterinary community make sound clinical decisions . processes that are used tomarketing. relations as well as acting as Karen and her husband Lyle make facilitate smoothWhen they are not working, Michelle a senior operational advisor. are happily raising their operations within ourand Orin spend their time with their children on a farm outside of clinics have been developedthree children – Kobe, Beck and Jude Edmonton. by Jon. 2and their Viszla Bubba.
  • When should I consider selling my Practice? • Key questions to ask yourself • Is now the right time? • Answers about the process of selling • VetValuator: a clinic value calculator 3 View slide
  • What questions should I be asking? YES NO• Is your clinic growing over 10% per year? If you• Do you enjoy the day-to-day running of the clinic? answered no to most of• Have you recently made significant investments in the clinic? these, you may want to• Do you have any Associates who would buy your practice? consider selling your• Are you prepared to work more if an Associate leaves? practice• Do you need to own my own clinic to meet your retirement goals? 4 View slide
  • Where am I in the ownership lifecycle? Owner works in clinic Value less often. Additional More associates staff and management of brought in, revenue clinic reduces cash flow increases Revenue and Owner builds operations stabilize. client base and Slow growth, strong reputation cash flow Age 30 40 50 60 70Reasons to • You‟re not enjoying • You‟re a serial • Revenue is growing, cash • You no longer want ownerthink about owner lifestyle entrepreneur – time to flow increasing, staff is responsibilitiesselling • Cash flow is very start and grow a new stable • Threat of HR instability tight practice! • Your Clinic‟s value is is a big business risk • You‟ve enjoyed being a highest – sell at the top! veterinarian, but are thinking career change I love my clinic, but hate management – how can I become a practicing veterinarian again? 5
  • Is there an option between selling and owning? • I hate HR. Hiring, firing, labour laws – it‟s the worst part of my job • I’m not an administrator. I don‟t enjoy the financial management, pay tax penalties from time-to-time, and spend too much time on it. • I love medicine. I love my clients and my patients, and would like to spend every day doing that. • I want to do more. I wish my clinic was more progressive, but I just don‟t have the time. • I can’t find the right manager. I‟ve tried a few practice managers, but nothing is up to what I want. BUT… I’m not ready to sell.These days, there are a lot of options between selling 100% and keeping 100% • If your clinic is big enough, you may be able to bring on a partnerSell 50% • In some cases, this partner could do the administrative tasks • Lock in the value of your clinic today, and stop doing the administrationSell and Stay • Continue to direct medical practice, and maintain your clinic heritage • This option is becoming more and more commonJoin other • Partner with other clinics, and hire central administrators for theclinics administrative tasks See page 13 for VetStrategy’s options for the Veterinarian who wants to keep practicing, but stop administering 6
  • Who could I sell to? There are different ways to think about succession Pros Cons • Associate has rapport with • Often need to self-finance Associate staff and clients • Few associates have sufficient risk within • Little business interruption tolerance Clinic* • Deals often fall apart – if the associate leaves it can affect clinic value • May be able to transition clinic • Often fall apart due to risk- Another over several years, which may aversion and lack of deal-making veterinarian be more comfortable experience • Often replace entire staff • Need to advertise makes sale public • Confidential; no need to • Uncertainty about “corporate” Veterinarian advertise treatment of patients and staff Group* • Deals occur fast and simply • Cash up front* We can help with both of these – please keep reading! 7
  • We can help your associate acquire your clinicDeals with associates can break down for a number of reasons. We have servicesdesigned to help facilitate these acquisitions. Partnership • We have developed a tax-advantaged approach to partnering with Associates Financing • We have access to capital and can help provide better terms than Associates can get on their own • Our approach leads to immediate payment to you, not over time Clinic operations • We can implement our management solutions for Associates who want to own, but may not want to manage Economies of scale • Working with us enables savings on supplies and products • Our network provides help finding great staffWe may be able to make your deal better. Give us a call – it’s worth a coffee! 8 8
  • VetValuator: What is my clinic worth? Veterinary clinics can be valued based on three things: cash flow, value of assets and inventory, and the story* • Amount of cash produced by the operations of the clinic • Calculated before accounting for taxes, depreciation or service on any debt Cash flow • Expenses are “normalized” to account for any amounts special to the current owners, such as car payments, salaries for relatives, or rent below market value Formula: Cash flow • The multiplier, or story factor, accounts for the specific x context of each clinic • This accounts for things like revenue growth, location, Story factor employee stability, condition of clinic, etc. + The story • With the story factor, we try to answer two questions: Current value – “How sustainable is current cash flow?” of assets – “How hard will it be to increase cash flow in the future?” • Story factor is generally between 3 and 4 and inventory Assets and • Value of sellable inventory at cost (food and drugs) inventory • Current value of equipment (initial cost minus depreciation)* There are several methods used to calculate clinic value. Please see page 30 for more details 9
  • Clinic value: ExampleClinic details“I have a three veterinarian clinic with $1.25 million in revenue. I own the building, but don‟t want to sell it. I manage expenses well,so when you add up my purchasing costs and lab bill, it‟s about 30% of revenue. My assets and inventory total $150,000. What‟s myclinic worth?”Cash flow• Total revenue is $1.25M Revenue $1,250,000• After adjusting for owner„s compensation, total labour Cost of goods $375,000 costs are 40%, or $500,000 Cash flow Labour Cost $500,000 $212,500• Occupancy costs, using a market value for rent, is 8%, or Occupancy Cost $100,000 $100,000 Other Costs $62,500• Other costs are 5%, or $62,500Story 1 Story 2• Long-term associate and technician will leave after • All staff committed to staying sale • Clinic growth an average of 8% over past 3 years• Last renovation was 30 years ago • Renovation in 2005, new digital x-ray For this• Clinic showed no growth for the past 3 years • Good practice in new, growing area• Clinic in an old neighbourhood with declining example, population VetValuator would value Story factor = 3 Story factor = 4 the clinic at $787,500 to $1,000,000 Cash flow $212,500 Cash flow $212,500 x by Story factor X3 x by Story factor X4 To value your Plus Assets $150,000 Plus Assets $150,000 clinic, use the VetValuator at the = Clinic value $787,500 = Clinic value $1,000,000 back of this document 10
  • How may a difficult economy impact practice value?We believe that veterinary clinics are a great long-term investment. Revenues in our industry will be much moreresistant to a bad economy than others. We‟re in it for the long term, and that is why we are still buying!However, if you‟re thinking of selling in the next few years, you may want to think about selling now. Flat or decliningrevenue, even in the short term, could have a big impact on cash flow and the story.Let‟s take a look at two examples using our vet from the last page, using Story 2, which had a story factor of 4, and avalue of $1,000,000Example 1: Flat revenue Impact Old value = $1,000,000What happens in the next twelve months? • Cash flow declines by $15,000 to $197,500 New value = $880,625• No revenue growth – $1,250,000• Small raises of 3%, now labour cost is $515,000 • No growth decreases• No other changes story factor to 3.75 down by $119,375Example 2: Revenue declines by 5% Impact Old value = $1,000,000What happens in the next twelve months? • Cash flow declines by $33,750 to $178,750• Revenue decline to $1,187,500• Don‟t hire summer staff, reduce labour by $10,000 to • Revenue decline $490,000 decreases story factor New value = $775,125• Keep cost of goods at 30% to 3.5• No other changes down by $224,875 11
  • Some questions and answers about sellingHow long does it Agreeing on a price is usually easy and takes 1-4 weeks. After that,take? closing the deal can take 6-16 weeks. Longer periods are most often caused by lawyers who take a long time to respond, so be careful when choosing your lawyer.When do I get paid? Immediately upon the deal closing.Should I tell my It depends. If the staff knows, the transition period is smoother andstaff? more comfortable. However, you don‟t want your people to leave as that may affect the deal. We‟d be happy to help you decide – this always depends on the context.What if I am This is a very important time to call us. In the past, we have been ablecurrently in to pay more than other parties. If you are dealing with an associate,discussions with we may be able to help reduce the risk to him/her.another party?What will my role This is really up to you. We are happy to help you reduce your role andbe moving forward? the time you spend at the clinic. Alternatively, we are willing to take over the administrative element of the practice and allow you to focus on being a practitioner.Will VetStrategy Simply, no. We don‟t have any views on the practice of veterinaryinfluence the practice medicine. We‟re about efficient support operations, allowingof medicine? veterinarians to practice the standard of medicine they believe in. 12
  • What would I do next? How would my income change?We can almost always offer the following contract to vendors: 6-month renewable contracts A significant salary for whatever schedule you wish to work Six weeks paid vacation No weekend hours No management responsibilities Continue to practice medicine the way To you want! calculate your veterinary income post-sale, use the simple income calculator on page 24 13
  • We have solutions for all ownership stagesWe can help buy your clinic outright, and we have three approaches forveterinarians who aren’t ready to leave their practices. Keep practicing, Stop Administering • If you still love practicing, and you‟re proud of the clinic you‟ve built, let us take over the hassles • Sell your practice, and stay on as Medical Director • We will take over HR, finance, negotiating with suppliers, marketing, maintaining the facility, technology - everything that gets in the way • We will stay out of the medicine, and give you the time and freedom to build your medical practice the way you‟ve always wanted • Your clients won‟t see a change, other than a happier you! Partnership • Sell part of your practice, and let us take over some of the administration • We can work out a buy-out over time, and let you benefit from continuing to grow your practice! Join us, without selling to us • We have developed a program that lets you take advantage of our buying power, our technology development and our operational experience • Make more money today • Sell when you‟re ready, and not before!There are many ways to make your life better – let’s talk about it! 14
  • Contact Us Internet: E-mail: Corporate offices: VetStrategy 780 Hwy 6 North Waterdown, ON L0R 2H1 Phone: 1-866-901-6471Orin Litman Jon Shell Michelle Cutler Karen AllenManaging Director Managing Director DVM, Owner DVM, Medical Director,416-999-9543 416-951-1476 416-737-0168 drallen @vetstrategy.comBernie Caplan Sherry Hughes Christy RoulstoneDVM, Director Ontario Operations Alberta Operations416-254-1590 Director 780-916-6803 15
  • VetValuator 16
  • VetValuator: A Valuation primerDisclaimer: This is not a replacement for a proper professional valuation, but a way to get a range of what your clinic may be worth. Alot of factors go into valuation – if you are ready to sell, we’d advise you to get your valuation done professionally.Accountants prepare financial statements differently. We’ve tried to use the most common terms. If your financial statements don’tmatch, ask your accountant or feel free to e-mail us and we’ll be able to help. How are clinics valued? In the past, people have used “one-times revenue” as a rule of thumb for the value of a veterinary clinic. Many studies show this to be incorrect, and valuators now use different techniques to value clinics.* Most are perfectly acceptable, and valuators will use several methods, and then choose the one they think is most appropriate for your clinic. Main types of valuation While there are many methods of valuation, they all fall into two categories: Category 1: Add up the current value of a clinic‟s assets and its “goodwill” Category 2: Compare a clinic to other clinics that have recently sold Goodwill The most complex thing in valuation is to calculate goodwill. The clientele and staff you‟ve built lead to cash flow for your clinic every year. Goodwill is an estimate how much that annual cash flow is worth today. To do this a valuation needs to estimate how much that cash flow really is, and how likely it is to continue. The VetValuator method VetStrategy‟s VetValuator is a “Category 1” valuator. We use a “story factor” or multiplier to estimate goodwill. Remember, this is only an estimate. Have fun with it!* For more on some of the different ways to value clinics, see page 30 To use the on-line version go to 17
  • VetValuator: Getting the information 1 Find your last year‟s financial statements* Revenue 2 Use your practice management software to calculate revenue for your last three fiscal years from financial 3 Use your last year‟s financial statement to calculate expenses statement Labour Labour • Start with labour expenses on your statement • Do you pay anyone who is not involved with the practice – family members? Subtract these • How much do you pay yourself out of labour expenses? Subtract this. Now add: – For full-time work, you should include $100,000. Multiply $100,000 x hours you work per week/40. For example, if you work 20 hours a week, add $100,000 x 20/40 = $50,000 • Include all benefits • For help calculating normalized labour expenses, please see page 26 Cost of goods sold (or Cost of Sales) Cost of • Add your purchasing costs (food, drugs, etc) to your laboratory costs and your cremation costs goods sold • For help calculating Cost of Goods Sold, please see page 27 Occupancy costs Occupancy • Rent plus maintenance plus taxes cost • Do you own the building? Do you pay yourself rent? • Make sure the rent makes sense for your location • For help calculating Occupancy Costs, please see page 27 Other expenses Other • Add up the rest of the expenses • Subtract management fees, any other amounts you pay to yourself, amounts for personal items or cars, taxes, depreciation, interest, and amortization • Should include things like communications, marketing, CE, etc. • For help calculating Other expenses, please see page 28* If your clinic is split into a management company and a professional company, try adding both together. This may not work, and if so, contact your accountant To use the on-line version go to 18
  • VetValuator: What is my Story Factor? Each clinic has its own context, or story. Some have been around for 50 years, and some for 5. Some are growing rapidly, while others are in decline. These differences affect the purchaser‟s expectation of cash flow in the future. Wouldn‟t you be more confident buying a practice that was growing at 5% a year instead of one that hadn‟t grown since 1998? In order to account for these differences, Cash Flow is multiplied by a factor that takes each clinic‟s story into account. In the veterinary industry, this factor tends to range between 3 and 4. A clinic in decline, in need of repair, with high turnover will get a 3, while a clinic showing high growth, with excellent long-term staff and new equipment will get a 4.Evaluating your storyOn the following page, we ask some questions to help you estimate your story in these categories: • Clinic performance • Human Resources • Costs • Facility and LocationThere are many different questions that you could use to estimate the story – these are the ones we look at first.Story Factor – An imperfect measureFiguring out the value of your story is one of the most difficult things to do. How one person looks at a clinic may becompletely different than another. Every valuator uses different questions!When you‟re done, do a reality check. Does the number reflect where you think your clinic ranks among other clinics? To use the on-line version go to 19
  • VetValuator: Evaluating your storyClinic Performance YES NO• Has your clinic revenue growth averaged over 5% in the past 3 years?• Is your clinic revenue more than it was three years ago?• Do you get more than 15 new clients per doctor per month?• Have your number of transactions grown in each of the last three years?Human Resources• Have your doctors been with you for more than five years? All “yes”• Will your doctors stay after the sale? answers• Do you have at least one long-term receptionist and technician? moves a story• Will they stay after the sale? value close to 4, all “no”Costs moves it• Are your labour costs less than 40% of revenue? closer to 3• Are your occupancy costs less than 8% of revenue?Facility and location• Have you been in your location more than 10 years?• Is most of your equipment less than 5 years old?• Have you done a renovation in the last 5 years? What do you think• Is your neighbourhood growing? your story factor is?• Is there another clinic within 1 km? Is it bigger than yours? Choose a number between 3 and 4 To use the on-line version go to 20
  • VetValuator: Reality check – Do your numbers make sense? YES NO• Is your revenue on your financial statement similar to your practice management software?• Is your labour cost between 30-50% of revenue?• Is your cost of goods sold between 20-35% of revenue?• Is your occupancy cost between 5-12% of revenue ?• Are other costs less than 10% of revenue ? If you answer “no” to any of these, your numbers are different from what we would expect in a veterinary clinic. Please double check the calculation. If you answer “yes” to all of these, try to estimate the value of your clinic on the next page! To use the on-line version go to 21
  • Calculating final valueInputs Clinic value rangeRevenue: Low range High rangeExpenses A ALabour: – x3 x4Cost of goods: – = =Occupancy cost: – + B + BOther expenses: – Your clinic value is estimated at: FROM = TO =Cash flow: = A Clinic value using your story estimateAsset value = BFor help calculating Asset Value, Aplease see page 29 x CYourestimate of = = C =your storyfactor + B To use the on-line version go to 22
  • What does this mean? There may be strategic reasons why your calculated value may underestimate the true value of your clinicYou should now have an estimate of your clinic‟s value. It‟s a great start to understanding thetrue value of your clinic!Could it be worth more than that range? Of course!Here are a just a few reasons:• You may have underestimated cash flow• We look at certain underlying trends in your numbers that may indicate that your practice is ready for significant growth• Your clinic may be in an area where we really want to grow• Working together, we may be able to improve operations and significantly increase cash flowWe have used a story factor of MORE THAN 4 for some clinics that we really wanted.If you call us, you can rest assured that we will look on your story in as positive a light as wecan – we always look for the hidden value in clinics – that‟s how we succeed!We look forward to talking to you. 23
  • If I sell, what will I make? This very basic sheet will help you calculate your veterinary income if you do sell your practiceProceeds from sale Sale price Financial position from Clinic debt - veterinary sources Clinic proceeds4 = A Money in the bank A x 5%1 Return on proceeds = B Annual incomeReal estate income Return on proceeds B Rent2 C Rent2 + CVeterinary salary Annual veterinary salary + D Hours worked per week x $3,0003 Annual income = Annual veterinary salary = D1 Assumes an after-tax annual return of 5% when you invest the proceeds from the sale2 If you own and keep your building3 Assumes $120,000 for a 40 hour work week4 Assumes no capital gains tax (use capital gains exemption of $750,000) 24
  • VetValuatorReference andCalculation Pages 25
  • VetValuator: Calculating labour costs Labour expenses in financial statement ONLY subtract items that Payments to individuals not involved in practice are included in your labour – operations or management* expenses on your financial statement. If you do not take a regular wage, but instead take an Salary paid to owner* – owner‟s “draw” or professional fees, do not subtract anything here. Hours owner works per week x $2,500** Replacement cost of owner = + Benefits*** + Locums and other veterinary professional expenses + Normalized labour cost =* Subtract these only if they are included in the labour expenses on your income statement. If they appear elsewhere, do not subtract them here** Assumes $100,000 salary for 40 hours/week*** Add this only if net already included in labour expenses on income statement 26
  • VetValuator: Calculating cost of goods and occupancy cost Cost of goods sold Occupancy cost You own the building Rent/sq. ft. in a similar location Supplier 1 cost nearby Square feet x Rent = Supplier 2 cost + Utilities + Property tax + Cremation cost + Building maintenance* + Occupancy cost = Laboratory cost + You don„t own the building Rent Utilities + Other cost of + goods sold Property tax + Building maintenance + Total Cost of = Occupancy cost = Goods Sold* Estimate average annual maintenance cost 27
  • VetValuator: calculating other expensesLegalMarketing +Accounting + Don‟t include any personalEquipment maintenance + items, such as automobiles, or any capital expenses, such as x- ray machines or blood analyzerTelephone + purchases.General administration +CE +Uniforms + If you pay yourself managementComputer Costs + fees or other fees, do not include them here. These areCleaning, housekeeping and Landscaping + often referred to as “professional fees” or “management services” on yourBank and Credit Charges + financial statementInsurance costs +Other +Total other costs = 28
  • VetValuator: Calculating Assets All of the other calculations were based on your Income Statement. Calculating Assets is based on your Balance Sheet*. Assets and Inventory Look for a line called “Inventory” on your balance sheet. Most clinics have between $25K and $75K in inventory. If Inventory your balance sheet is different from this, try to estimate the A cost of your drug and food inventory. Some Balance Sheets calculate the Current or Net Asset and Initial Asset Cost Leasehold value for you. If so, just enter the Current Asset and Leasehold Value Depreciation and - Some Balance Sheets will combine Leaseholds and Assets. If Amortization so, just enter the number once. Current Asset Value = B Most clinics over 5 years old will have between $50K and $200K in current assets plus leasehold value combined. Total Assets Initial Leasehold Cost Inventory A Depreciation and - Current Asset Value + B Amortization Current Leasehold Value + C Current = C Leasehold Value Total Asset Value =* Some Balance Sheets total your current Inventory, Assets and Leaseholds for you. If so, just use that number on page 22! 29
  • Valuation methods There are a number of different approaches to valuing veterinary practices. Good professionalvaluators will usually use a few approaches to try to get an accurate value. Here are a few examples: Comments • First step is to get an estimate of the cash flow if a clinic • A good method, but Discounted • Cash flow is projected for a period of time (usually 10 years) very sensitive to cash flow • Each year is discounted by a certain rate and added up to get chosen discount rate the value of a clinic‟s goodwill • More complicated • Goodwill is added to your assets and inventory to get a value than others for your clinicVetValuator Method: • As with discounted cash flow, first step is to get an estimate • Can be less precise Multiple or of the cash flow of a clinic than Discounted Cash story factor • Cash flow is multiplied by a “story factor” to get the value of Flow goodwill • Easy to understate • As with discounted cash flow, goodwill is added to your assets and calculate and inventory to get a value for your clinic • Your clinic is compared with similar clinics that have been sold • Too few vet clinics are Comparable recently sold to make this transactions • Based on the comparison, your value is determined reliable • Clinics tend to be sold for between 45% and 90% of revenue • “Ranking” can be hard • Based on how your clinic ranks on a number of factors, your to justify Market clinic is assigned a position within that range • Simple and easy to understand 30