Dr. Gary Ackerman, the Founder of Ackerman Group, joins us to talk about how veterinary practice owners can successfully navigate the complex process of business transitions in today’s busy seller’s market.
Dr. Ackerman also shares some of the pitfalls to avoid along with great financial advice.
Welcome to Consolidate That! Ivan, great to see you again today, really excited about our guest, some of the people that listen to our episodes and actually listened to our special that we did at VMX might recognize our guest today, we did a quick brief introduction and an interview with him there and excited to hear more from him.
We’re excited to have here Dr. Gary Ackerman and we’re going to talk about – interesting topic, it’s going to be more geared towards the veterinarians that are selling the practice. From the background, Dr. Gary Ackerman is a veterinarian and then he ran his practice for about 20 years and then transitioned to helping veterinarians to sell their practices.
He sold his multi-location veterinary practice in 2001 and then since then, he had been advising and brokering practices sales. Real estate consultant, tax planning, over 1.5 billion in veterinarian and tax-deferred transactions and he’s a financial advisor to veterinarians between 2009/2017, around 750 million in corporate practice sales since 2018, that’s only in two and a half years and hundred plus corporate practice sales, 70 plus joint venture private equity sales when the holistic approach. Gary, welcome to the show, thank you for joining us.
Ryan, Ivan, nice to be here and got an interesting conversation today.
I want to jump in. I mean, the market is so frothy right now, there’s so many sales, there’s so much going on. I think that everybody said, I don’t remember which study it was but they said that there’s about 30 to 40 brokers are contacting each veterinary practice that is up for sale out there or hoping they are for sale. The multiples are growing. I mean, we heard 15, we heard 17X.
How in this environment, your business is targeted to help veterinarians to sell, how in this environment competitive it is to get to it, I guess with your experience and the background, you’re well-known in the industry but is it hard to get clients these days with all the consolidators and the market as it is today?
We actually are tracking over 60 companies that are buying practices now, I think we are at 30 or 40, it’s not 30 or 40 brokers. Most of the 30 or 40 that are contacting are business development people from the different consolidators. Everybody out there has got the business people from the different companies knocking on their door, sending them emails, sending them text, you’re overwhelmed if you’ve got a nice practice right now. Somebody’s coming in the door a couple of times a week.
It’s very easy to go down the path that you’re talking about is doing a sale right now because it used to be, you might have to go out and go after a company or acquire a company now, they’re coming after you until it’s really a seller’s market right now, the 15X and the 17X that we were referencing, we’ve definitely seen that, there’s transactions that are going on that we’re seeing that are higher than that, it’s just a matter of how big you are, how many practices you are, what the situation is for the company, a lot of different things that can contribute to that.
That’s amazing, with that, what is the appetite from the veterinarians because the baby boomers are sort of, there’s still practices by baby boomers that are for sale, but if you’re looking at the general population, this is veterinarians that want to continue working for the next five, 10 years and more and then because of this environment, everybody feels like they’re not going to get on the bus.
There’s more and more of these sort of joint venture deals, how do you see that environment changing and how do you see these younger vets that own practices, how do they interact with consolidators and what’s the appetite from their side to actually sell?
We’re seeing our clients bases is going younger over the last year to two years, we’re definitely seeing that, it used to be that they be members that we’re looking to sell, there’s not – especially in the larger practice, there’s not a lot of those practices where the younger veterinarians are raising their hands and saying, want to buy the entire practice because it’s just gotten too pricey in a lot of circumstances.
They might want to buy a part of it or they might want to participate in it, we’ve seen a lot of these joint venture and private equity transactions go on for the company perspective, if you keep some skin in the game and the part of the selling that or the associates or both, that’s their risk mitigation tool and they were like, what to do that even more when you’re getting into these higher multiples because they’re bringing more risk to the table when that occurs and so, they really feel like it adds stability if you looked at the numbers, that certainly appears to, from the stuff that we’ve been tracking and I see that occurring more and more simply because of the size of this practices.
If you want to try and do an exit about big practice to associates, you’re on a tenure that 15, 20-year plan. A lot of the veterinarians are not planning that far out. Our rule of thumb, when we’re doing the holistic planning that we do is that if you’re within five to eight years of exiting, that’s probably a really good time for you to be looking right now, this is a market with multiples that you don’t necessarily want to miss.
For those that are a little bit younger, doing the joint venture, the private equity and this is a situation that we allow you to exit at the current multiples, monetize part of the practice value, but still retain a piece of the practice or a piece of the parent company and typically, fairly better on that second piece that’s retained and you can generally hold on to it for two or five and six years. There’s an ability to exit at the current multiples.
Tax rates are lower right now, multiples are higher, tax rates go up, if interest rates go up, all of these are going to affect evaluations. We see a lot of interest in people capturing at least a piece of this market right now.
Absolutely, yeah. There’s a couple of things that you mentioned there, we drill down in previous episodes on the different acquisition models. When we’re talking about joint venture, there’s the one that you mentioned so the owner retains part of the practice and then there’s also rolling equity, right? A lot of consolidators right now allow to roll equity into part of the sale, proceeds to roll into the parent organizational path, it sort of – I think they were sort of innovative with it, right now. I think most of them are doing that, what is that – I have sort of two full question.
One, is there an average what consolidators allow to roll? If I’m a younger guy and then I have a lower risk tolerance and longer horizon, maybe I want to roll more and what do they allow to roll in order to benefit at the end from the parent organization.
The second question that I have is that, do you feel like this retention of a part of a practice has been an effective way to motivate veterinarians? Is it really not disconnecting them or is it keeping the interest of the parent organization with the single practice?
If I’m retaining 40 percent of the practice, I’m not really thinking about the overall organization and the benefit, I still – I got paid out and I’m still working on my practice rather than the organization as a whole. There are certain strategies, they’re synergies at the top of the organization, I’m not interested to do anything to benefit those.
Lots of meat on those questions, there’s a lot of different things to relate to it. We rarely view joint ventures and private equity investments as two different things. If your joint venture, your investing still were continuing to invest in a business that you already own and you maybe bring in your associates but you’re not taking on any more risk or anything, if anything, you’re probably reducing your risk because you’re not 100 percent owner.
You’re also continuing to get the cashflow and so you’re asking about how much companies allow, we typically see ranges of 20 to 40 percent but we’ve fairly commonly done those where the selling doctor retains 49 percent and we like those from a low risk perspective because you already know the financials of the business you’re investing in, you’re already in it so if anything, you’re reducing your risk a little bit and historically, the value for the part two that you’d be selling in two, three, five years, has gone up substantially, we’ve got a lot of metrics where we’ve tracked out and so we have a pretty good idea as to what’s going to happen in that department.
Conversely, if you’re investing in the private equity entity that owns 50, a hundred, 200, 500 practices, that’s a financial investment. That’s an investment and it’s probably the only investment for your portfolio that you can do on a pre-tax basis. If you excel your practice, you take the cash and walk away and do anything else, then you’re paying taxes but this is generally tax free roll up into the parent company which is a leveraged veterinarian entity that’s private equity, they historically have been the moderate risk private equity but that’s absolutely more risk than your practice.
What we see in those circumstances is the returns are higher but the percentage that you roll over is lower. As far as seeing 40 or 49 percent rollover into private equity, that’s extremely uncommon. More commonly would be 10 percent or 20 percent.
Now Gary, if I could take us a little bit further, higher level from where we are there and talk a little bit about what people should expect. For veterinarians that are listening that are looking to sell their practices and also, I think it’s just as important for the consolidation groups that are looking to purchase the practices to sort of here, maybe some of the information and the advice that’s getting told to the sellers but what are some of those things that can just right off the bat go wrong? What are people not expecting to happen when they’re going to sell their practice and what can go wrong that you try to prepare them for.
The biggest thing that can go wrong that we see is doing it yourself and bad local advice, getting advice from people that are not well versed in the veterinary industry. Easy do it yourself transaction because we have so many people knocking on doors of veterinarians.
They are much more complex transactions now with the joint venture or the private equity and other ergonomics and contingencies and things like that they were five years ago and these are being brought in because the numbers are higher, the risk is higher and so the companies are trying to mitigate some of that risk. Probably one of the big hindrances to getting transactions is not or getting it done efficiently is just not knowing what to ask for, what to put into them and kind of going it solo, in an area that you’re not – this is probably the most material financial transaction of their lifetime and they should get good advice here, if anywhere.
Other areas, probably the biggest issue is associate doctors. Associate doctors are generally intended to transfer their main producers at the hospital then they’re going to be required to go over us as part of the transaction and there’s usually some financial incentives, there’s usually contracts that are maybe assignable but the big issue we have is if there’s no contracts or vague promises or things along that line, associates are definitely something that can derail a transaction and so we work really hard with everything from JV portions to incentive equity, to cash bonuses on all of these circumstances.
We generally tell all of our sellers to be prepared to spend some money on your associates at the time of the closing. It’s just what’s going to be required. Second biggest thing we see is landlord issues and then if you’re the owner of the practice then that’s really not an issue but about half of our transactions are lease holds and landlords can be problematic. You’re not as much a priority to them as getting the transaction done to you is.
We’ve seen landlords with their hands out, we’ve seen landlords that wouldn’t cooperate, they’re almost never going to release you on the lease obligations, so there’s a whole host of things that can crop up their – that just really depends on what kind of relationship you have with your landlord and how much they want to turn the screws.
Other biggies that we see are throwing one of the biggest ones is lack of very good detailed financials and things along that line. We’re struggling to get out of somebody, either they’re not accrediting production appropriately or the practice management software and so we done our case, bigger dollars towards the doctor contracts or we see multiple situations where there’s tons of quasi personal expenses that not a buyer might not necessarily assume.
They might not employ your wife or your son or they might not buy your car, they might not do all of these other things and they probably would deposit all the income. All of these are things that we address and do in our financial analysis but the cleaner the financials are, the more you’re following an “aha” chart of accounts where you’ve got a pretty normal routine veterinary practice to go look at a profit loss statement, the easier it’s going to be to get your transactions on.
The reality is, the further you are away from that, we tried to normalize it, we tried and add it all back, we’ll certainly do a better job than a veterinarian will ever do on their own and we’re much more incentivized to do it appropriately than a company is. If it’s not good data, it’s really hard to get all of that transferred back to our selling doctors. We see a lot of issues with that.
Excellent, going back to the transaction, sort of the models that they’ve done, you said that up to 49 percent, we’ve spoken to a couple of consolidators, they said that at that range, they are having trouble motivating change, let’s call it. For example, the biggest state is sort of 49 percent owner, it’s almost half. Basically, when they are approaching, veterinarians may want to change, ad services and anything just like you’re running your own practice, you’re a benefactor of the final sort of cashflow production, you own 50 percent of it and then you do risk your business, that’s really cool.
Then, when the parent organization comes in and says, we’re going to change our vendor that sells us amoxicillin and it’s a different brand today and then they will just say no. We heard that happening because the less sort of equity, the parent organization has, the less veterinarians are engaged in the success of the parent organization rather than their own piece. Is that relevant? Have you seen that before?
A couple different parts to that question. I do see more engagement at the local level if they still own at the local level on the part of the veterinarian because that’s what you’re going to get paid on eventually but that’s not that degree. What I do see is there is a lot of deference between the buyers. There’s what we would term financial buyers that aren’t operators. They just come in and they’re buying based on the number.
They may not even see the practice or meet with you or anything like. We’ve got others that are all about how do we work together to operate this in the best manner. You need to be – our analogy to doing a transaction is kind of like dating. You are dating a number of different consolidators and you’re meeting them and understanding all of that. I mean they are going to put on their best face. That’s what they do when they come in the first time.
They are meeting your daughter, your baby, okay? What will happen after that is you get engaged. You do a letter of intent, which is a little bit of the challenge because now you’re a little adversarial because you’re now making sure that your documents that are going to be done and then after that you’re going to get married and when you’re married, how is it going to operate.
What we try to do is we’ve actually got about a five-page questionnaire that we’ve gone out to anybody that we’re doing transactions with and we get them to fill that that goes into how do you operate inventory, what computer systems do you use, what lab systems do you use, how do you compensate people, what’s your vacation policies, do you have a handbook, a personnel handbook that we can get a copy of?
This is all information that when we’re working with somebody, we want them to be able to compare among different companies because it’s material to what it’s going to be like afterwards. I think there probably is a little bit more engagement, a little bit more awareness of the numbers when you’re in a joint venture because you’re frankly getting paid either monthly or quarterly or what those numbers are, whereas if you’re in a private equity, you’re going to see it kind of at the end of the year.
You are going to see numbers from the parent company and you’ll see some numbers at the local level. You just won’t see as much and so unless there’s some phone assistant or something like that in place, we don’t see the people who look at it quite as closely when they’re in private equity situation as in a joint venture but you know that’s a relative thing. I mean, veterinarians are good people on hold when they create these practices and build them.
This is their baby and just because you sold a piece of it or all of it doesn’t mean that you’re going to act significantly differently. Our emotion, people we see sell it and go to work the next day feeling and acting the same way. They still care and so I don’t see a lot of change there when there is significant change where I see pushback is a fitting facts to quality of care they’re giving or what they can do with their employees and things like that. That certainly can provide some issues after closing.
With that, when we are selling a part of practice and then we’re saying, “Okay, we have all of these cool things that we’re going to do after.” We’ve heard it all. It’s like – well, there’s general like five, three or five things. We are going to do marketing, we’re going to optimize your HR, we are going to do all of that thing. How often do you see the consolidator actually articulating what they’re going to do because we bump into quite a few of them.
Where it’s like we’re going to do all of these magic and then veterinarians are like, “Okay, you’re a magician so you’re going to do magic” but they don’t go down and say, “Okay, we’re going to do marketing. This is exactly what we’re going to do. This is how we’re going to improve, we’re going to change the website, we’re going to improve search engine optimization, we’re going to improve the ad tactics” like there is none of that in the pitch decks that we reviewed.
There is no structural to say, “Okay, we see your practice as an opportunity. You’re going to own 49 percent of it and we’re going to do one, two, three, four, five and this is going to lift that many points, this is going to lift that many points and this is how margin is going to expand if you will do everything that we tell you.” How tactical these consolidators are when they are going through these practices or it’s all sort of blowing smoke and then after that, it’s like we see both but what’s your experience like?
A little bit is how tactical and how honest are they going to be upfront but it’s not – I won’t say it’s –
Yeah, I didn’t want to say that second part.
I don’t want to say it’s honest but how open are they going to be because I think a lot of them have those thought processes that internally they are doing them. I think what we see a lot of times is that the selling doctor here is, “Well, nothing is going to change” or not a lot will change and the reality is they have a couple of others that are being real upfront. They said, “Yeah, a few things are going to change” and they’ll take off some of the things that they’re probably going to do.
Where you really can get into what you’re talking about if you are getting like a social media or online presence or if you’re looking at ordering or things like that, you’re going to dig a little bit deeper when you’re doing the intros and you frankly got to get past the business development person to the internal people at the companies to talk to them and you can do that. The question is are you going to do that during your due diligence before you sign a letter of intent or are you going to do that afterwards?
Because that is going to involve a fairly deep dive and you might be doing it on five or ten companies. That’s commonly an area of due diligence on both side after your under letter of intent. The companies are looking at you and looking at what your capabilities are and they’re looking at where they can bring it in. The other thing that we see is some of the real progressive operators are getting almost like a cafeteria plan of things that they can bring into your practice that you can take on overtime, okay?
They’re not going to come in and do it all at once and they’re not necessarily going to do it unless you want to do it. What we’re seeing is skillsets. Some good examples of this might be you want to expand your dental area, so they’ve got a company that will come and help design a dental suite and they’ll bring somebody in to do that training. Like I said, I can do that. Do you have to? No. Call centers are another good thing that you can utilize them or not.
Online search engine optimization and things like that tends to be more central but a lot of it is actually local but you might find somebody central that is doing a better job of monitoring your Facebook page or your comments and different things and all of that line and so a lot of it is how do you integrate with the companies because some of the stuff they can put a dedicated person on it centrally that you just plain can’t do logically.
You’re going to have somebody who is wearing many hats that’s doing it but don’t expect that you’re going to jump into every single thing the first month post-closing. It could be a two or three year process.
Well Gary, it kind of hits on the point where you said before where a lot of the veterinarians will show up to work that next day and be just as happy or work in the same way. Do you think that that comes from a more realistic or transparent view during the due diligence process on both sides or is it important? You know, we talk heavily about a stabilization period where you acquire a clinic and take time for them to sort of get used to the temperature of the water and figure out where they are in the ecosystem.
Do you think that that’s important or do people get just as excited if day one they’re showing up and they’ve got a new logo on their scrubs and new training manuals and things like that?
So most of them are not going to change the logo and the training manuals are going to take time. Everybody wants the stabilization period because in particular, it goes back to the risk and things along that line. The companies first want to make sure that they capture what they acquired before trying to grow it, okay? They want to make sure that this is what we bought, let’s make sure we know what we’re doing.
We don’t want to get anybody mad, we don’t want to lose staff. Let’s make sure that we’re doing this right and let’s just take a big deep breath and make sure it’s working for everybody. Then overtime and also integrating with other people, you know they run a typically stronger manager operation than a lot of the selling doctors have because selling doctors almost invariably wear some of the hats that the manager might wear.
It’s routine for me to be telling selling doctors that ultimately your manager is going to have to do this because they’ll never be able to hire another veterinarian that will do all of the things that you do and so in that as you are slowly giving up responsibilities that may have been centralized previously you’re going to find that there is going to be an interest from the part of other people on taking in some of these initiatives too because it can help with the practice, so there may be more people involved in the discussion as to what do we do and what do we not do.
That makes sense, yeah. Shifting gears a little bit, we’re about 20 plus percent consolidated. We’re certainly moving in the ingoing more in the next couple of years, there is a big window of opportunity and big multiples. Single veterinarian practices, where they’re at I know that it’s a huge risk for private equity. They don’t want to buy them but the multiples are pretty low on those and then there are ways to acquire single practices and de-risk them.
Do you see the transactions happening at the single veterinarian practices and what is the general sort of temperature on that?
The temperature on that is rising mostly because the temperature is so hot on the practices that everybody wants and so there’s been a lot of – not a lot but a moderate amount of desire to go off center from the three to six doctor practice and buy something smaller and grow it. It would be helpful if they’re a reasonably good size single doctor practice, a million dollars of revenue or up. It would be helpful if they’re on a good demographic area.
If they’ve got reasonable facility either expansion capabilities or obviously room to add a couple more doctors to it but we definitely are seeing people that in lieu of doing a Denovo or in lieu of buying something that’s already got significant revenue in multiple doctors that are buying these, looking to get the doctor to stay on maybe a little bit longer, they might have to do a three or four year employment agreement rather than a two or three year employment agreement just because they are so critical.
There are certainly – we’re starting to do some of these transactions and we’re paying attention to that market because we see that as the more full-sized practices are going to get thinner. There’s going to be less to do and these smaller practices become the bigger practices over time and so the companies are certainly looking at ways to generate return and that a lot of it comes from growth. They are looking at that as more of a growth portfolio than buying something at a 15X and turn around and sell it at a 23X.
Yeah, so these are the ones that are more focusing on a margin expansion rather than just arbitrage, right? These are the guys that will buy them and develop them. That’s excellent. I want to go back to the rule equity scenario. You mentioned it’s 10 to 15 percent that is happening at the moment. Is that because the private equity wouldn’t want someone to get a bigger upside and they want to keep it all to themselves or is it because of the risk tolerance that the veterinarians have and they don’t want to risk the proceeds from the transaction?
Both of the above depends on the company. We see some companies that are really tight with their private equity and don’t like to give out large numbers with it, then we see other circumstances where 40 percent private equity, up to 40 percent might be offered and we’ve got a seller that only wants 20 percent and so that’s a risk level.
We generally are able to work around that, you know we’re trying to look at the sale pricing, how much is cash, how much is equity, what the prospects are for the company, what the financials look like on the company and try to marry what the individual needs with what the company is offering because we’re usually going to have multiple offers. We’re not beyond going and asking for something that they didn’t get offers. That’s what we do.
Awesome. Well Gary, we zoomed through 30 minutes very quickly here, I didn’t even realize but for all of those veterinarians that are listening to us, where do they find you? How do they get your advice? How do they get in the line to get your services and help?
Well, the first thing I would tell you to do, we do the same thing that you do. We’re trying really hard to educate the veterinarians that we just think it’s – then you can make a decision by being educated about what’s going on in the market so go to our website, it’s ackerman-group.com and on there, there is a knowledge base, which has got a couple dozen webinars and light papers and things along that line.
If you can’t find there some of the information that might be relevant to you, related to evaluations or transitions, then I don’t know where to tell you alone because we really are trying to put a lot of information there. On our website, you can click the link and we’ll do a free evaluation for anybody who’s got a practice to give them an idea of where they’re even it is now and we’ll send them comps on five or six practices that sold similar to them in the last year to two years.
That’s kind of like Zillow for practices and so we can certain show them what’s going on in the market for similar practices and in doing that we’re going to get kind of a peak under the hood as to their numbers because ultimately, there’s a lot of different things that drive pricing and evaluation and when you can do and stuff but numbers are a big piece of it and so we’re going to have a good look out and if there is any areas that we think you might need to tweak or do better at or clean up or anything like that.
We’re going to certainly give you some ideas, if you want to contact me it’s easy, firstname.lastname@example.org, send me an email. We’re happy to talk with everybody about their particular situation because even though this is all going on in a big industry, every sale is individual, it’s personal and we got to get in there and the holistic piece when you introduced me is all about integrating your sale with your financial advice, with your CPA, with your real estate.
With all the other things that are integral that you should be looking at on these transactions because this is biggest financial transaction of your life.
That’s really helpful and I usually ask for a book recommendation but I do think that your knowledge base is the one to go to. It’s wonderful, I know when we were planning this episode, that was exactly where you guided me as well and I was – I had more than enough to read there and lots of great stuff. We really appreciate having you on the show. I think there is a ton of great things that we can continue to learn from you and we look forward to hopefully having you back on the show again soon.
That’s great, let me know. I’d be happy to come back, guy. This is good education for everybody.
Thank you for finding the time.