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CONFIDENTIAL
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.
Working Draft
Last Modified 21/01/2009 8:27:07 PM Eastern Standard Time
Printed
The ownership
life cycle
2010
Clinic ownership
and management
series
2
A bit about us
Michelle Cutler, DVM and Orin Litman, MBA
Karen Allen, DVM Jon Shell, MBA
Jon was a small business operator for several years before getting an MBA. Following graduate school, he was an associate with international consultancy McKinsey & Company before helping to found VetStrategy n 2006.Jon focuses his time on clinic operations as well as administration. Many of processes that are used to make facilitate smooth operations within our clinics have been developed by Jon.
A WCV graduate, Karen owned Mill Creek Animal Hospital since 1996 before joining forces with Vetstrategy. Karen has been actively involved in the AbVMA and facilitates thorough and critical review of current research to ensure our vets have access to information they need to make sound clinical decisions . Karen and her husband Lyle are happily raising their children on a farm outside of Edmonton.
Michelle is an OVC ‟00 grad, where she co-founded Global Vets. In addition to being a co-founder of VetStrategy, Michelle is a practicing vet at McLean Animal Hospital..Orin, a scientist by training, spent most of his career with Katz group, helping to grow their pharmacy business in Ontario. He received his MBA before helping to found VetStrategy in 2006. Most of Orin‟s time is spent on development and marketing.When they are not working, Michelle and Orin spend their time with their three children – Kobe, Beck and Jude and their Viszla Bubba.
We’re family and friends. We’re building a business to reflect the values we believe 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.
Bernie Caplan, DVM
An OVC ‟77 graduate, Bernie‟s Annex Animal Hospital has been a fixture in his neighbourhood for 30 years. He has participated in the ownership of other clinics, and is a founding director of VetStrategy.In addition to being a clinician at Annex, Bernie focuses his time on veterinary community relations as well as acting as a senior operational advisor.
3
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
4
What questions should I be asking?
If you answered no to most of these, you may want to consider selling your practice
• Is your clinic growing over 10% per year?
• Do you enjoy the day-to-day running of the clinic?
• Have you recently made significant investments in the clinic?
• Do you have any Associates who would buy your practice?
• Are you prepared to work more if an Associate leaves?
• Do you need to own my own clinic to meet your retirement goals?
YES NO
5
Where am I in the ownership lifecycle?
Value of clinic
Age 30 40 50 60 70
Owner builds client base and
reputation
More associates brought in, revenue
increases
Revenue and operations stabilize. Slow growth, strong
cash flow
Reasons to think about selling
• You‟re not enjoying owner lifestyle
• Cash flow is very tight
• You‟re a serial entrepreneur – time to start and grow a new practice!
• You‟ve enjoyed being a veterinarian, but are thinking career change
• Revenue is growing, cash flow increasing, staff is stable
• Your Clinic‟s value is highest – sell at the top!
• You no longer want owner responsibilities
• Threat of HR instability is a big business risk
Owner works in clinic less often. Additional staff and management
reduces cash flow
I love my clinic, but hate management – how can I become a practicing veterinarian again?
6
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%
Sell 50%• If your clinic is big enough, you may be able to bring on a partner• In some cases, this partner could do the administrative tasks
Sell and Stay• Lock in the value of your clinic today, and stop doing the administration• Continue to direct medical practice, and maintain your clinic heritage• This option is becoming more and more common
Join other clinics
• Partner with other clinics, and hire central administrators for the administrative tasks
See page 13 for VetStrategy’s options for the Veterinarian who wants to keep
practicing, but stop administering
7
Who could I sell to?
There are different ways to think about succession
Associate within Clinic*
• Associate has rapport with staff and clients
• Little business interruption
Pros
• Often need to self-finance• Few associates have sufficient risk
tolerance• Deals often fall apart – if the
associate leaves it can affect clinic value
Cons
Another veterinarian
• Often fall apart due to risk-aversion and lack of deal-making experience
• Often replace entire staff• Need to advertise makes sale public
Veterinarian Group*
• Uncertainty about “corporate” treatment of patients and staff
• Confidential; no need to advertise
• Deals occur fast and simply• Cash up front
• May be able to transition clinic over several years, which may be more comfortable
* We can help with both of these – please keep reading!
8 8
We can help your associate acquire your clinic
Deals with associates can break down for a number of reasons. We have services designed to help facilitate these acquisitions.
• We have developed a tax-advantaged approach to partnering with Associates
Partnership
• 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
Financing
• We can implement our management solutions for Associates who want to own, but may not want to manage
Clinic operations
• Working with us enables savings on supplies and products• Our network provides help finding great staff
Economies of scale
We may be able to make your deal better. Give us a call – it’s worth a coffee!
9
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*
Cash flow
The story
• Amount of cash produced by the operations of the clinic• Calculated before accounting for taxes, depreciation or
service on any debt• 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
• The multiplier, or story factor, accounts for the specific context of each clinic
• This accounts for things like revenue growth, location, employee stability, condition of clinic, etc.
• With the story factor, we try to answer two questions:– “How sustainable is current cash flow?”– “How hard will it be to increase cash flow in the future?”
• Story factor is generally between 3 and 4
Formula:
Cash flowx
Story factor+
Current value of assets
and inventory
Assets and inventory
• Value of sellable inventory at cost (food and drugs)• Current value of equipment (initial cost minus depreciation)
* There are several methods used to calculate clinic value. Please see page 30 for more details
10
Clinic value: Example
Clinic 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 my clinic worth?”
Cash flow
• Total revenue is $1.25M• After adjusting for owner„s compensation, total labour
costs are 40%, or $500,000• Occupancy costs, using a market value for rent, is 8%, or
$100,000• Other costs are 5%, or $62,500
RevenueCost of goodsLabour CostOccupancy CostOther Costs
$1,250,000$375,000$500,000$100,000$62,500
• Long-term associate and technician will leave after sale
• Last renovation was 30 years ago• Clinic showed no growth for the past 3 years• Clinic in an old neighbourhood with declining
population
Story factor = 3
Story 1
x by Story factor X 3
= Clinic value
Cash flow $212,500
Plus Assets
Cash flow$212,500
$150,000
$787,500
Story factor = 4
Story 2
x by Story factor X 4
= Clinic value
Cash flow $212,500
Plus Assets $150,000
$1,000,000
• All staff committed to staying• Clinic growth an average of 8% over past 3 years• Renovation in 2005, new digital x-ray• Good practice in new, growing area
For this
example,
VetValuator
would value
the clinic at
$787,500 to
$1,000,000
To value your clinic, use the
VetValuator at the back of this document
11
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 more resistant 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 declining revenue, 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 a value of $1,000,000
Example 1: Flat revenue Impact
Example 2: Revenue declines by 5%
What happens in the next twelve months?
• No revenue growth – $1,250,000• Small raises of 3%, now labour cost is $515,000• No other changes
What happens in the next twelve months?
• Revenue decline to $1,187,500• Don‟t hire summer staff, reduce labour by $10,000 to
$490,000• Keep cost of goods at 30%• No other changes
• Cash flow declines by $15,000 to $197,500
• No growth decreases story factor to 3.75
Impact
• Cash flow declines by $33,750 to $178,750
• Revenue decline decreases story factor to 3.5
New value = $775,125
down by $224,875
Old value = $1,000,000
New value = $880,625
down by $119,375
Old value = $1,000,000
12
Some questions and answers about selling
How long does it take?
Agreeing on a price is usually easy and takes 1-4 weeks. After that, 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 staff?
It depends. If the staff knows, the transition period is smoother and 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 currently in discussions with another party?
This is a very important time to call us. In the past, we have been able to pay more than other parties. If you are dealing with an associate, we may be able to help reduce the risk to him/her.
What will my role be moving forward?
This is really up to you. We are happy to help you reduce your role and 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 influence the practice of medicine?
Simply, no. We don‟t have any views on the practice of veterinary medicine. We‟re about efficient support operations, allowing veterinarians to practice the standard of medicine they believe in.
13
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 wayyou want!
To calculate your
veterinary income post-sale, use the
simple income calculator on page 24
14
We have solutions for all ownership stages
We can help buy your clinic outright, and we have three approaches for veterinarians who aren’t ready to leave their practices.
• 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!
Keep practicing, Stop Administering
• 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!
Join us, without selling to us
There are many ways to make your life better – let’s talk about it!
• 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!
Partnership
15
Contact Us
Internet:
E-mail:
Corporate offices:
www.vetstrategy.com
VetStrategy780 Hwy 6 NorthWaterdown, ON L0R 2H1
Phone: 1-866-901-6471
Orin LitmanManaging Director416-999-9543
Jon ShellManaging Director416-951-1476
Michelle CutlerDVM, Owner416-737-0168
Bernie CaplanDVM, Director416-254-1590
Karen AllenDVM, Medical Director, 780-288-1584
drallen @vetstrategy.com
Sherry HughesOntario Operations Director289-338-6022
Christy RoulstoneAlberta Operations780-916-6803
16
VetValuator
17
VetValuator: A Valuation primer
Disclaimer: This is not a replacement for a proper professional valuation, but a way to get a range of what your clinic may be worth. A lot 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’t match, ask your accountant or feel free to e-mail us and we’ll be able to help.
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.
While there are many methods of valuation, they all fall into two categories:
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
How are clinics valued?
Main types of valuation
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
The VetValuator method
The most complex thing in valuation is to calculate goodwill.
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.
To use the on-line version go to www.vetstrategy.com/vetvaluator
18
VetValuator: Getting the information
Find your last year‟s financial statements*
Revenue from financial statement
Labour
Cost of goods sold
Occupancy cost
Other
1
Use your practice management software to calculate revenue for your last three fiscal years
2
Use your last year‟s financial statement to calculate expenses3
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)
• Add your purchasing costs (food, drugs, etc) to your laboratory costs and your cremation costs• For help calculating Cost of Goods Sold, please see page 27
Occupancy costs• Rent plus maintenance plus taxes• 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• 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 www.vetstrategy.com/vetvaluator
19
VetValuator: What is my Story Factor?
To use the on-line version go to www.vetstrategy.com/vetvaluator
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.
On the following page, we ask some questions to help you estimate your story in these categories:• Clinic performance• Human Resources• Costs• Facility and Location
There are many different questions that you could use to estimate the story – these are the ones we look at first.
Evaluating your story
Story Factor – An imperfect measure
Figuring out the value of your story is one of the most difficult things to do. How one person looks at a clinic may be completely 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?
20
VetValuator: Evaluating your story
Clinic 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?
• Will your doctors stay after the sale?
• Do you have at least one long-term receptionist and technician?
• Will they stay after the sale?
Costs
• Are your labour costs less than 40% of revenue?
• 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?
• Is your neighbourhood growing?
• Is there another clinic within 1 km? Is it bigger than yours?
All “yes” answers
moves a story value close to 4, all “no” moves it
closer to 3
What do you think your story factor is?
Choose a number between 3 and 4
To use the on-line version go to www.vetstrategy.com/vetvaluator
21
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 www.vetstrategy.com/vetvaluator
22
Calculating final value
Revenue:
Labour:
Cost of goods:
Occupancy cost:
Inputs
Expenses
–
–
–
Other expenses: –
Cash flow: = A
Asset value = B
A A
x x
= =
B B+ +
= TO
Low range High range
Your clinic value is estimated at:
FROM =
3 4
Clinic value range
Clinic value using your story estimate
A
x
=
B+
=Your estimate of your story factor
= C
C
To use the on-line version go to www.vetstrategy.com/vetvaluator
For help calculating Asset Value, please see page 29
23
What does this mean?
You should now have an estimate of your clinic‟s value. It‟s a great start to understanding the true 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 flow
We 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 we can – we always look for the hidden value in clinics – that‟s how we succeed!
We look forward to talking to you.
There may be strategic reasons why your calculated value may underestimate the true value of your clinic
24
If I sell, what will I make?
This very basic sheet will help you calculate your veterinary income if you do sell your practice
Sale price
Clinic debt
Clinic proceeds4
Proceeds from sale
Return on proceeds
x 5%1
A
B
Real estate income
Rent2
C
Veterinary salary
Hours worked per week
D
x $3,0003
1 Assumes an after-tax annual return of 5% when you invest the proceeds from the sale
2 If you own and keep your building
3 Assumes $120,000 for a 40 hour work week
4 Assumes no capital gains tax (use capital gains exemption of $750,000)
Money in the bank
Financial position from veterinary sources
A
Annual income
B
+ C
+ D
Annual income =
=
Annual veterinary salary
-
=
=
Return on proceeds
Rent2
Annual veterinary salary
25
VetValuator
Reference
and
Calculation
Pages
26
VetValuator: Calculating labour costs
Labour expenses in financial statement
Payments to individuals not involved in practice operations or management*
Salary paid to owner*
* 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
–
–
Hours owner works per week
x $2,500**
Replacement cost of owner =
+
Benefits*** +
Normalized labour cost =
Locums and other veterinary professional expenses +
ONLY subtract items thatare included in your labourexpenses on your financialstatement. If you do not take a regular wage, but instead take an owner‟s “draw” or professional fees, do not subtract anything here.
27
VetValuator: Calculating cost of goods and occupancy cost
* Estimate average annual maintenance cost
Supplier 1 cost
Cost of goods sold
Supplier 2 cost +
Cremation cost +
Laboratory cost +
Other cost of goods sold
+
You own the building
Occupancy cost
Rent/sq. ft. in a similar location nearby
Square feet x
Rent =
Utilities +
Property tax +
Building maintenance* +
Occupancy cost =
You don„t own the building
Rent
Utilities +
Property tax +
Building maintenance +
Occupancy cost =Total Cost of Goods Sold
=
28
VetValuator: calculating other expenses
Legal
Marketing +
Accounting +
Equipment maintenance +
Telephone +
General administration +
CE
Uniforms +
Computer Costs +
Cleaning, housekeeping and Landscaping +
Bank and Credit Charges +
Insurance costs +
+
Total other costs =
Other +
Don‟t include any personal items, such as automobiles, or
any capital expenses, such as x-ray machines or blood analyzer
purchases.
If you pay yourself management fees or other fees, do not
include them here. These are often referred to as “professional fees” or
“management services” on your financial statement
29
Inventory
Assets and Inventory
Initial Asset Cost
Depreciation and Amortization
-
Current Asset Value =
VetValuator: Calculating Assets
All of the other calculations were based on your Income Statement.Calculating Assets is based on your Balance Sheet*.
Look for a line called “Inventory” on your balance sheet.Most clinics have between $25K and $75K in inventory. If your balance sheet is different from this, try to estimate the cost of your drug and food inventory.
Initial Leasehold Cost
Depreciation and Amortization
-
Current Leasehold Value
=
Some Balance Sheets calculate the Current or Net Asset and Leasehold value for you. If so, just enter the Current Asset and Leasehold Value
Some Balance Sheets will combine Leaseholds and Assets. If so, just enter the number once.
Most clinics over 5 years old will have between $50K and $200K in current assets plus leasehold value combined.
A
B
C
Total Assets
Inventory
Current Asset Value +
Current Leasehold Value +
Total Asset Value =
A
B
C
* Some Balance Sheets total your current Inventory, Assets and Leaseholds for you. If so, just use that number on page 22!
30
Valuation methods
There are a number of different approaches to valuing veterinary practices. Good professional valuators will usually use a few approaches to try to get an accurate value. Here are a few examples:
Discountedcash flow
• First step is to get an estimate of the cash flow if a clinic• Cash flow is projected for a period of time (usually 10 years) • Each year is discounted by a certain rate and added up to get
the value of a clinic‟s goodwill• Goodwill is added to your assets and inventory to get a value
for your clinic
Multiple or story factor
• As with discounted cash flow, first step is to get an estimate of the cash flow of a clinic
• Cash flow is multiplied by a “story factor” to get the value of goodwill
• As with discounted cash flow, goodwill is added to your assets and inventory to get a value for your clinic
Comparable transactions
• Your clinic is compared with similar clinics that have been sold recently
• Based on the comparison, your value is determined
Market
• Clinics tend to be sold for between 45% and 90% of revenue• Based on how your clinic ranks on a number of factors, your
clinic is assigned a position within that range
• A good method, but very sensitive to chosen discount rate
• More complicated than others
Comments
• Can be less precise than Discounted Cash Flow
• Easy to understate and calculate
• Too few vet clinics are sold to make this reliable
• “Ranking” can be hard to justify
• Simple and easy to understand
VetValuator Method:
