Exit Options for One Doctor Practices

by | Dec 8, 2020

It may sound crazy, but have you considered giving away partial ownership, let’s say 30%, to an associate? If you can convert/reinvent a 1 doctor practice to a 2 doctor practice by giving away 30% of equity to an associate, you will most likely come out ahead.

Before we get started, it may be helpful to level-set on the current landscape in the veterinary profession.

  • A serious shortage of doctors; it is an existential problem facing the entire veterinary industry.
  • Migration and greater concentration of associate doctors at “large” hospitals.
  • More consolidators than ever before buying more hospitals than ever before.
  • More consolidators than ever before buying more hospitals than ever before.

None of these major market forces are working in your favor. Frankly, they are all working against a 1 doctor practice and you know this better than I do.

So, how do you attract the “right” associate in spite of these market forces?

You have to offer the one thing the others can’t and won’t offer…ownership.

Before we agree to disagree, let’s review two scenarios.

Scenario A: a $800K annual revenue, 1 doctor practice seeking a 1x revenue purchase price offer in the secondary market…

  • Veterinary broker/listing
  • One-off buyer/associate
  • Small group/chain buyer
  • Merger opportunity with a Consolidator

Admittedly, this market is not my area of expertise with the exception of VCA mergers. Generally speaking, I understand the secondary market offers to be roughly between 85% to 100% of annual revenue.

Scenario B: a $1.2M annual revenue, 2 doctor (70/30) partnership seeking a 1.5x revenue purchase price in the Consolidator Market.

  • 70% owner – $1.2M x 1.5 x 70% = $1,260,000
  • 30% associate – $1.2M x 1.5 x 30% = $540,000

*1.5x revenue multiple is just for illustration purposes and to keep the math simple. Consolidators will not use a revenue multiple, although it would be my opinion that 1.5x is on the low side.

The basic deal structure would go something like this…an associate agrees to join a $800K revenue 1 doctor practice and when revenues grow to $1.1M the associate gets 20% equity stake in the hospital, at $1.2M they get additional 10%.

One stipulation I would include would be that the associate would have to maintain full-time employment status in order to collect. If you create your hospital specific deal structure designed to deliver the results you are seeking, there is almost no risk. Ownership does not trade hands until the growth target is reach. In the meantime, you enjoy all the benefits of having a second doctor.

Bottom-line, if this is a viable option for you, it would be a WIN for you, a WIN for the associate, and a WIN for the community your hospital serves. Additionally, this type of deal structure will attract the “right” associate. Going back and forth upping a signing bonus with a large hospital to sign an associate will get you nowhere.

Final Thoughts

If you are a successful single practice owner, consider being a multiple practice owner. In my mind, you are the best candidate to acquire and convert a 1 doctor practice to a 2 doctor practice. Leverage your experience and leadership…the bonus for you is that the second hospital will only add value to your main hospital.