No Images? Click here 11 June 2019 Is the Veterinary Profession Fractured?Some Corporate Practices are Leaderless There is abundant evidence of Australia wide difficult veterinary staffing issues and this spills over into listed corporate practices, a multitude of which are reliant on a combination of part-time employees to fill rosters. In cases where the original vendor owners have retired and moved on, many of these practices are essentially leaderless. Meanwhile, a multitude of veterinarians owning practices tell us that they attract many new clients from corporate practices nearby where the veterinarians on duty wave away a client because they are likely to have to work beyond their rostered hours or the treatment may be difficult. They personally don’t suffer the consequences of clients and fees going elsewhere that a practice owner would. In many cases they lack an experienced lead veterinarian who can develop the skills of inexperienced employees. Indeed, this phenomenon has been occurring from the early days of Greencross as its practice vendors satisfied their work earn out contracts and departed. The situation has become acute as the proportion of part-time veterinarians have increased. Practice a Car Wreck! A former owner of a premium practice who sold to a corporate describes their view of the present state of their former practice as being akin to having owned a valuable prestige vintage car which they lovingly cared for until its sale, then seeing it a year later parked in the street in a sad condition uncared for and badly scratched from contact with other vehicles. The Loss of a Generation of Experience Corporatisation has compressed the time in which many experienced veterinarians have retired with most leaving practice once their earn out obligations with a corporate buyer have ended. Earn Out Payments are Not Being Achieved In practice many, probably most, veterinarians don’t achieve the goals set in the earn out part of their sale contracts and therefore can only plan on receiving the upfront portion of the contractual payment, typically 80%. In many cases, corporate fiddling with processes in practices have upset the equilibrium of the people within making it near impossible for the vendor veterinarians to achieve their earn out payment. The lesson seems to be that anybody selling to a corporate shouldn’t plan on getting more than their upfront payment. Lessons from Greencross Looking back Greencross’s share price had well and truly passed its zenith when a private equity group made a buyout offer, pushing up its price, but by now the private equity buyers may be confronting the question as to what to do with it? Visibly, private equity practices and corporate practices have been leaking clients to privately owned practices for years. The private equity buyers have probably gamed the option of splitting off the Petbarn business from the veterinary practices but that would still leave them confronting a huge issue with respect to the practices. Some of those practices are no longer regarded as the shining icons of the veterinary profession that they once were under the ownership of talented veterinarians. The buyers must be spending a lot of time working out how to revitalise them. That’s no easy problem. In other industries it has been normal for a private equity buyer to slash costs, increase internal gearing and somehow manufacture enough financial success to refloat the business, and hence, make lots of money by shuffling ownership paper. As a person who has been advising veterinary practice owners, dental practice owners and medical specialists for over 30 years, I am at a loss to understand what corporate magic could be exercised when I hear on an almost daily basis stories from veterinary practice owners across Australia telling me that they are getting lots of clients who have left corporate practices. I cannot imagine myself buying shares in a veterinary company relisting after a period of temporary ownership by a private equity group. That clearly appears to me to be a high risk investment. I remain to be convinced otherwise but I doubt that the corporates will be able to successfully make the transformation. National Veterinary Care Limited (NVC) As at 31st May 2019 NVC’s total return in the form of dividends plus capital growth for the twelve month period was negative 22.39%. Pity any veterinarian who sold their practice and decided to take consideration in the form of its shares or who decided to buy its shares on the stock market a year ago! NVC’s rural cousin Apiam Animal Health Limited has also had a dismal one year return producing a negative 34.25% to 31 May 2019. The markets message to rural veterinary practice owners is that if you sell out to Apiam, don’t buy shares in it! Since I have long advised dentists, as well as veterinarians, and watched the machinations of dental corporates, I note that at the same date of 31 May 2019 the one year results of listed dental companies were:- 1. 1300 Smiles Limited – one year return of negative 0.63%. 2. Pacific Smiles Limited – one year return of negative 30.45%. 3. Smiles Inclusive Limited –one year return of negative 85.15% - that’s really painful, particularly for the dentists who entered into co-ownership practice partnerships with it last year. All of the above evidence raises huge question marks over the operation of professional practice consolidations. The reality borne out by experience is that it is extraordinarily difficult for corporates to run veterinary or dental practices near as well as the best privately owned practices. Indeed, while there have been instances of corporates running successfully for a period of time, the evidence suggests that over the long period any veterinary or dental corporate with a large population of practices will suffer a falling away in their performance. False Lesson from MBA Studies Much of what I learned during my MBA many years ago related to the world of big business but a collection of professional practices doesn’t make a big business, it remains a string of separately located small businesses. While corporate managers from head office have a habit of “yapping” about KPI’s and empowerment of staff, the evidence suggests that corporate ownership of practices is a big turn off to both staff and clients. Differences Between Big and Small Business The key characteristic of a big business is that it’s a type of business which requires a vast amount of capital. Nobody can run an iron ore mine as a small business because the infrastructure and huge machines required to establish and run a large mine requires a vast amount of money to establish and a long time, often many years, to bring a mine into successful profitable operation. Similarly, an international airline cannot be run as a small business, nor can a major airport or a successful logistics business. All these require massive amounts of capital investment which make them naturally big businesses. Big businesses are owned by shareholders and have to comply with a substantial amount of government regulation and other regulation imposed by stock exchange listing rules. The examples above are naturally big businesses. By contrast coffee shops, bread shops and pizza houses are naturally small businesses and buying hundreds of them and aggregating them into a franchise chain has proved to be a high risk endeavour for Retail Food Group. Incidentally, its one year performance is negative 78.66% - that’s really painful. Accounting Consolidations Twenty or so years ago there were three accounting consolidations being Stockford, Harts Australasia and Knights Insolvency. They aggregated privately owned accounting practices in which partners had worked long hours to service clients and as they purchased more and more practices they turned into loss making endeavours. I knew a director in each of two of them personally and Synstrat was approached to join in but quickly decided against it. What really happened is that partners in successful accounting practices who had close relationships with clients and who had worked hard and who were prepared to visit businesses outside hours and speak to groups in their local communities, etc., suddenly discovered the benefits of a comfortable working week under a corporate. Administrative problems that were once solved inside the practices were hand balled to head offices, and the head offices took on more and more staff to deal with the issues. Inevitably, each of those groups profitability fell away to losses and they finished in liquidation. Investor Risk Aversion If there are still those with ambitions to set up new veterinary and dental chains of practices and on sell them through an initial public offer and stock market listing, I suspect that stock brokers and investment bankers have become risk averse given the many failures of the model. Can Veterinary Partners List? All of the above makes me wonder how Veterinary Partners which has purchased a significant group of veterinary practices is going to on sell the group and extract its capital at a profit. That to me represents a huge challenge. Potential investors are bound to question the risks involved in veterinary staffing and point to the dismal results of veterinary and dental companies, and indeed, other failed professional practice aggregations. Synstrat Accounting is Australia’s most experienced veterinary practice valuer. Speak to Graham Middleton or David Collins. What the Evidence Says The evidence is clear that the corporate model of rolling up large numbers of veterinary, dental, accounting or medical practices has proved to be a deeply flawed high risk model. Lessons for Veterinarians – Opportunities for Practice Owners The natural advantage of having long term practice owners known to clients and working alongside staff is much greater than the advantage that corporates can bring. Across Australia there are many privately owned practices thriving. They are serving their clients well, are profitable, indeed some extremely profitable, and they hang onto and grow their client base. Ask how Synstrat Group can improve your accounting and financial advice. As your accountant or financial advisor explained to you how successful veterinarians can grow their wealth by concentrating on proven non-controversial means. To follow up speak to Jenny O’Brien 03 9843 7777 for an appointment with Graham Middleton or other Synstrat staff. Charges will apply after an initial 30 minute discussion. Limits on Veterinary Corporates The reality is that the corporates have passed their zenith. The successful early days of Greencross had long since given away to stagnation by the time it was bought out by a private equity player and delisted. The stock market performance of National Veterinary Care and Apiam Animal Health makes it extremely difficult for either to raise additional capital via a share issue and poses awkward challenges for their management. The state of their businesses raises a huge barrier for any other group wishing to aggregate a list of practices and extract their capital via an IPO and stock market listing. Opportunities for Young Veterinarians In an age where so many of the veterinary population either choose to or need to work part-time, there is a big opportunity for veterinarians able to work full-time, and who are prepared to work hard, to buy or start practices, and win market share off nearby corporate practices. Ideally, a good practice with two veterinary owners able to cover for each other and veterinary staff absences can build a very strong practice and create lifelong relationships with clients. Those lucky enough to obtain positions in good practices offering a wide range of experience and having good equipment can develop both their clinical skills and their client related skills preparing them for eventual purchase or establishment of a veterinary practice of their own. There is a vast amount of anecdotal evidence of clients objecting to the depersonalisation of corporate practices as in “I never see the same vet twice” or being subjected to clumsy upselling technique – nor are staff in such practices inspired by whiteboards in the treatment area showing their financial targets! Evaluating Value in a Practice – Tips for Buyers 1. What a practice did in the most recent financial year and in the recent months of the current financial year are far more important than what happened in July three financial years ago. It is vital to see evidence of the recent fees and bankings. How do the charges in the practice compare with what you are used to in practices in which you have worked? 2. Your neighbourhood accountant who has probably never dealt with a veterinary practice and doesn’t understand what good practice financials should look like, or doesn’t understand the difference between small animal, large animal, dairy related or equine practice financials is not a good place to start. It is important to speak to Synstrat. Graham Middleton or David Collins who have been valuing practices and advising buyers and vendors for many years will be pleased to assist. Should you buy the practice we will also introduce you to one of our accounting partners who deals with lots of veterinary practices and understands the nature of their financials. On an ongoing basis we will benchmark your practice performance and assist you in your long term journey as a practice owner. Our licensed advisory arm Synstrat Management Pty Ltd will advise you on the financial steps which bring long term success. The difference between correct structuring and long term outcomes can be up to several million dollars at point of retirement in the distant future. A critical step is getting the structure right at the beginning. Demographics A study in the medical profession many years ago estimated that female medical GP’s worked approximately 40% of the clinical hours of male GP’s as measured over the span of a full medical career. In other words, at that time two and a half female GP’s were the equivalent of one male GP in work availability. However, the demographics of our population are undergoing rapid change with a proportion of stay at home dads, the first child arriving at a later age, and reduction in family size, but it is clear that today’s veterinarians on average have far less clinical time during their careers than did the predominantly male veterinary population of the baby boomer generation. The best thing that a young veterinarian, prepared to work full-time and learn to do, is to seek employment in a good privately owned practice and learn from its owners what makes it successful including acquiring as much surgical skill as possible. A good attitude towards hard work and learning is essential. Employment in country practices often gives a greater opportunity to broaden skills and is a great preparation for purchasing or starting your own practice in city or country. If you think you are paying too much for Life Insurance including Income Protection, etc. Cameron Darnley is a Synstrat Partner who can assist. His contact number is 03 9843 7777. Relative Advantage and Disadvantage Unlike some areas of the economy where large corporates crushed the life out of small business, such as supermarket chains crunching the small corner grocer of yesteryear, privately owned veterinary practices have a huge natural advantage over corporately owned practices because they are run as personal relationship businesses. It is often the corporate veterinarians who lack the knowledge, skill and relationships to compete against well run privately owned practices nearby. The Good News The good news for veterinarians in private practice is that there is virtually nothing that the corporate practices can do to crush them in the way that supermarket chains crushed small corner stores. Indeed, the opposite is the case. The natural advantages that well run privately owned veterinary practices have over corporates outweighs the advantages of the corporates. If you would like a copy of Synstrat’s publications 50 Rules for financial success as a veterinary surgeon and Buying and Selling Veterinary Practices contact mary@synstrat.com.au indicating mailing address details. You will also be placed on Synstrat’s veterinary newsletter email list, if not already there. Naturally, we will delete the name of any veterinarian who does not wish to be on that list. It’s About Client Relationships – Stupid A practice has several partners but the oldest of them is very active and has a huge network of relationships formed over many years with clients as well as business contacts of all kinds. Because of the amount of work a new partner with an MBA as well as professional qualifications is brought into the partnership. The newcomer harbours an ambition to become “managing partner”. He takes on a few administrative tasks and persuades some of the partners that he is “the man of action” necessary to move the practice into the future. He is critical of the oldest partner, sneers at him in meetings and demands that he retire. The oldest partner digs in, services his clients and maintains close contact with them. Lots of people ring the practice and want appointments with him. The new partner makes many attacks and is eventually told to shut up or face legal consequences. The lesson – big business is governed by weight of shareholdings – relationship businesses are controlled by the strength and number of relationships. Best Wishes to all Veterinarians, Graham Middleton Disclaimer: The information contained herein is of a general nature and no specific action should be taken without individual advice. Speak with Synstrat staff as appropriate. Prepared by Synstrat Management Pty Ltd for clients of the Synstrat Group. Synstrat Management Pty Ltd is the holder of Australian Financial Services Licence No. 227169. ABN 57 006 295 325 The Synstrat Group provides Accounting, Financial Services, Business Advice, and Financial Advice. Prepared by Synstrat Management Pty Ltd for clients of Synstrat Group. Synstrat Management Pty Ltd P. 03 9843 7777 ABN 57 006 295 325 If you are not the intended recipient of this communication please delete and destroy all copies of this message and telephone Synstrat on +61 3 9843 7777 immediately. If you are the intended recipient of this communication you should not copy, disclose or distribute this communication without the authority of Synstrat. Any views expressed in this communication are those of the individual sender, except wh ere the sender specifically states them to be the views of Synstrat. If you do not wish to receive this email in future, please reply to the sender requesting termination of service. |