Anatomy of a Practice Merger

Mergers appear to be a growing trend among equine veterinary practices. Specifically, smaller practices are merging into larger practices, resulting in great opportunities for both the small and large practice owners. For many small practice owners, merging can provide them with growth opportunities, cost savings, future liquidity for their ownership, and a natural transition of their clients and employees into a larger organization when they are ready to retire. Author’s address: 121 Countryside Court, Ste 140, Southlake, TX 76092; e-mail: jachalk@chalkcullum.com.

1. Introduction

A merger creates issues different from a simple acquisition or divestiture of a practice. Issues such as economic value, cultural fit, ownership structure, geography, real estate, and practice philosophy are just a few of the many issues that should be considered when an opportunity to merge is presented. Any potential party to a merger should begin by thinking about the following questions: “who am I?” “who are you and would you fit with me?” “how would we work together?” and “what is a potential structure?” This paper will briefly discuss these questions.

2. Who Am I?

Before a practice owner can begin to consider expansion they should begin with developing a clear understanding of who they are. This “identity check” involves several things such as financial history, client base, practice specialty(ies), practice type, and strategic objectives. Examining the financial history involves analyzing complete financial statements over several years to understand the “financial story” of the practice. Historical revenue growth, ratio analyses, and owner distributions are just a sample of some of the things an owner should know about their practice before considering a merger. This type of financial analysis is critical for every business owner, even if you are not considering an expansion.

Examining the demographic profile of a practice involves understanding the market(s) served, market competitors, needs of the client base, type of services provided (ambulatory vs. hospital services), and core competencies. Studying these segments over an extended period of time can begin to tell the “story” of the practice. Defining strategic objectives help convert a vision into more specific plans. They set the major benchmarks and are designed to be measurable, specific, and realistic in order to guide decision-making.

It is only after you have a clear understanding of your practice that you can begin to explore whether or not other practices would be a possible merger candidate. Before you begin considering a specific practice, you should define the “perfect” merger candidate based on your identity and what you need to make the combined practice stronger than the two individual practices.

3. Who Are You and Would You Fit With Me?

Once you have identified what it is you are looking for in a merger partner, you can then begin investigating specific practices. Each possible candidate should be compared to the “perfect” merger candidate to determine just how close that individual practice is to your ideal. Obviously, we are not talking about comparing one bunch of bananas to another at the grocery store. There will be a very limited number of possible practice candidates but comparing any potential candidates against an ideal merger candidate is a very helpful exercise and should help to convince you to move forward, or not.

In order to determine if a merger partner is a match, you will need to examine information on the potential merger candidate. This information is very similar to the information you would use to understand your practice’s identity. You will want to review the financial information as well as practice demographic information about the merger candidate. It is usual and customary to enter into a confidentiality agreement prior to examining the information of another practice. This due diligence investigation is concluded when the parties either agree to not proceed or agree to investigate a potential merger.

4. How Would We Work Together?

The next step to a practice merger is both parties determining if they want to be partners. This involves many aspects but is mostly about personality and practice habits of the owners and whether they can work together. We all know practitioners that we might respect professionally, but for one reason or another, we would never want to be their partner. This analysis takes some time and relationship building. One way to accomplish this is for each potential partner to spend time in the practice of the other potential partner. During this period, the two (or more) potential partners should work with and around each other. They should work with the staff of the other potential partners. By doing this you will get a “feel” for what it is like to work with this potential partner and whether your practice habits and styles are compatible.

5. What is a Potential Structure?

After determining that both parties would like to pursue a potential merger, it is then appropriate to begin to discuss the structure of a possible transaction. Typically, mergers involve one practice merging into another with the combined practice having combined ownership. The key to this process is determining the value of each practice and then using that value to determine the new ownership percentages in the new combined practice. For example, if two single owner practices wanted to merge and one practice was worth $400,000 and the other was worth $600,000, the ownership of the combined practice would be 40% and 60%, respectively.

This illustrates how important the practice value is when you are trying to determine the structure of a merger. Obviously, value is like beauty, it is in the eye of the beholder, and there are many ways to value a practice. It is important that the same method is used to value both practices so that both practices are treated as fairly as possible when you use those values to determine ownership of the merged practice.

Once the ownership of the new combined practice is determined, it is then important to put in place all of the documents necessary for the new practice partnership. These include partnership agreements, employment agreements (outlining how the combined practice will pay for the efforts of the partners), and buy-sell agreements that detail how the partners stop being partners. You should never enter into a merger without having a clear understanding, in writing, about virtually everything that has to do with money. Potential misunderstandings can be avoided with clear written communication involving all of the business aspects of the new practice.

6. Conclusion

Should you decide to explore the possibility of a merger, you must know who you are, have an extensive due diligence process to determine who they are, become comfortable with the structure of the transaction, and, last but not least, know your future partner(s) almost as well as you know your own family.

Acknowledgments

Conflict of Interest

The Author declares no conflicts of interest.