Economic woes could spur consolidation
With the world economy melting faster than the polar ice caps, your instinct might be to lay low and weather the storm. But, some experts and practitioners say, the economic climes might be a fair wind that could accelerate the trend toward practice consolidation.
“In general, crises will accelerate a trend toward consolidation for reducing overhead costs and personnel costs,” said Lawrence Gelburd, a lecturer at the University of Pennsylvania’s Wharton School. “It could be a smart move if [practices] can lower their overhead without having to go out and borrow a lot of money.”
National Commission on Veterinary Economic Issues (NCVEI) Chief Executive Officer Karen E. Felsted, CPA, DVM, CVPM, said the economic crisis will gear up the trend toward all aspects of improved business practices, including consolidation. But she warned against thinking it was a quick fix for financial concerns.
“If you look at all the changes practices can make to improve their operations and profits, consolidation is one of the hardest and one with the longest lead times until you see improvement,” Felsted said. “It’s still a great way of positioning yourself for the future, but you’re not going to see immediate positive changes.”
According to NCVEI, which has been collecting data on the impact of the recession on practices, revenue is still growing, but at a much slower rate than in years past.
“On average, revenue in companion animal practices increased about 6 percent when comparing July of ‘07 to July of ’08, and about 2 percent if you look at August of ‘07 to August of ’08,” Felsted said. “Considering that average revenue growth was about 13 percent several years ago, this is a significant change.”
She encouraged practices to go to the organization’s website to enter their data, in order to create a more accurate picture of the economy’s effect on veterinary practices.
One veterinarian who merged his practice into a national veterinary hospital network this year said consolidation was a good move for him.
Thomas Lassiter, DVM, started Arboretum View Animal Hospital in Downers Grove, Ill., in 1978. He sold the practice to the BrightHeart Veterinary Network earlier this year. Lassiter said the economy would probably spur on the trend to do as he did.
“I don’t see how it can do anything but accelerate it. It has to,” Lassiter said.
He said consolidation gave him a better retirement program, more vacation, better health insurance, and the ability to upgrade equipment and add specialty staff.
“We have some opportunities in front of us that we didn’t have before,” he said.
He did point out that in consolidating, he had to relinquish some control over the practice he had built from the ground up. But for him that was not a problem.
“I was able to step out of management back into general practice,” Lassiter said. “I suppose if you were a person who needed to have your finger on the control button it might be a problem. It hasn’t been an issue for me.”
FIND THE RIGHT FIT
NCVEI chief Felsted said a key to a successful consolidation is finding the right partner. She said practices with similar approaches to medicine and business are more likely to consolidate well. Other factors to consider are comparable fee structures, close proximity and team-oriented owners.
“We don’t always play well in the sandbox together,” Felsted said. “It’s an old cliché, but business partnerships are like marriages—you simply must have the right partner for it to be a success. Finding a partner with these attributes is hard at all times. It’s not going to be any easier now though the difficult economic times may make some owners a little more open-minded about change.”
Real estate professionals also agree that consolidation could be a smart move in this economy – if the conditions are right.
Dick Goebel, DVM, president of veterinary practice broker Simmons and Associates Great Lakes, said the best situation is a larger practice absorbing a smaller, nearby one. He drew an example of a hypothetical town with a large, multi-doctor practice and a solo practice.
“If a practice has not been very profitable in the past, one thing to look at is consolidation,” he said. “If that solo practice can be acquired, the incremental dollars are extremely profitable.”
He said if the larger practice is bringing in $1 million a year, and the smaller practice brings in $400,000, the absorption of the smaller practice can be very lucrative.
“Assume that the larger practice has excess capacity,” Goebel said. “They have a schedule that’s not full, so they’ve got the capacity to handle more business. If you move the $400,000 of business under that roof, you have $1,350,000 in the first year. Virtually 90 percent of that revenue can be moved.”
As the year draws to a close and the recession deepens, consolidation could be a viable option for practices wanting to increase profits and who are in a good position to merge.
“It makes a lot of sense to put practices together and enjoy the economic efficiency of the situation,” Goebel said.