How will the business be valued?
Veterinary businesses are generally valued using a multiple of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA).
EBITDA is a useful metric as it essentially provides the operating cash profits generated by a business excluding the impact of working capital swings, capex, financing and tax. This allows acquirers to analyse the cash flows that will be generated by a business without the impact of financing structures which they will not inherit.
As a quick way of calculating EBITDA, take the operating profit of your business and add back depreciation and amortisation.
It’s also important to take into account any adjustments required to EBITDA in order to present the sustainable profits of the business. An example is the inclusion of the salary for a full time vet if the shareholder primarily draws money from the business via dividends.
The multiple applied to EBITDA will depend upon a number of variables including the type practice, number of vets, desirability of location and growth opportunities. The market has seen significant volatility in recent years, with multiples peaking in 2021, however levels have fallen since then due to the CMA’s intervention in the market.
Multiples for strong single practices and small groups are likely to fall into the range of 8-12x, however this is contingent upon the factors raised above.
Offers will generally be made on a cash free, debt free basis, assuming a normal level of working capital.
In essence, this means that the cash on the balance sheet will be for the benefit of the selling shareholders, any loans or third party debt facilities will be repaid/deducted from the price, and the working capital will be adjusted to ensure that neither party benefits or loses out as a result of swings in debtors/creditors.
As an example, a valuation may look as follows:
Underlying EBITDA = £0.5m
EBITDA multiple = 8x
Enterprise value = £4m (8 x £0.5m)
Cash on balance sheet = £0.5m
Debt = £1.5m
Working capital adjustment = £0.1m
Equity Value (amount payable to the shareholders) = £3.1m (£4m + £0.5m - £1.5m + £0.1m)
It’s also important to stress that corporate acquirers will often look to defer payment of an element of the consideration through an earnout mechanism. This will be calculated based upon the future performance of the business, normally over a 2-3 year period following completion. Where the selling shareholders remain key to the business in the medium term, earnouts are particularly prevalent.
Who are the potential buyers?
The market has seen significant consolidation by large corporates in recent years and this continues to be the case. There has, however, been increased scrutiny from the CMA since 2022 around competition concerns, which will continue to impact larger deals going forward.
The most prolific acquirers in recent years have been the following:
What are buyers looking for?
Fundamentally, buyers are looking for strong practices with sustainable profit levels and stable staff bases. A few specific factors which will influence buyer appetite are as follows:
Care provided given their scarcity, referral and secondary care specialists are highly sought after and attract premium valuations. First opinion practices are clearly the bread and butter for corporate acquirers, but remain more readily available and are valued accordingly.
Type of practice: corporate acquirers are primarily focused on small animal practices rather than large/farm animals.
Shareholder involvement: ideally the shareholders will have grown a team around them to manage the day to day operations of the practice and reduce their involvement. Where the shareholders remain key to operations, the level of deferred consideration will be higher as the risk is greater for the acquirer.
How can Eclipse Corporate Finance help?
Eclipse Corporate Finance, a boutique mergers & acquisitions advisory firm exclusively focused on the UK healthcare sector. We advise on all forms of transactions, including company sales and acquisitions, management buy-outs and capital raises.
Having advised one of the largest corporates in the UK veterinary sector on major acquisition processes, we have in depth knowledge of the factors which influence a successful deal in the sector.
Please get in touch for an initial discussion on how we may be able to help you with the sale of your veterinary business.