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If You Like Physician Practices: You will Love Veterinary
John DeLorenzo, CFO Consulting Partners LLC
Following our introductory article introducing our healthcare practice, we followed up with an article that discussed the changing dynamics of physician practices.
As we serve our clients in healthcare practices, we are seeing significant opportunity within the veterinary practice area. This article titled – If You Like Physician Practices: You Will Love Veterinary, will tell you why.
While there are some larger corporations leading the consolidation of vet practices, think Mars, NVA (National Veterinary Associates) Blue River and VetCor, they generally target groups that have had some level of consolidation already. Mars targeted some of the larger consolidated groups such as Blue Pearl, Pet Partners, Banfield and VCA, while consolidators like Blue River out of Chicago will target individual hospitals. Groups like Veterinary Practice Partners and Community Veterinary Partners, both in Eastern Pennsylvania, will invest in and co-own practices with current owners.
While private equity has been active in vet consolidation, they are also investing in the consolidators, leaving early stage consolidation to others. Earlier this year Oak Hill Capital Partners, Harvest Partners and Cressey & Company recapitalized VetCor. Morgan Stanley Global Equity Partners invested in Pathway Partners Vet Holding. In 2017, Summit Equity sold NVA to Ares and OMERS and KKR invested in Pet Vet Centers. NVA and Pet Vet Centers valuations were rumored at EBITDA multiples of 13-15x while the Mars acquisition of NVA was at 18.2x according to bankers.
According to Forbes/Merger Market, smaller hospital acquisitions are fetching 8-10 multiples while smaller single practices in less desirable locations are getting 6-7x. A typical larger vet group can have EBITDA margins in the area of 15-20%, with smaller practices 7-18%. According to Simmons Veterinary Practice Sales and Valuations the industry average is 10-12%.
So, what we are learning? The vet business is healthy with an industry average of 10-12% EBITDA margins. Consolidators can acquire practices in the low to mid-teens multiple range, while growing margins as a result of creating a consolidation platform to 15-20% while increasing the valuation multiple as well. This is a recipe for good returns for investors while providing significant exit returns for sellers.
Also, it appears that the competition for buying opportunities is easier than that of physician practices as vet practices are in an earlier stage of consolidation than physician practices with the absence of hospital competition that exists in the physician practice area. Also, people love their pets and are willing to pay for more complex procedures that continue to develop in areas such as orthopedics, neurology and oncology.
While the vet business still has some of the “professional corporation” regulatory issues faced by physician practices, there is significantly less liability, payor issues (Medicaid, Medicare, private payor), and general regulatory issues to contend with than that of a physician practice. On a simplistic basis, these advantages seem to accrue while providing similar investment returns between physician practice and vet practice investments.
CFO Consulting Partners’ healthcare practice is here to help you as we are well versed in hospital, medical and veterinary practices. We can assist vet practices to prepare for an exit while providing private equity with assistance to prepare a consolation strategy, identify acquisitions and assist with due diligence and integration.
M&A East attendees have the opportunity walk the Private Equity Marketplace exhibit floor and connect in a dedicated environment with 90+ PE firms with $125 billion to invest in middle market deals.
Eight Red Flags that your Board Financial Package is Failing to Support Board Needs
Allan Tepper, CFO Consulting Partner LLC
One of the goals of boards is to oversee the financial performance of the company or companies to which they are associated. Informative, transparent financial statements are necessary for boards to discharge those duties. If your board financial package lacks one or more of the following, there would likely be a deficiency in the board’s oversight function.
– The financial package should contain the three basic financial statements – P&L, Balance Sheet and Cash Flow. The benefits of the P&Ls and balance sheets are fairly well known; however, the cash flow statement may not be as well known. The cash flow statement answers the question, “Where did our money go?”
– The package should contain accounts receivable and accounts payable agings.
– Critical notes to the financial statements should be included to explain complex accounting transactions.
– The P&L and balance sheet should be compared to budget.
– The package should contain reasons for variances from budget, and if it does, the explanations should be business reasons, not accounting reasons.
– The package should contain key business drivers.
Is Your Finance Department a Cost or Profit Center?
Allan Tepper, CFO Consulting Partner LLC
To begin, I will define cost and profit centers, using my definition developed after leading accounting and finance functions for over twenty-five years.
Cost centers need to be efficient and be doing critically important tasks. From a company perspective, cost centers need to keep their costs at the lowest possible level while functioning at a highly effective level.
Profit centers have all the same attributes as cost centers, but produce revenue, thereby adding profits to a company’s bottom line.
Well-run finance departments have profit center elements. Although finance departments, as a unit, are not true profit centers because they do not directly produce revenue, they have many positive bottom-line attributes. Finance functions aid other cost and profit centers to be more efficient and effective and incentivize them to work cross-functionally as a team.
There is an often used phrase called a “strategic CFO.” That person would primarily focus on making the whole company stronger. I believe it follows that a goal for all companies should be to make the finance department function more like a profit center than a cost counter.
Examples of how finance departments become strategic include:
– Perfect the closing process so the books are closed quickly and accurately after month end, and time is available for analysis.
– Make the budgeting and reporting process part of a company’s DNA.
– Work with the various company units that feed information to the accounting department in order to make the information accurate and at the proper level of detail.
– Provide analyses that allow for action-oriented decisions. An example would be an analysis of the profitability of various business units. Another could be customer profitability analysis.
– Have the capability – systems and people – to meet the normal demands of all stakeholders on a timely and accurate basis.
– Spearhead merger and acquisition projects.
In summary, well run accounting and finance functions have significant attributes that help improve the bottom line of the whole company. A discussion with a C-level financial management consulting firm should provide insights on how to transform an accounting function from a cost to a “profit center.”
Case Study: Financial Transformation
Engaged by a service provider (a boutique law firm) that had been in business for approximately 18 months. Firm was highly successful on the legal side but was immature on the operations/business process side. In 18 months, firm had had three Chief Operating Officers, all from “Big Law” and all who had not been successful. Position had been vacant for three months, placing great stress on the Managing Partner. Total staff the commencement of the engagement was approximately 50, with a ratio of 2 lawyers for each non-legal position.
WHAT WE DID
Our assignment was to perform a high-level assessment of all Firm operations: Finance, HR, IT; Billing and Payables and Administrative support; provide observations and make recommendations for improvement. Assessment also included evaluation of staff morale and related staffing issues. Expected duration of assignment; two weeks.
Assessment identified two issues requiring immediate attention; staff morale and need for full time Chief Operating Officer to relieve burden on Managing Partner. Remedial actions were taken within ten days and included the naming of our consultant as Interim Chief Operating Officer with undefined term of service.
Longer term recommendations included: steps to improve the Firm’s Information Security polices and IT infrastructure, execute a search for and implementation of new ERP system; actions to clarify and realign staff roles, hiring of a full time Finance Director; development of better reporting and creation of a capacity plan; establishment of a more formal HR function.
The firm was in the process of tripling the size of its primary offices as the engagement began. The subsequent six to eight weeks were devoted to managing the myriad of issues associated with that move while stabilizing and improving staff morale. In addition, significant planning was performed on the ERP and IT front while proposing a longer-term staff realignment plan.
Subsequent eight weeks were focused on ERP software selection, full scale IT and information security review, development of a new reporting dashboard for Partners; assessment of firm insurance coverage, development of a new 401K and profit-sharing plan and overseeing year end closing process including management of bonus recommendations.
Post year-end close focus has been on implementation of new ERP system, new 401K and profit sharing plan, complete rebuild of Firm’s IT infrastructure and creation of robust information security practices. In addition, an overall firm capacity plan and forecast was developed.
Since our arrival, there has been no staff turnover. Key initiatives have been conceived and executed. Managing Partner is primarily practicing law. Firm is well on the way to having an back office operation that is of the same superior quality as the Firm’s legal practice.
The CECL Approach, 3 of 3
For this newsletter CFO Consulting Partners has partnered with Ardmore Banking Advisors to review the potential material financial benefits of a well planned and executed implementation of the new current expected credit loss (“CECL”) accounting standard.
Most banks have an awareness of the need to prepare for the transition to CECL, and that many foundational activities need to be looked at now. Together CFO Consulting Partners (“CFO CP”) and Ardmore Banking Advisors (“Ardmore”) have constructed an approach to help banks address the “early must do’s” of CECL at a reasonable cost.
CFO CP leverages its extensive experience with banking industry finance, and Ardmore it’s deep expertise in credit and credit data to translate the CECL transition process into tasks and activities that create valuable efficiencies and bottom line impact for the Bank. Together we can cut through the noise and assess a bank’s CECL readiness and at the same time help create a CECL action plan that will drive real value for the bank.
We have discussed aspects of CECL implementations in prior newsletters, The New CECL Approach Part I, and Part II. Similarly, Ardmore’s webinar Step #1 Of the CECL Journey provides additional perspective.
CFO CP and Ardmore are each focused on complementary aspects of the CECL implementation process in the finance, accounting, and credit disciplines. Well executed CECL projects led by an interdisciplinary team of Credit, Finance, and other bank management, coordinated by experienced project managers and executed well, can produce tangible bottom line improvements, and better efficiency ratios.
Experienced CFO CP and Ardmore Project Managers can help the bank’s CECL team identify opportunities for process improvements. The resulting databases, internal control enhancements, and automation will produce faster decisions, easy access to controlled and trusted data, high functioning executive teams and, ultimately, improved efficiency ratios. If CECL implementation is managed well, a bank can leverage the implementation to break down silos, upgrade systems, improve processes, and reduce expenses.
CFOs can strategically manage the spending to required accomplish CECL goals AND drive efficiencies which will ultimately reduce the expense ratio. Opportunities exist in:
- Credit Administration: Ensure that all credit practices are properly aligned with your CECL implementation, upgrade automation, and improve underwriting processes.
- Finance: Re-engineer financial controls and loan accounting processes, optimize general ledgers, optimize risk adjusted capital levels, and Improve management information for the Board and Management.
- IT: Improve data governance, develop and data management tools, and retire inefficient loan and credit systems.
- Operations: Update credit processes (such as data entry and coding processes), and re-engineer controls and processes
- Lending: Efficient analysis of deal structures and lending to minimize life of loan losses and capital impacts
An assessment for CECL readiness can reveal a lot that can be useful to the institution beyond the needs of CECL compliance including:
- Assess the current state of the institution’s credit portfolio data and origination process, ALLL, Financial and
- Credit policies, practices and governance – all within the context of CECL;
- Review Current ALLL System & Processes;
- Review controls on data used in the current ALLL process;
- Identify data points required to support industry best practice portfolio data & regulatory compliance data for CECL;
- Review loan origination process, stakeholders, criteria and coding;
- Review data stored in the core for accuracy consistency and robustness;
- Review all identified credit data source systems for data/database integrity; and
- Review any existing data warehouse capabilities, and how portfolio data is organized, maintained, and retained.
CECL compliance practices and implementation plans should be in place in 2018. Auditors, regulators, boards of directors and investors will want to know bank’s plans for CECL, including the costs and the benefits beyond compliance.
Those institutions that leverage the potential benefits of the CECL implementation will have a competitive advantage over their competitors through increased efficiencies, automation and clarification of corporate risk management practices.
About the Authors
CFO Consulting Partners, Tom Van Lenten: Tom leads CFO Consulting Partners CECL consulting services to financial institutions. CFO CP’s CECL services include: CECL readiness assessment, analysis of the accounting and regulatory implications, project management, and assisting with updates of policies, procedures and internal controls which are impacted by CECL.
Ardmore Banking Advisors, Peter Cherpack: EVP, Partner. Peter is a nationally known thought leader in CECL implementation for community banks, and with other Ardmore consultants conducts CECL readiness assessments with a focus on credit and credit data readiness.