Director’s Comments: Industry Update, November 2020

The current paradox in the veterinary economy – high workload with vet shortages

It certainly seems that for the veterinary industry, the current COVID-19 crisis has had an economic outcome that would have been hard to predict.

While so many other industries have lost customers and had to reduce staff hours, the pet industry has flourished and this has prompted us to take some different actions to offer support with the very different challenges faced by this sector.

As of the last week in August, the ‘Pet Care’ sector showed a staggering 40% increase in spending compared to the same period in the previous year! This information was provided by Illion survey that monitor the credit card spending of 250,000 volunteered consumers, so is likely to be reasonably accurate. Note, however, that the sector is ‘Pet Care’ and no further specifics are given as to where the money was spent and it probably includes spending at pet shops as well as money spent at veterinary practices.

Our own monitoring using software installed in 200 Australian practices has indicated that the month of September showed an over 20% revenue and primary consultations growth compared to September last year. Although this is not as high as the Illion survey, it is still a very significant increase in workload.

The great news for veterinary practices is that if the higher profits are maintained for a prolonged period of 6 or more months this will result in businesses that value higher. However, it does also bring with it a unique challenge for this environment – and that is staffing a rapidly growing business when there was already a shortage of experienced vets.

One of the ways to look at the increased workload with the vet shortage is with strategic price increases. This would allow a practice to afford higher wages to harder working employees who are possibly having to do more overtime.

Here is a link to the web event on Pricing that APL Accountants did with TEDX speaker Paul Dunn. It offers some really practical advice on price increases and also some great viewing for business owners and team members about the psychology of pricing: https://www.youtube.com/watch?v=sIxnhAUwDXY

Equipment Valuation FAQs

Any business is made up of both tangible assets (those that you can see and touch, like equipment, fit-out and furniture) and intangible assets (like goodwill, brand recognition and intellectual property).

There are many misconceptions about how these different asset classes should be treated in a business valuation and sale. To address these misconceptions, we have put together and answered some frequently asked questions that we get as prolific valuers and business brokers:

FAQ 1: Why do some business valuations not value fit-out, equipment and goodwill separately?

Answer:

While some may think that any asset is worth the sum of its parts, this is not always the case with a business, for two main reasons.

  1. A business is usually worth what it is worth based upon it’s perceived financial prospects.
    The fit-out and equipment will of course make a difference in how attractive the business is to a buyer. A stylish, modern practice will attract a premium and the reinvestment that is needed in an older practice will be taken into account in the price that someone will pay.
    HOWEVER, fit-out and equipment will almost never be the primary driver of the price paid for an established business.
    Prospective buyers of a business will usually base their decision to purchase and the price that they will pay primarily upon the business’s perceived ability to generate income for the owner.
    A bank looking at financing the purchase of a practice will likewise base its decision on the likelihood that the purchaser will be able to repay the loan from the practice’s turnover and profit, rather than how well fit-out and equipped the practice is.
  2. The value of the component parts independently is very different to their value as part of a whole.
    The fit-out, equipment and goodwill of a business can be very valuable together because of their ability to make money, and not at all valuable apart… because:

    • The custom nature of business fitout makes it inappropriate for use anywhere else.
    • It is hard to predict a business’ ability to move goodwill away from its current location; with this lack of predictability comes risk.
    • The lack of a robust, transparent second-hand market for vet equipment means that it is hard to find a reliable way to price it.
    • Very old equipment that people are still able to use to generate income in a practice is worth something to the owner and NOTHING on the open market.

FAQ 2: Do I need an equipment valuation to apportion the sale price in a practice sale contract?

Answer:

We should start this answer by providing some background.

The apportionment of the price paid for a practice between fit-out, equipment and goodwill can mean very different tax outcomes for the buyer and seller and, as such, buyers and sellers will often want to apportion the purchase price differently in the contract when a practice is sold.

Typically:

  • The purchaser will want to have more of the price allocated to equipment and fit-out, so they can later depreciate post sale and get a tax write-off.
  • The vendor will want to have more of the price allocated to goodwill to avail themselves of potential CGT concessions, with the potential of paying less tax.

Agreeing to an apportionment of price in the sale contract usually ends with a compromise between the two parties, whereby neither gets an optimal outcome for themselves.

This doesn’t have to be the case though. It is possible to leave the sales price unallocated in the contract, so that both parties are able to allocate the price post sale independently of each other.

The Australian Taxation Office (ATO) has advised that in the absence of an agreement on apportionment in the sale contract, “each party would generally have regard to and be able to justify their reasonable apportionment based on the relevant value of the separate assets at the time of the making of the contract”.

This means that the buyer and vendor are both independently able to apportion the sale price how they see fit, even if they don’t agree with each other, as long as they have a justifiable rationale for how they have done so.

To answer the question succinctly:

You can apportion the price between equipment and goodwill in a practice sale agreement, but you do not need to do so. Sometimes (too often) having apportionment can lead to a sub-optimal tax outcome for all involved.

FAQ 3: Does this mean that I don’t ever need an equipment appraisal

No – you may well need an equipment appraisal for several reasons. For example:

  1. While you may not need an equipment appraisal for the sale contract, you may need one to apportion the sale price afterwards for accounting/tax purposes. This appraisal can be done via several different methods, like:
      • A quantity surveyor or industry specialist
      • The depreciated book value of the equipment

    Each methodology will give you a different outcome – you should ask your accountant which is best to employ for your purposes.

  2. Insurance purposes
  3. Refinancing

If you have a question that we haven’t addressed or need clarification on any of these points, please let us know. If you would like to speak to us about a valuation, please contact info@valuvet.com.au

The (unsung and underappreciated) virtues of a regional rural practice purchase

For every good practice that Practice Sale Search has for sale in one of the state capitals, we have many buyers competing with each other to submit a winning bid… and yet… when the practice is located in a regional or rural centre, the demand often dwindles…

Why is this?

There are many reasons that people want to live close to the city. These reasons include proximity to their family, ethnic group, international airport, prominent schools, etc.

There are also, however, many HUGE advantages to buying a practice outside of capital cities that are often overlooked.

Here are 5 reasons a buyer should consider buying a vet practice in regional or rural Australia.

  1. Better Deals
    The laws of supply and demand tell us that the lower demand for regional and rural practices should mean that there are better deals to be had for interested buyers.
  2. Easier to produce more
    Practices in major cities are fighting tooth and nail for work, spending large budgets on marketing and advertising and offering loss leader services to get busy. Rural areas have a much higher population per vet and don’t need to compete as hard to get patients. It is simply easier to be busy.
  3. Running costs lower
    A business’s profit is obviously not just a function of making sure that there is income (, but also of keeping expenses low. In this area, regional Australia has metro beat too, as many of the costs of running a practice are cheaper outside of the cities. In our experience, regional/rural vet practices usually pay less for:

    • Wages/salaries for admin and nursing staff and have better retention/less churn of staff.
    • Rent per square metre for medical/commercial space.
    • Advertising costs, as the need for advertising is lower (See point 2).
  4. Home purchase
    When looking to purchase your first home, you may find that the higher property prices in metropolitan Australia end up restricting your lifestyle. Buying a business in a Rural/semi-rural area may offer you the chance to buy a larger home than you thought possible, earlier than you thought possible. The lower outlay for a home may also leave you with more to spend on holidays, hobbies and your children’s education.
  5. Lifestyle:
    Many veterinarians who have made the move out of the cities report huge lifestyle benefits including:

    • Less time wasted stuck in traffic (including their work commute)
    • Better access to uncrowded beaches, parks and golf courses
    • A better sense of community and safety than living in the city
    • Less stress as a result of their cheaper lifestyle

As you can see, walking the path less travelled and buying in regional Australia has many advantages. It is well worth exploring your options, as you may well find that there are plenty of underappreciated, undervalued practice opportunities and lifestyles to be found, if you can look a little further afield.

How can your business do better in the face of a possible recession?

There is no doubt that we are facing a global recession. The extent to which it will affect veterinary practices is unknown, but an astute business owner would be wise to at least give this some thought, and NOW is the right time to do this.

Regardless of whether you are thinking about the value of your business or carrying on being a business owner, in times like this, maintaining your profit margins is critical.
If you are selling, then the element that has the greatest impact on the value of your business is PROFIT. Low profit means your business values low and higher profits means it values for more.
If business ownership is going to be your calling for the next few years, then profit is also going to be important, because this is how you are going to maintain your lifestyle, keep your team gainfully employed and continue equipping your practice so that you can treat your patients optimally.

In a recession, one of the challenges you will face will be that pet owners may struggle to pay large bills. So, in the absence of being able to charge more, where can you look at improving your financial position?

The answer lies in being more efficient – being able to do the same or even more work without feeling like you are working harder. Another way of looking at this is the ability to maintain your current workload by running leaner. To do this, your business needs structure and the ability to leverage on tools that help to do the same things faster. And there are literally hundreds of things you can do in this space, but it requires a slight change in focus.

Here are some examples:

Having a good X-ray processor instead of an old slow one – this may sound like a paradox because it costs money to have this bit of equipment but, in a veterinary practice, your greatest expense is the ‘time of your team’. If it takes people longer to do a job, your wages are higher. And this is particularly true of items of equipment that are used FREQUENTLY.

If we are thinking about running leaner and the paradox of getting extra equipment, then consider also NOT buying or upgrading equipment you do not use! An ultrasound machine is a good example of this. The average vet practice does under 20 ultrasound procedures per full time vet a year – that is at best one every 2 weeks. So be honest with yourself, if you don’t use it, don’t upgrade it or buy it.

Technology is probably one on the greatest levers you can use in times like these. A great example here is enabling and encouraging online appointment scheduling. This allows customers to book at any time of day and zero input from the reception desk – less staff time.

For the reasons above, APL Accountants is going to make EFFICIENCY and LEAN TEAMS the focus of many of their materials and events over the next few months, because we feel that this is the best strategic focus for the next 12 months.

 

Interview Paolo and Anne

COVID19 and Vet Practice Values

Since the introduction of the COVID-19 pandemic restrictions in Australia, many industries have been severely impacted, and the road to recovery for many of them is still uncertain. While there are some chicken littles out there, running around saying that the sky is falling and hoarding enough toilet paper to satisfy a small country, the facts on the ground show a brighter outcome for the vet industry than many would have predicted.
Below is an interview with Paolo and Anne Lencioni, managing directors of ValuVet and APL, where we ask them some of the frequent questions that are being asked about the impact that COVID-19 has had on vet practice fortunes.

Q. What has the impact of COVID-19 been on Vet practices?
A . We are in the fortunate position to have a solid overview of the situation, as we have hard data from 200 vet clients across Australia that we monitor.
During the first few weeks when restrictions were announced, vets were worried that their trading would be restricted, or people would spend less. Our statistics show that this didn’t happen – vets continued trading as normal; in fact, in many cases turnover increased. People weren’t spending on going to restaurants and entertainment and in many cases ended up spending more on their pets. From a valuation perspective, things did go quiet in late March and April, but since May it has rebounded and we have been catching up the backlog from those first months.

Q. Have some areas and practices have been disproportionately affected?
A. Areas with migratory workforces and holiday makers have probably been more negatively affected than other areas.
The restrictions on travel have had some limited impacts on consumer spending for vets. For example, we have seen that:
• vets in holiday areas have been more affected than others and
• spending on boarding services have been down on what they would have otherwise been.

Q. How did Vet corporates fare?
A. We get the feeling that the vet corporates will have suffered more than privately owned practices during the COVID-19 economic shut down. It certainly seems that most vet corporates reduced their opening hours over this period. We feel that this may have been because of a lack of availability of staff.

Staff in the industry had legitimate concerns about working when everyone in other industries was told to stay at home because it wasn’t safe.

Owner operator vets had an easier time convincing staff to work, because the staff could see their boss was willing to do so. A corporate head office in another state asking staff to return to work had a harder time with this.

Q. What has the impact of COVID 19 been on Practice Sales and start-ups:
A. When restrictions started, people paused on all deals, but now it seems like supply and demand are back to normal. We certainly have buyers and sellers still coming to us with transactions at the same pace as before. It may be impacted by the banks willingness to lend.

Q. Are banks lending as freely for vet practice purchases as before?
A. It is too early to tell. They are being more cautious and looking at things more carefully, but we feel that if you can show trading has been stable, there is no reason not to lend. Specialised lenders will realise quickly that vets are a stable bet, but high street banks will probably be more hesitant.

Q. Has government stimulus helped vet practice sales?
Lower interest rates, instant asset write off/ accelerated asset write off may mean that people who are looking to buy equipment might do it now. It will make it easier for vet buyers to spend more.

We feel that JobKeeper won’t influence the industry much. Overall, our vets don’t seem to qualify (We only have 2 out of 200 clients that have qualified for it).
Q. Do you think that COVID-19 will impact the Supply chain for vet consumables? Will it make consumables harder to get or more expensive?  
A. I have had no indication this is happening to significant levels; however, we can monitor our clients’ costs easily and will be able to tell in the near future.

Q. Do you think that COVID-19 will make recruitment of vets easier or harder?
A. I think recruitment will be easier as vets are one of the few industries that seem untouched by the financial insecurity at this time. That said, vets that have previously left the profession may return for job security and income security at this time if they or their spouses lose their work.

To get an appraisal or to speak to Anne or Paolo about your practice circumstances email anne@aplaccountants.com.au or paolo@aplaccountants.com.au or call 07 3488 0131.

Restraint of trade in vet practice sales

Veterinary practice sales involve large sums of money changing hands. Hundreds of thousands (if not millions) of dollars being paid in compensation for goodwill.

But how does the buyer know that he/she will get that goodwill? The success of this transfer will depend largely upon how the vendor behaves post sale.
• Will they endorse the new owner?
• Will they work for the new owner post sale?
• Will they disappear, never to be heard from again in the community? OR
• Will they work against the buyers’ interests and try to induce the client base to leave the practice?

The vendor’s capacity for help or hindrance in the successful transfer of client goodwill is the reason why most sale of business contracts will include restraint of trade clauses.

There is a lot of misinformation about restraint of trade clauses. These misconceptions have led to an array of problematic scenarios, including the following:
• buyers being under-protected in their transactions
• buyers overreaching and asking for unreasonable restraints, which ultimately cost more time and money for lawyers to negotiate and may not even be enforceable;
• vendors agreeing to overly restrictive covenants that could impact their ability to provide services within the region; and
• vendors refusing to agree to reasonable requests.
With these situations in mind, it is important that buyers and vendors alike both have a solid understanding of restraint of trade clauses.

Here are some restraint of trade frequently asked questions and answers:
Q1. What is a restraint of trade clause in relation to the purchase and sale of a veterinary practice?
Restraint of trade clauses are clauses in the practice sale agreement and/or the vendor’s post-sale work contract where the vendor agrees to restrict their future liberty to carry on trading as a veterinarian.
These clauses are usually expressed as “non-compete” and “non-solicitation” clauses that have a geographical restraint area and a restraint period of time that they are valid for.
In a non-compete clause in the sale of a veterinary practice, the vendor usually agrees that, for a specified period, they will not open a new practice, or provide veterinary services to another practice, within a certain geographical radius of the practice they are selling to the buyer.
In a non-solicitation clause in the sale of a veterinary practice, the vendor agrees not to solicit or canvass clients, or staff members, to leave the vendor’s practice for a competing business.

Q2. When there is a restraint of trade in a contract that is expressed as a radius from a place of work, is it as crow flies or by road?
If the area of a restraint is expressed as a radius, it refers to the distance from the practice as the crow flies.

Q3. We are often asked if restraint of trade clauses are enforceable – are they?
Courts have been willing to enforce post-sale restraint clauses to protect a buyer who has purchased the goodwill of the business, particularly in circumstances where significant money has been paid to the vendor for the goodwill.
While an excessively harsh restraint on a person’s right to work will be unenforceable, if the geographical restraint and duration of the restraint are reasonable in protecting the goodwill that was paid for, then a restraint of trade clause is perfectly capable of being enforced and has been in many cases.

Q4. How do you determine what constitutes a reasonable restraint of trade for a veterinarian in a practice sale?
There is no fixed formula for working out what would constitute a reasonable restraint distance or period of time for a restraint clause. It is generally accepted that the restraint must go no further than is reasonably necessary to protect the commercial interests that the buyer purchased from the vendor.
Timewise, a restraint clause may be for the amount of time it takes for the buyer to reasonably form a relationship with the vendor’s clients following the sale (i.e., to ‘absorb the goodwill’).
In terms of geography, it will vary, depending upon how densely populated an area is and the competition for veterinary services in the area. For example, in a transaction for the sale of a practice in the Sydney or Melbourne CBD, it is more likely to be reasonable to have a shorter restraint radius (i.e., 1-2 km). For a transaction in city suburbs, a restraint of 5-10km is more likely to be reasonable, and in a transaction for the sale of a practice in a regional or rural area, a larger restraint radius will likely be appropriate (i.e., 15 km or more).

Q5. What could the consequences be for breaching a Restraint of Trade?
If the vendor has violated their restraint of trade, a buyer may apply to the court for an order to stop the vendor violating the restraint of trade (i.e., an injunction) and/or damages. The court will calculate damages according to the lost income or profit the buyer suffered as a result of the vendor’s actions in breach of the restraint.

Second Practice: Second Entity?

There comes a time in every successful dental practice owner’s career when they consider opening another branch, or buying another practice. This juncture represents a possible turning point in their personal fortune. It introduces an opportunity to grow their wealth by expanding the scale and scope of their business interests and, at the same time, it also introduces new complexities and risks into their life, which have the potential to bring down what they have built thus far.

Much of the complexity and risk that is introduced at this point will be dictated by structural decisions that the business owner makes. In particular, will they choose to establish a separate entity and ABN for the new practice, or own it under the same ABN as their old practice?

The arguments for using a single entity:

Predominantly, owners choose to establish multiple businesses in the same entity for the following reasons:

1. Reduced initial outlay

Setting up a new business entity involves accounting and legal expenses, from structuring advice and the establishment of entities and registrations with appropriate regulators. If you choose to operate your second (or third) practice under the same structure, you can save yourself these costs.

2. Reduced recurring accounting and bookkeeping

Each entity that you operate out of requires regular BAS statements and tax returns. As a result, operating out of one structure usually involves reduced financial records to maintain and reduced financial compliance obligations. This in turn can translate into reduced bookkeeping and ongoing accounting fees.

3. Reduced administrative burden and banking fees

Operating under one structure also reduces the administration burden on owners, as there is no need for new invoice templates or bank accounts. Many systems and processes are in place from the existing practice, and it’s just a matter of piggy-backing off these for the new clinic.

Put simply, owners who proceed with this option believe it to be cheaper, and generally less of a hassle to manage day-to-day. Whilst this may hold true in the short term, this approach may be inadvertently crystallising significant headaches in the future.

The arguments for setting up multiple entities

There are significant advantages of separating practices into different entities. These include:

1. Risk mitigation and asset protection

Asset protection is a fundamental consideration when establishing the entity from which to conduct business trading.

Most people will be aware that business owners typically do not hold practices in their personal name, and prefer to do so within a company or trust structure. It ensures a level of insulation for their personal wealth, so that any potential clinical or business risks (and failings) are contained within the trading entity, and there is no risk of contamination to personal assets.

This same logic can be applied when choosing a structure in which to own a second business venture.

Establishing different entities for different practices provides an increased level of asset protection and risk mitigation.

Although owners will always aspire to operate a strong performing practice, the unfortunate reality is that not all practices are successful and, in today’s competitive environment, many do in fact fail.

If this was to occur, and a failed practice is owned by the same entity, all other assets (including any other practices!) within the entity will be at risk to cover any outstanding liabilities and obligations. Consider all the hard work required to establish a successful practice – for that to potentially be undone by a new and unrelated business venture would be devastating.

2. Easier strategic planning

Most owners of multiple practices would recognise the benefits of having clear information to help them assess each practice separately. Most owners of multiple practices have the best of intentions in this regard. However, as the added responsibility and workload of running multiple practices takes hold, when practices are held in a single entity, this often falls by the way side. Lines are blurred and costs are combined as one.

This, in turn, can have numerous impacts:

Forecasting and budgeting for each location gets less accurate
Decision-making for each business becomes compromised
Allocation of resources like time, effort and money can become poor, because of the lack of clarity

3. Simplified exit strategy if selling one of the practices

If you own more than one practice under the one business structure, selling them becomes more complicated.

Of paramount importance to any buyer is profit and, if the expenses of each location haven’t been diligently kept separate, assessing the businesses separately can feel like trying to unscramble an egg. For example:

  • To allocate a wage/salary cost to each location, you could look at the hourly rate of each employee and their work schedule.
  • To allocate supplies/consumables, you could work out a ratio corresponding to production in each practice.
  • To allocate lab, you might look at the relevant item numbers charged at each practice and allocate the lab bill accordingly.

However, it is important to realise that:

  • The above methodologies are estimates and best guesses. They are not exact.
  • It can be impossible to verify how accurate the allocation has been.
  • Allocating expense categories within the one entity across practices can be easily manipulated.
  • When selling, this lack of verifiable expenses creates a risk for a buyer and the bank that is supplying finance to them.
  • The lack of verifiable allocation creates a complexity hurdle that could be considered a put-off for potential buyers and reduce the price achievable upon a sale.

What if I already have multiple business interests under the one entity?

If you already have multiple business interests under the one entity, it may be hard to get the asset protection and clarity/ verification of business performance without restructuring, and this can be a costly exercise. If you decide that the benefits of restructuring are not worth the expense, it is possible to create cleaner accounts of several businesses under the one ABN, for the purposes of (strategic or) exit planning.

Here are some procedural tips that you can implement in your practice that would help make your accounts easier to assess (and possibly sell) separately:

  • Create separate bank accounts for each location.
  • Eliminate staff-sharing across sites, or keep it to a minimum.
  • Brand the practices separately and have separate websites and phone numbers.
  • Get separate advertising (adwords, yellow pages, etc.) accounts for the separate sites.
  • Try to get separate accounts for separate lab and consumables (it is possible to still get economies of scale discounts with more than one account).

Conclusion

Deciding to isolate interests into separate entities will increase some costs in setup and maintenance, however, saving yourself these costs is often a false economy. These additional costs are more than outweighed by:

  • The increased visibility that the owner gains into their individual performance,
  • Their ability to act confidently on these insights when allocating resources,
  • The increased insulation their interests gain from possible risks, and
  • Enhanced options when exit planning.

It would be prudent for anyone planning on purchasing their second practice (or second business) to get structural advice from an accountant familiar with the dental industry. If you already have your business interests in one entity and are planning an exit, any good broker or accountant familiar with dental practices should be able to give you advice for how to clean up your books, so that the fortunes of each practice are more easily understood and examined.

“The fish was this big!” and other valuation distortions

By Simon Palmer and Dr Paolo Lencioni

When someone is looking to buy or sell a practice, they are often presented with an appraisal of the practice that has been prepared by the other party in the transaction. While the results of the practice’s trading may be clear, there are numerous appraisal techniques to choose from, and often some creativity applied when using them.

Terms like “Production/Revenue”, “profit”, “EBIT” and “expenses” are of course fundamental to any valuation technique, and there should be an objective universal definition of what they mean. Unfortunately, as you will see, they can be manipulated by people who are self-taught or trying to push their own agenda.

Here are some of the creative approaches to valuations that can distort value.

  1. Average of the past three years’ production or profit.

Some people will attempt to value a practice using a calculation that includes an average of the past three years’ production or profit. That is, they treat the last three years equally when appraising a practice. Their rationale for this is to dampen the effect of an unsustainable spike or temporary decline in fortunes.

For a buyer, the most recent year should be far more relevant, interesting and worth much more consideration than the years that preceded it. Someone using the average of the last three years’ production or profit in their calculation is understating the importance of up-to-date information and dampening it. This could be intentional or not.

The distortion this creates is:

  • If a practice is growing over time, averaging the last three years would reduce the valuation.
  • If a practice is slowing over time, averaging the last three years would increase the valuation.

When the previous year’s results are considered in a valuation, we recommend using a 50%:25%:25% weighted average, where the most recent results are worth twice as much as the previous results.

  1. A Vendor’s invisible income

A practice is said to be valued using invisible income if its calculation includes revenue:

  1. that the practice has collected in cash (and was never invoiced).
  2. that the practice would have collected if they hadn’t given discounts.
  3. that the practice would have collected if the principal had worked more (if they are inflating the revenue because the principal took more time off in his last year in hours per week or weeks per year).
  4. that the practice would have collected if the principal had done clinical work that they can’t do (if I did ortho the production would have been $XXX…).

Invisible income is money that the practice didn’t verifiably receive. No one can prove it came in, or that it would have come in if the principal worked more or didn’t give discounts. As such, it cannot be counted in any serious practice appraisal and would inflate a valuation without verifiable merit.

  1. A Buyer’s discounted income and discretionary expenses

A practice appraisal can be deflated unnecessarily if a buyer:

  • tries to discount income from clinical work that the buyer isn’t interested in or doesn’t do.
  • Tries to deduct discretionary capital improvements that they would want to make post sale (e.g. a refit or a fit-out and equipment of another surgery).

 

The true value of a practice is what it would be able to achieve if it was put to wider market. Not what it is worth to a specific buyer. If the wider market could replicate the clinical skills of the exiting vet, there is no reason to discount it. If capital improvements are not necessary to operate that practice and achieve the results that it is being sold under (if they are discretionary), there is no reason to include them in an appraisal.

 

  1. A Vendor’s invisible expenses

Sometimes a practice’s value may be inflated by invisible expenses. This can happen if a practice’s calculation of profit includes discounted expenses that won’t be passed on to the purchaser. The most common invisible expenses include when the vendor:

  1. Owns their own premises and isn’t paying themselves the same level of rent that they would charge to someone else if they sold the practice.
  2. Is paying themselves less than market rate for their services.
  3. Has family members working for them and is paying them less than a market rate salary and/or having them do tasks for free that the purchaser would need to pay someone to do.
  4. “The fish was this big”

There is no established database of what businesses sold for or what valuation techniques were used to value them. Veterinarian’s asking around trying to identify market knowledge are often left with unreliable narration by buyers or sellers trying to make themselves look better in the story. Buyers have been known to understate what was paid and sellers have been known to overstate what they received (or leave out the onerous terms and conditions of the sale) in order to make themselves seem more astute at negotiation.

Buyers and sellers valuing a practice based on half-truths communicated from a party to a transaction like this could be wildly underestimating or inflating a practices value.

Conclusion

While formulas do exist for valuing a practice, it is important to realise that:

  1. It is impossible to reduce every practice in Australia to a single formula that can be used across the board in every circumstance. Every valuer will tell you that there are different methodologies that are more appropriate in different circumstances.
  2. There are a lot of attributes of a practice like opportunities and risks that affect value and cannot easily be put into any formula. For example, A formula cannot account for a big residential development going up nearby or one suburb being more attractive to buyers than another. A formula also cannot account for underutilized or overutilized attributes of a practice.
  3. The variables in some of formulas are prone to creative interpretation (As seen above) by amateur valuers.

While the parties to a transaction may want to save themselves some money by using “established valuation techniques” to come up with a price via a Do-It- Yourself Valuation, by doing so that they may be costing themselves far more. There is no substitute for independent arms-length appraisals or market testing the practice via competitive tension.

 

If you would like more information about vet practice valuations, or want to have a confidential conversation about your options, please contact ValuVet at info@valuvet.com.au

Leaving a Perfect Legacy in the Buyer of your Practice: Putting the Cart Before the Horse

Let’s say you had a café that you bought a coffee from every morning.

It was near work and convenient for you.

The coffee was pretty good, reasonably priced and the guy that owned and ran the place (Steve) was friendly and empathic. He remembered your name and favourite order, and always asked about your kids. After a few years, you felt like you were friends, even if you didn’t socialise together.

Everyone in the neighbourhood felt the same way about Steve and his coffee shop and it was always busy.

One day you came in and Steve told you that he had sold the business and was planning to retire.

After Steve leaves, you visit the café, but it isn’t the same…

The new owner has given the place a much needed refit and coat of paint, and the coffee is probably just as good… but the prices have gone up, and the new guy isn’t as friendly. He never remembers your name or your order. The mojo of the place has gone, and you decide it’s time to find a new regular cafe.

Steve’s café quickly becomes quieter, barely resembling the busy, vibrant business it once was.

Now, with that premise in your mind, I want you to ask yourself a few questions:

1.       You may be sorry that your regular coffee place is gone, but are you angry with Steve?

2.       Is the neighbourhood angry with Steve?

3.       Does anyone blame Steve for selling to the new guy?

I don’t think that anyone in their right mind would blame Steve for the deficiencies of the new owners, nor the decline of his café under new ownership. How could Steve know how the new guy would run the place and, even if he did know, was it his responsibility to ensure that the place ran well after he had sold it?

This story is an allegory to show an important point about selling a veterinary practice.

Many practice owners seem obsessed with finding the right successor for their patients, one that will preserve their legacy in the community.

As touching as this sentiment is, it is often misplaced for a number of reasons:

1.       Your clients will not blame you for the deficiencies of your successor. It is impossible for you to determine whether the new owners have all of the qualities needed to successfully replace you. Your clients know this, and don’t expect you to even try.

2.       Your primary loyalty and obligation needs to be with yourself and your family. The proceeds of the sale of a veterinary practice are going to be substantial, and will make a big difference to your life (and your family’s) post-sale. You need to look after yourself, before you start worrying about your successor’s deficiencies on a personal or clinical level. This isn’t being selfish – this is being smart.

3.       It is impossible to really know how successful your successor is going to be in advance anyway. Even if they are as charming as any person you have ever met, they may have poor business, leadership or management skills. These things are very hard to gauge in advance.

4.       Even if they are successful….are they a good vet?

Even if the prospective buyer is charming and has great business skills, their clinical skills may be poor, and this may be impossible for you to ascertain in advance of the purchase.

If given the option of selling to two or three parties, each offering a similar price and terms for a practice, then of course a vendor can factor in compatibility, personality and gut instinct, to determine who would be a good successor. However, starting off with a specific profile in mind for who the right buyer is, is to put the cart before the horse. Selling your practice needs to be a commercial decision at its core.

The person who offers you the best price and terms for your practice may not look like you; they may not act or sound like you. Once they take over, they may not be as successful as you, or be as good a vet as you are. When you bump into clients or the buyer post-sale, you may feel guilty about this, but I promise that your clients and staff won’t blame you for selling to the wrong person. You will find it harder to forgive yourself if you compromise on your own financial wellbeing to find “the right successor”, especially if you find out later on that they weren’t so “right” after all.

Have You Considered Rural Practice?

I have seen many rural practices over the years, and the high quality service that is provided to the community by the local vet never ceases to amaze me.  I have seen hospital facilities equal to anything in the city; I have seen great LA practices operating in very small communities, and prospering because they are servicing a robust, local rural economy – in many cases, the local vet practice is looked upon as the employer of choice in town. I have seen rural practices that would easily be in the top 5% of profitable practices anywhere in Australia, and I have seen some rural practices practicing at a level that they offer referral services to their colleagues from other practices.   

The good news (in my opinion) is that this is where the best opportunities to enter our industry currently lie.  So, why are veterinarians not looking west (or east in WA) to further their careers? I think this is slowly changing, with more graduates leaving our rural-based vet schools, but there are still opportunities going begging in good rural communities, with existing practices selling, offering partnerships or looking for associates who will become potential practice owners.

The other plus for rural practices is career advancement. Because of the relative lack of competition and absence of specialists, you have the opportunity to work with a number of different species and to ‘have a go’ at many cases that would be otherwise be referred in the city.  A good point in question is orthopaedic surgery in small animals – it is not unusual to see rural practices operating at the high end of the spectrum, by performing such procedures as bone platings and TTAs. I have seen an orthopaedic practice, an avian practice, a behavioural practice, a feline practice and many reproduction practices all operating as sub-specialties within rural practices – all these practices were attracting referrals from their colleagues in the region – proof that working in the bush is no hindrance to one’s professional career.

One of the best reasons to consider spending career time in a rural area is being an integral and respected part of the community. It is not uncommon to find veterinarians on town councils, school boards, hospital boards, service clubs – the list of possibilities is endless. Most importantly, there is never a shortage of sports or social activities in country towns. It’s a great lifestyle; most rural communities lack for none of the big city attractions, but they can offer so much more. So, let’s think a bit laterally when it comes to seeking employment in our industry – there many great options to be had in rural Australia.