Overcoming the Business Ownership Stockholm Syndrome

/by

“Stockholm Syndrome” is a term that is used to explain a psychological phenomenon where hostages can sometimes develop positive feelings and a bond with their captors. Strangely enough, it is possible for the phenomenon to extend its grip into aspects of our lives, like business ownership.
Initially, business owners talk about their business like it is a jailer, keeping them away from their family, friends, sports and hobbies. Business owners will tell everyone of the stresses and burdens of ownership, the compromised weekends and holidays answering emails and dealing with issues back in the practice. They will say that it is a necessary evil in their lives to facilitate their financial freedom.
Yet strangely, when they have achieved financial freedom and can afford to retire, when they are reaching the final decade or so of their career…and all things point to it being a good financial time to start looking at selling…many business owners will choose to delay or avoid exit planning and hold onto business ownership far longer than they need to.

Why is this?
For many, whether they can admit it to themselves or not, business owners can get to a point where their “jail” has become the only home they know. A place where they have earned a respected identity, where they have predictability, and their lives make sense. They get to a point where they have dedicated so much time and energy to the practice over the years that they have compromised their other passions in pursuit of their career. Even though selling makes total sense for their financial wellbeing, health and stage of life…they simply can’t picture themselves without their business anymore … and this can lead to many detrimental consequences.
Understanding how Stockholm Syndrome can manifest in business ownership is crucial for safeguarding a business owner’s mental health and promoting effective financial decision-making when it comes to selling your practice.

So, what can we do about it? Here are 3 ways that you as a business owner can ensure that you don’t fall victim to this syndrome:

1. Make a point of actively maintaining your identity beyond the business
Business owners need to make a conscious effort to maintain hobbies, interests, family roles, community involvement and relationships outside of the practice. Prioritising time in these other parts of your life will help you reduce the importance of the practice as part of your identity and help mitigate the fear of loss of purpose or identity crisis that is often experienced during retirement.

2. Embrace a post-sale transitional period
Embracing transition periods post sale, by gradually reducing involvement in the business for a few years before full retirement, can help you:
– Make the practice more attractive and get better offers from buyers, as it can significantly minimise the risk of buying the practice.
– Gradually acclimatise to the changes in your lifestyle and routine, reducing the shock of sudden retirement.
– Dedicate time to the cultivation of post-sale identity described in point 1.

3. New chapter mindset
Instead of viewing retirement as an endpoint, frame it as a new chapter, filled with opportunities for growth, exploration and self-discovery. Cultivating gratitude for past accomplishments and excitement for future possibilities can help business owners embrace the sale of their business with optimism and enthusiasm.

The current slow down in many practices requires proactive action

/by

The need for taking active steps to drive business is so important that business advisory software (Profitdiagnostix) has made some additions and are offering direct marketing software. They are using text messaging services for pet owner re-activation and engagement. Veterinary practices have an advantage of being able to access large lists of pet owners as they have been collecting customers and pets contact details accurately in their practice management systems for long periods of time. These lists have historically always been underutilised but contain all the information needed to bring back disengaged customers, missed vaccinations, run senior clinics and even seasonal campaigns. In a recession, there is a dire need to drum up business in a cost effective way, and this is undoubtedly the best way to do it, as opposed to large spends on unfocused social media campaigns where you don’t know what pets people have, if they even have a pet or any information about that pet such as its age.

Our gut feeling tells us that we are exposed to two very different demographics in veterinary practices – those that use credible business advisory services are by nature the types of practitioners that are interested in the finances and making proactive/educated business decisions – these are the ones doing well and their businesses are still valuing high. On the other side, where we perform valuations for practices that have never had any focus on their business outside of just ‘being a good vet’ currently we are being faced with a lot of surprises in this demographic with very low value businesses as a result of minimal profit. However, there is a warning label that comes with using business advisory services – we are also now often confronted with practices who have been ‘advised’ that their practice is worth millions, but when it comes down to a formal valuation their business is only worth a fraction of what they were expecting – there are many ‘business advisors’ out there who cannot accurately interpret a set of financial statements but seem happy to come up with a value for your business.

With a further minimum wage increase on the cards, we expect another surge of tough times because the inevitable result of this will be an increase in inflation once again – businesses need to pay people more, and the only way to offset the increase in wages is by increasing prices (this is a well known economic phenomenon known as the Wage-Price Spiral). Our advice now is to be engaged, know where your business is losing money with accurate financial advice and drum up business if you are in the 70% of practices that now have shrinking customer numbers.

“What’s the formula?”

/by

One of the most common questions that we get from people when they hear what we do is:
“What’s the formula that people use to work out the price of practices nowadays?”

Sometimes, they follow up with a half-remembered formula that someone once told them, like:
• “30 years ago, when I bought my practice, they used to say that you pay X% of turnover for goodwill plus equipment value plus stock…is that still the case?” OR
• “Are corporates still paying X multiple of EBITDA?”
• “I heard practices are now sold at X% turnover…is that right?”
• “Do buyers still value practices by adding X to Y and taking away Z…?”

The implication behind the question is that people like me have a secret handshake mathematical equation that someone can give you that will be accurate when applied to any vet practice in any circumstance across Australia…. As much as I wish this were true…a simple one-size-fits-all formula like this doesn’t exist. It never did. And when you think about it, it is actually amazing that people think it would.

No one would believe that there was simple formula to work out the price of every car on the road. Everyone seems to understand that there are simply too many variables (age, quality, brand, size, km drive, condition) for this to be the case and that some cars have value simply due to scarcity, perceived value and supply and demand.

If I told you that someone had a simple formula to work out the price of all real estate across Australia…you would know innately that I must be lying. The value would vary depending upon how urban or remote the location is, how recent the build is, the quality of the building, the number of bedrooms and parking spaces, how desirable the location is, proximity to beaches, views, access to public transport, etc.

People would also appreciate that, on top of this, there are external market forces like interest rates that can impact buyers’ behavior and price fluctuations over time as well.

Valuations of vet practices have even more variables than cars or real estate.
No simple formula can be robust enough to be accurate:
– Regardless of where the practice is, Bondi or Alice Springs
– Regardless of whether it is well established or in its first year of existence
– Regardless of whether its revenue is $100k or $10M
– Regardless of if it has significant profit or none
– Regardless of how specialised the clinical work is or how key-man dependent the practice is
– Regardless of how secure the premises lease is
– Regardless of how interest rates fluctuate.

To be accurate, the valuer needs to have access to and be able to call on:
– A deep understanding of the industry
– A volume of practice operational data to be able to understand where the expenses, profit and key performance indicators fall within industry benchmarks.
– A knowledge of the supply and demand for different sizes of practices in different parts of the country. This requires access to comprehensive and accurate market transaction data.

In conclusion, valuing a business is a multifaceted endeavour that transcends the confines of a simple formula. It demands a holistic understanding of the business, industry dynamics, market conditions and regulatory landscape. Expert valuers, equipped with years of experience, analytical prowess and access to comprehensive market data, offer invaluable insights that shape informed investment decisions. While formulas may provide a starting point, entrusting the valuation process to a seasoned professional is essential for unlocking the true value.

ValuVet director comments February 2024

/by

Now is a good time to have a long look back at what the veterinary economy is doing and also get an understanding of how we have been measuring this, because any analysis of this nature is only as good as the data used. Much like a clinical trial for a medication which you are all more familiar with, studies can easily be biased by insufficient or inaccurate data. As clinicians, we should always dig a bit deeper than simply believe the headline, so we feel it appropriate at this point to give a bit more detail as to where the information in this newsletter comes from.

The best way to display the information has been by comparing like-for-like months from 2 consecutive years. For example, Dec 2022 compared to Dec 2023. This allows us to take into account the seasonal fluctuations in the industry, which is generally quieter in winter and also allows for the most part to take the regular holidays into account.

Getting accurate data is a completely different challenge, because asking for manual data submission cannot be done quickly enough to perform a country wide month-on-month trial. So instead the data comes from an app that is installed in over 200 veterinary practices in Australia and then collects every single invoice raised in the practice every 24 hours. Attached to every invoice is usually a patient and a client, as well as the services offered. It is thanks to this app (www.profitdiagnostix.com) that we are now able to give the profession this very valuable information.

Further to this, practices that have been operating for less than 2 years are eliminated from the trial, practices whose record keeping is inconsistent are eliminated from the trial and practices who have changed software over the last 12 months are often eliminated – once again, similar to a drug trial where patients with underlying problems are not selected.

With the above selection, the data is limited to about 300 full-time vet equivalents spread across Australia; the trial could probably include more, but clean data is better than high volumes of lower quality data. Furthermore, none of these are from corporately owned practices, so this ensures that there is a diversity of management and practice types in the sample.

No clinical trial is complete without another type of sanity check that is performed independently, otherwise how would you avoid the placebo effect. As a sanity check, the data is then compared to what we see in our valuations at ValuVet (www.valuVet.com.au) and what the accountants and business advisors see at APL Accountants (www.aplaccountants.com.au).
So what does data look like?

In Dec 2023 (The December just gone by), revenue was up by 3% compared to Dec 2022. This is better than the negative 2% we had a year ago, but still below inflation, which is at about 5%. This means that against inflation, the industry is shrinking by a very small amount.
Number of patients seen was down at negative 4.5%, which again is better than the negative 10% seen a year ago.
However, we need to keep in mind that in 2022 we were comparing to the boom of 2021 and now we are comparing to a much weaker year, so the fact that the industry has been beaten by inflation cannot be ignored when the bar we were comparing to was not that high.

Similar figures were displayed in October and November 2023 so December was not just a one off outlier.

So what does this mean for privately held practices?
Whilst it is easy to think your business is performing just like the industry average, this is not always the case. As we said in the previous paragraph, our sanity check is based on hands on work done by the accountants at Valuvet and APL Accountants who work individually on each practice and prepare both valuations and 3 monthly reports for each practice. What we can see here is that the variance in performance is higher than ever. There are practices doing very badly and there are practices that are booming more than ever – so what could possibly be causing this variance? Is your practice a boomer or a buster?

The answer lies in the fact that history shows us that recessions are the times when the weak get weaker and the strong get stronger. Just like on a bicycle race on the Tour de France, we only see the bunch of riders really break up when they get to the mountains. On the flat stages everyone stays together.
So the practices that are booming are likely doing so because their closest competitors are doing exponentially worse. A practice headed by good decision makers will do better in times when a lot of difficult decisions need to be made. This means that now, more than ever, the decision makers in business have to be well informed and proactive (at least more well informed and more proactive than their competitors).

Having a complete snapshot of your practice financials, practice sales trends and individual team performance is more important than ever. That is why we strongly recommend that practices have fully reconciled financials and a formal financial report prepared every 3 months (annual quarter). We also like them to have a 3 month forward looking financial projection so that they can plan ahead and targets for their 4 most important sales metrics – This is where APL Accountants fits in with their services and provides this to all their advisory clients.

To assist with being proactive is something altogether different. Here we have had to identify what we feel is the greatest threat to the industry in terms of the sales not keeping up with inflation. For the first time ever in September APL Accountants started to measure client attrition as an average across their customer base. Because this involves a rather complex calculation, it has never really been used as a global industry KPI. Client attrition measures the percentage of your clients that visited your practice 1 year ago and then never returned in the last 365 days. Historically, pre-Covid this was 25% – meaning that one out of every 4 clients you see today will not be at your practice in a year’s time. This value had been measured on a client by client basis but was never averaged out across the industry.

When APL Accountants decided to take a much closer look at this in September, they discovered that client attrition had increased to 30% – meaning that almost one out of every 3 clients will not be around in a year’s time! This takes about 25% off the lifetime client spend at a practice!

Identifying this problem has put in motion some things where practices can proactively reduce their client attrition.
The most effective way of doing this is by utilising a direct marketing strategy using text messages because currently text messaging has the highest open rates and response rates compared to other methods of contact. Profitdiagnostix therefore has initiated a direct marketing service using text messages to lost clients. Because they were already reporting on client attrition, the lists of lost clients and patients were already available. This is proving a very effective tool in managing lost clients, but is also providing useful information because the two way text messages allow clients to respond. And the responses give an indication as to why clients are not visiting a particular practice, for example:
– is there a significant sample of responses saying that they are no longer using your practice and going to a competitor?
– or are clients saying that they don’t have the money and will come back later when they do?
– or are they complaining about your service and / or pricing?
– or are they saying thank you, please book us an appointment

In summary, to maintain the value and profitability of your business in a recession is not impossible, but it does require that you keep a closer look at the numbers compared to boom periods when work is just coming through the door. Sometimes you have to move out of your comfort zone and ask for financial and reporting services that you historically may not have considered, for example:
– more intensive financial reporting so that you can look at where the financial leaks are in your business, including business valuations where introduction of junior vets as stakeholders in the business is likely to improve team performance.
– looking at team performance on an individual by individual basis and structuring pay increases strategically to favour better performers
– direct marketing strategies to existing clients that might yield a few uncomfortable truths and feedback about your business.
It is often these sorts of financial and reporting services that give the correct decision making power to business leaders, but they are not DIY. They generally require the services of an external expert.

Why buy the practice premises?

/by

Every vet practice has a premises to operate out of that they either lease from the premises owner or own themselves.

Occasionally, a practice owner that is leasing is given the opportunity to buy their premises at a reasonable/fair price…
If you, as a business owner, have this opportunity:
– What are the relevant considerations that you should take into account?
– Why should you buy when you can rent?

1. Capital growth through paying your rent
As a practice owner, you are already paying rent to someone else – if you buy the premises and put that rent towards premises interest repayments, you would be able to a get the capital growth through the increased premises value over time.

2. Asset Diversification
A lot of business owners would like to build some assets outside of their home and business. Commercial real estate can be a good asset class to diversify into – especially if you have a chance to buy commercial real estate with a solid tenant.

3. Practice renovation costs improve capital
When you are renting and you pay money to renovate, that renovation will either need to be undone at the end of the premises lease or it will improve the value of the landlord’s asset.
However, if you own the real estate and you pay money to renovate, the renovation should improve the value of both your business and your premises, such that both assets are increasing in value.

4. Security of tenure
Security of tenure is perhaps the best reason for a veterinarian to buy their own real estate.
What is security of tenure?
Simply put, it is your assurance of the legal right to continue using the space that your business is in. While it is possible to get security of tenure by leasing premises…even the longest leases are usually not as long as a long career as a veterinarian.

Poor security of tenure can compromise the value of your practice in multiple ways.

4.a. A veterinary practice isn’t the type of business that is easily moved
The further you need to move a client base, the greater the practice attrition if your practice becomes less ‘convenient’ for them to get to.
If your lease ends and you need to relocate, veterinary practices aren’t easily moved when you compare them to other businesses. You aren’t just talking about tables, chairs and a sign on the door, like an accountant or law firm.
If a veterinary practice is moving to a new premises, you will usually need special council permissions and radiation licenses for the new premises, organisation of council waste removal, non-standard fit-out, radiation shielding and plumbing.

4b. Existing client goodwill attached to the location
As much as all veterinarians want to think that they are irreplaceable in their clients’ eyes, there are usually clients in any practice who are only coming back because it is close to where they live or their work, their children’s school, the train station, etc. The percentage of client goodwill attached to the location varies from practice to practice, but it is usually significant, and needing to move a practice’s location, therefore, will usually result in some client attrition.

4.c New client goodwill attached to the location
New clients come to a practice for many reasons. One of the reasons why a new client may choose your practice over others is that, when they had a veterinary issue, they remembered seeing your sign or passing your practice when they were in the area.
The percentage of new clients received by this method will vary from practice to practice. Those in a prominent street front will usually get more business this way than a veterinary practice in a suite in a commercial building. Moving a veterinary practice will also mean a loss in community familiarity associated with that location, and could therefore mean a loss of new clients.

4.d Selling a practice with poor security of tenure is hard
When the time comes to sell your practice, good security of tenure reinforces the value of your goodwill and practice as a whole.

Practice Purchase Deposit FAQs

/by

There are many misconceptions about the role that a deposit plays in a practice purchase transaction.
Is it negotiable? Is it refundable? Who holds the deposit? How is it released?
To provide some clarity in this regard, we thought we would answer some deposit FAQs.

1. What is the usual amount of a deposit in a business sale?
While the standard deposit amount is 10% of the purchase price, it can be negotiated to be a higher or lower amount, depending on the commercial terms agreed to by the parties.

2. At what stage in the purchase/sale of business does the purchaser need to pay a deposit?
Usually, a deposit is paid by the purchaser to the deposit holder upon execution (signing) of the formal, binding contract of sale, or by a specified date shortly after the contract is signed.

3. Who holds the deposit? Can the deposit holder use the money?
Depending on the scale of the transaction, the deposit is usually held by the vendor’s agent or the vendor’s lawyer. In either case, the deposit is usually held in a trust account (a special kind of bank account maintained by agents and lawyers). The deposit is held until one of the parties to the transaction becomes entitled to it under the contract of sale. The deposit holder is not permitted to access or use the deposit funds (and would be in for some serious consequences if they did!).

4. At what stage in the purchase/sale of business does the deposit become non-refundable?
Once the deposit is paid, it is dealt with under the formal contract of sale. Often, if a contract is subject to purchaser conditions (such as finance, due diligence or premises lease approval, etc.), the contract might specify that if the condition does not eventuate, then the deposit is returned in full to the purchaser. If a contract is signed unconditional or becomes unconditional, then generally speaking the deposit is “non-refundable”.

5. At what stage in the purchase/sale of business does the deposit get released?
This depends on what is written in the contract.
Generally, the deposit is released:
– back to the purchaser if the contract is not unconditional and one of the conditions precedents are not met (e.g., unsatisfactory due diligence of the contract subject material, failure to obtain suitable finance, the premises lease not being assigned, etc.)
– to the vendor at the settlement/completion of the transaction
– to the vendor if the purchaser defaults on completion or an intermediary pre-condition (failure to satisfy due diligence as incoming tenant, etc.)

6. Some purchasers offer to pay a deposit with their offer (i.e., before a formal contract is signed) – what are some of the implications of this?
Offering to pay a deposit prior to contract is sometimes used by prospective purchasers as an incentive for their offer to be accepted. However, such an arrangement without a formal contract in place comes with significant risk for all parties involved – including the deposit holder.
Without a contract of sale signed by both parties, it is very difficult to know if all parties are on the same page about how the deposit is to be held and distributed. As such, a deposit should only be paid once the formal, binding obligations of the parties are agreed and signed.

7. The purchaser has asked for a reduced deposit… does this mean that they are not serious about the transaction.
Not necessarily.
A purchaser will often be relying on finance to purchase a business. This finance is only released by the lending institution at settlement.
A deposit is payable on exchange of signed contracts BEFORE the finance becomes available.
This means that the purchaser often needs to pay the deposit before finance is available out of their savings. On a large deal, with a significant purchase price, a purchaser may not have enough of their own funds saved to pay the usual deposit % amount.

8. If the purchaser defaults on an unconditional signed – but not completed – deal, what role does the deposit play?
Should a purchaser default on a sale contract that is unconditional:
– The vendor is able to keep the deposit in full, without selling the practice to the purchaser.
– The deposit becomes the first and most accessible part of the damages paid to the vendor, HOWEVER, the purchaser may be liable for damages that far exceed the deposit amount.
– The vendor may have to take legal action against the purchaser in order to recover the rest of the damages they are entitled to.

9. If the purchaser defaults on an unconditional signed – but not completed – deal, what are the implications of a smaller deposit for the purchaser and the vendor?
The smaller the deposit:
– The smaller the first tranche of damages payable to the vendor if the purchaser defaults.
– The larger the amount of damages that the vendor will need to seek to recover from the purchaser via legal action.

What’s your Escape Velocity?

/by

What would happen if a terrible misfortune (health or financial) happened to you or a loved one? A misfortune that resulted in you needing to sell your practice in a hurry…
Your practice may provide a great income for you and your family while you are working in it. It may be worth a significant amount of money if it were to be sold under normal conditions. However, if you or your family ever need to realise the value of your business fast…a different kind of valuation kicks in, one where every delay could mean a reduced valuation and unnecessary financial hardship for you and your family.
As such, your Escape Velocity – the speed with which you could sell your business – is a concept that every business owner should be aware of and try to increase wherever possible, so that there aren’t avoidable delays if they needed to sell.

Here are 4 easy ways that every veterinary practice owner can increase their Escape Velocity from their vet practice.

1. Get a will
If you somehow disappeared tomorrow and your family needed to sell your practice in your place…could they? Could they hire a locum to keep the business going while it was sold?
The speed with which they are able to do either of these things lies in:
– you having a will AND
– them being able to find it.
I have frequently tried to help families going through the worst of times sell their practice, only to find that there were unnecessary and costly delays due to the legal process that needs to be followed if a person passes away without a will.

2. Make sure that you have a long, transferable lease on your premises at all times
Ideally, a veterinary practice buyer will want approximately 10 secure years on the premises lease when they buy.

Having at least 5-10 secure and transferable years on your premises lease at all times means, that if you need to sell unexpectedly, your practice sale will not be held up by a buyer negotiating a longer lease with the landlord.

3. Have a good commercial lawyer with veterinary practice experience
A veterinary practice sale is a complex transaction with over a hundred moving parts.
The speed and ease with which a lawyer works through these variables will have everything to do with their expertise and experience in this area.
This isn’t the time to use a lawyer that helped your family with immigration, conveyancing or divorce, who says, “they do a bit of everything”. This isn’t the time to use your cousin or brother-in-law who always gives you free legal advice. This is the time to use a commercial lawyer, preferably one that has handled veterinary practice transactions.
It isn’t uncommon for a lawyer who is inexperienced with business sales and/or the veterinary profession to waste time:
– investigating industry norms like remuneration, restraints of trade, appropriate zoning on premises, transfer of health fund status, radiation license, etc.
– asking for unreasonable or uncommercial terms because they don’t appreciate the intricacies of the vet industry.

4. Get regular practice appraisals
Getting regular appraisals of your practice will have several benefits if you need to sell quickly.
Firstly, and perhaps the most obvious reason, is that it will ensure that you are able to confidently ask for a price that is reasonable and achievable.

Secondly, and perhaps less obvious, is that it will ensure that your financials are clear. In our line of work, we see a lot of veterinary practice accounts and, unfortunately, probably less than 10% of those that we see are clear enough for a valuer, bank or buyer to assess.

We often find:
• Expenses put into non-specific/non-descript expense categories, which are a shorthand that makes sense to the person doing it, but not to outsiders (like prospective purchasers, or their financial advisers).
• Expenses unallocated and put into catch-all categories like “general expenses” or “miscellaneous”.
• Capital purchases mixed in with normal ongoing expenses diluting the profit (e.g., computers mixed in with internet and software subscriptions, equipment mixed in with consumables).
• Personal expenses may be mixed into the financials, diluting the profit of the practice (e.g., personal insurances mixed in with practice insurances, personal mobile phone and travel mixed in with those of the business). **
• Sometimes, other financial interests may be going through the same financial entity (investment property, other practices or businesses run out of the same ABN).
• The owner of the practice is also the owner of the real estate and doesn’t know what the market rate rent would be if someone bought the practice but not the real estate.

All of this takes time to clarify and get to the bottom of. Getting regular appraisals done by an independent professional valuer will flush out the above complications and eliminate weeks of work that your accountant, a buyer and their bank will need to do when they assess your practice.

How to minimise selling “subject to…”

/by

When you are selling your practice, signing the sale contracts is certainly a milestone to be celebrated. It means that you’ve agreed with a buyer on all the variables involved in the price and terms of the deal.
What many people will be surprised to hear, is that even though you have the signatures on the contract, it usually doesn’t mean that the deal is locked in.

Most contracts that are signed are not unconditional on the date that they are signed. The deal is usually still subject to some “conditions precedent” that need to be met before the deal is set in stone.
In order to secure a sale you will need to (with the help of a lawyer) navigate and minimise the “conditions precedent” in the contract of sale, such that the sale is locked in as quickly as possible.

Here are some examples of common conditions precedent and how a vendor, their broker or lawyer should minimise these:

1. Finance
While a buyer should have sought out and secured finance before signing the contract, the negotiated terms are not final until there is a signed contract. As such, the finance on the practice sale cannot be unconditional until the practice sale and premises lease/sale contracts are signed and reviewed by the bank. As such, most sales are “subject to finance” for 10 days or so post signing. An organised buyer should not need much more than this.

Tip 1: A vendor shouldn’t start drafting contracts until the buyer has selected a financier, submitted an application for finance and has preliminary approval, subject to a final contract.

2. Due Diligence
When a business is for sale, buyers should be given enough information to evaluate the business and come up with an offer. The information provided at this initial stage usually includes a prospectus/ IM, Profit and Loss reports, dental software reports and a copy of the lease on the premises.
However, when an offer is accepted, a buyer, their lawyer and their bank will often need additional information to verify that the information given is correct and that the business is operating correctly. Financial due diligence requests might include tax returns, bank statements and/or BAS statements. Legal due diligence requests might include checking contracts with staff, the radiation licence, trademarks or a zoning permit on the building (note, these are examples and not an exhaustive list).

Tip 2: A buyer should NOT wait for a sale contract to be signed before they do this due diligence. Once an offer is accepted, drafting contracts can take several weeks; there is no reason why this period (between when an offer is accepted and contracts are ready to be signed) cannot be used by the buyer to complete due diligence, such that the contracts signed are NOT subject to due diligence.

3. Other contracts being agreed and signed
Most practice sales are captured by 3 or 4 agreements that all need to be agreed or signed, in order for the transaction to be complete. There is of course the Practice Sale Agreement, but this is usually subject to the:
– Premises lease agreement OR premises sale agreement
– Post sale work agreement for the vendor

3a Premises lease or sale
Most practices are bought on the understanding that they will be able to continue practicing in their current location. To secure this, the buyer needs the practice sale contract to be subject to either a premises sale or lease.

3b Vendor work contract
Many deals will be subject to the vendor working post sale for a period of time. When this is the case, the contract of sale might be subject to the signing of the vendor’s post-sale work contract.

Tip 3: It is best practice that the premises lease or sale agreement and vendor’s post-sale work contract are negotiated and signed at the same time as the practice sale agreement, such that the practice sale is not delayed by these.

When “it’s not that bad”…makes it worse

/by

All too often, veterinary practice owners only make the decision to sell their practice after several years of declining revenue and profit.
Why is it that so many vet practice owners wait so long? They know that the declining revenue and profit will be depreciating their asset…Why is it that when they see this happening, they wait?
It isn’t because they have a master plan to turn it around…
It isn’t because they see market forces turning in their favour…
It isn’t because they are blissfully happy in ownership…
It isn’t because they love the practice more than they love their financial wellbeing…
All too often, it is because of a phenomenon known as the Region-Beta Paradox.

The Region-Beta Paradox is a cognitive bias that explains how:

1. People will get stuck in a declining set of circumstances because it isn’t deemed bad enough to do anything about.

AND

2. This often means that people will get better outcomes from a worse set of circumstances, simply because a worse set of circumstances will be acted upon faster.
Once you hear about this paradox, examples of it are everywhere:
– You might see a doctor if your discomfort was greater than 5 out of 10, but would put up with the discomfort if it was 2 out of 10…you could be getting better faster from a 5/10 injury than a 2/10 injury.
– People working at jobs that are ok (but not good) are unlikely to quit to seek out better employment, but people with bad jobs are. Thus, people with bad jobs are much more likely to get to good jobs faster.
– People in ok, but unfulfilling, relationships are less likely to break up and seek better relationships than people in bad relationships. …And…
– When a business owner holds on to a business that is in decline and not making them happy, they will often get a better result (financially and emotionally) the faster they act.

How can we overcome the Region-Beta Paradox in business ownership?
The first step is to recognise when you are in it
1. We need to be honest with ourselves when the business is in decline and will be worth less in a few years. An easy indicator of this is when profit is declining over time.
2. We need to be honest when we don’t have an effective strategy (or the energy) to do anything about it.
3. We need to be honest about whether running the practice is making us happy, or if we are simply used to it and are “comfortably numb”.

The next step is to question why we are stuck in this paradox
We need to ask ourselves: “Why, if I admit that things are currently not good…if I don’t think that things are getting better…do I wait for things to get worse before I take action”?
Surely we should all be striving to get to “good” as fast as we can, rather than staying where we are, mildly deteriorating and complacent?

The final step is to take action
This is not always easy.
It involves stepping out of the declining business condition that you are in, before it reaches the threshold of bad. It involves:
– Reinvesting time, effort and energy into your business to turn it around or
– Selling the business before it depreciates further, and reallocating your time towards:
o other, more rewarding business interests
o interests that make you happier
o working as a veterinarian without being a business owner
o phasing into retirement

The lesson to learn from the Region-Beta Paradox is that the thing that is usually standing in the way of getting to “good”, in business and in life, isn’t “bad”.
We will usually spring into action and overcome “Bad”.
The thing standing in the way of getting to a good result is usually our amazing ability to put up with a deteriorating set of circumstances for far too long.

When to hold ’em and when to fold ’em: what poker can teach us about exit planning

/by

For those of you who are unfamiliar with poker, I will recap how the game works:

To begin, a player needs to put in money to get dealt their cards. The player then needs to choose to invest further for every additional round of cards that are drawn. With each round of cards that are dealt, the probability of success will change, and a good poker player will be continually re-assessing their odds of winning. When the odds are in their favour, a good poker player will continue to bet – and when they aren’t, they will quit (or “fold”).

Poker is unlike almost any other game, in that being successful in poker is not just a measure of how you play the cards that you are dealt…being successful is also a measure of the cards that you choose NOT to play. This is highlighted in the statistic that a professional poker player will only choose to play a mere 15-25% of the starting cards that they are dealt, while an amateur will choose to play over 50%. A professional player is successful because of their proficiency at navigating the sunk-cost fallacy and quitting hands that they have a lower chance of winning.

The sunk-cost fallacy is a strong cognitive bias that exists in most people, in which there will be a strong urge to continue to invest resources (such as time, money or effort) into an activity that is unlikely to yield a positive return, simply because they have already invested so much in it.

In poker, and in business, the sunk-cost fallacy makes a person’s rational analysis of the likely future returns difficult to assess, because they are blinded by their past investment. When this happens, it is impossible to know when it is the right time to move on.

A poor poker player will fall victim to the sunk-cost fallacy if they continue to invest in a hand that they have a low chance of winning. Their emotional attachment to the chips they have already put in makes them want to continue to work (and bet) on a hand with a remote probability of success.

Business owners often fall victim to the sunk-cost fallacy because they have so much invested in their businesses (in time, effort, money, identity) that they hold on to their businesses and careers far beyond when all the evidence around them says that it is in decline, time to sell and/or retire.

So…how do you avoid falling victim to the sunk cost fallacy? It is not that complicated:

1. Being able to read the signs.

In business, and in poker, you need to be keeping a close eye on “the cards you are dealt”, so that you can notice when the odds of success change.

In business, this means keeping an eye on KPIs like revenue, expenses, profit, competition, new client flow, etc.

2. Being able to recognise your emotions.

In business, and in poker, it’s important to make important decisions rationally and unemotionally. If you are deciding to stay, is it because you have read the signs and rationally assessed the positive prospects of the future? Or is there an irrational/ emotional anchor keeping you from moving forward?

3. Make decisions based upon the probability of success, rather than emotional attachment.

Once you’ve read the signs and kept your emotions in check, all you need to do is make rational decisions based on the probability of success.

In business ownership, and in poker, winning is not about each transaction, it’s all about the long game and winning the long game is not just about playing well…it’s about knowing when to stop. Knowing “when to hold ‘em and when to fold ‘em”, so that you are ahead after the total amount of time and hands played.