Stock Valuation FAQs

When a practice is valued, it is often for goodwill and equipment, “plus stock”. That is to say, the stock levels will be determined closer to settlement and an amount added to the valuation to compensate the vendor for the stock that will be onsite at the date of transfer.

There are a lot of Frequently Asked Questions (FAQs) and misconceptions about how stock is treated in a valuation.

We have gathered these FAQs and asked Anne and Paolo Lencioni of ValuVet for their view of best practice in this regard.

Q1. How does a purchaser know how much to prepare to pay at the date of sale, when the amount of stock is a moving target? Should the vendor give the purchaser an estimate of this value in early discussions about the sale?

Generally, stock doesn’t vary a lot from year to year, unless the practice is showing good growth. The seller should be able to give an indicative figure for stock during sale discussions, so that a buyer is prepared. A final stock take should be done at time of settlement and the result should not be drastically different from the figure previously given. 

Q2. When stock is appraised for the sale, is it at retail price or the price that they bought it for? (If they bought it at a discount, is this discount passed on?)

The stock should be appraised using the price the practice paid to wholesaler. That is to say…yes, any discount paid by the practice should be passed on to the buyer.

Q3. How often should a practice value their stock?

There is no right answer here. It is a very time consuming and non-revenue producing exercise. I would say it is still necessary and worthwhile to perform once a year.
Unfortunately, many vet clinics rarely do regular or accurate stocktakes and a practice sale is probably the only time most practices do stocktake really well.
Sometimes their accountants simply leave the stock as zero when doing their end of financial year accounts, which can cause huge tax problems down the track when the client eventually does a stocktake – a 30k sudden write up of stock in one year can generate approximately $10k in tax!

Q4. Is there a Goldilocks level of stock that owners should try to have in their cupboards at the point of sale – i.e., one-two months?

There should be no need to change stock levels due to sale.

Q5. Is all stock paid for by the buyer, regardless of age or likelihood of use? I.e., does a buyer pay for stock close to expiry or niche stock (jumbo sized gloves)?

There should be no out-of-date and limited short-dated stock included in the sale. Stock should have at least a month before expiry. If a buyer is reluctant to agree to take over some (niche) stock items, then this should be discussed in advance of contracts and agreed. If given enough notice, the seller can try to reduce levels of certain stock prior to sale.

Beware of strangers offering candy: Why sellers need to take a cautious approach with a new veterinary aggregator

Every year, some great practices will come to us asking what we know about a new veterinary aggregator that is marketing itself or approaching veterinary practices directly.

New aggregators come and go every year and generally have the same few things in common:

  • They will have a glossy executive summary brochure, showing a group of impressive-looking people on the board who have been successful in business in other industries.
  • There will be usually one or two (token) representatives on the board with some veterinary industry experience.
  • In their correspondence and conversations with you, they will come across as very ambitious, talking about how fast they will acquire practices, saying that they are already in advanced negotiations with some great practices.
  • They will say something to the effect that their (slightly) unique model and experience in other industries will act as a “disruptor” to the industry.
  • They will say there will be an advantage to you getting in early and being among the first to come on board. Their offer to you will be for a “limited time only”.

When our clients ask us our opinion on these new aggregators, we usually ask the following questions:

1. Will they buy 1 practice or are they wanting to buy 20?

Most veterinary corporate wannabes have no interest in owning a single practice – they want to own many. So, when they put down an offer on one practice, they have no intention of following through on that offer unless they meet a critical mass.

To sign up to sell to any aggregator, you would receive a Term Sheet/Heads of Agreement that would lock you in to several months of exclusivity (where you reject any buyer that you are currently in discussions with and cannot talk to another would-be buyer), while they do their legal contracts, financials and other due diligence on your practice. This is reasonable, as there is considerable cost involved in corporate due diligence and it would be unfair for them to outlay this cost, only to find that you were not serious about their offer in the first place.

The difference with a new aggregator is that they don’t just use this exclusivity period to do due diligence. They also use it to keep practices like you in a holding pattern while they try to get other practices to buy, in order to reach the threshold they need to make this interesting for them.

You may find that you enter a Term Sheet with a new corporate with honorable intentions, only for that the deal not to go ahead because they couldn’t get enough practices on board. By the time you are released from your exclusivity commitment and reach out to the other suitors that you were considering earlier (before you signed with the new aggregator), you could find that they are gone, either because they spent their money elsewhere or because they are annoyed that they were your second choice.

If you are considering whether to sign a term sheet with a new veterinary aggregator, be confident that either:

  1. They will buy one practice at a time OR
  2. They will reach the critical mass of committed practices they need in order for them to buy any, OR
  3. That you have time up your sleeve and aren’t counting on the sale in any real way financially or lifestyle-wise in the near future.

2. If they do buy your practice… what is waiting for you on the other side?

When you sell a practice to any aggregator, it usually comes with post-sale work commitments that you have to make. These commitments are made easier by promises that they will take the burdens of ownership off your shoulders, allowing you to focus on your clinical practice post sale. Generally, there will be offers of IT, HR, marketing support, payroll and corporate discounts on consumables. There will be an expert at head office that you can call for help when there is a staffing issue, or to help get you back up and running when equipment breaks.

Selling a practice to an existing aggregator means that there is a track record of acquisitions and there will be a back office that is well versed in veterinary practice ownership issues and how to resolve them. An existing veterinary aggregator should be able to give you some referral sources of practices that they have bought and the contact details of those practices’ principal veterinarians, such that you make sure that the promises are well founded and that the aggregator is reasonable to deal with.

Selling to an untested, new aggregator gives you no such assurances. They could be (and sometimes are) building the plane while they are flying it.

If you are thinking of selling to a new aggregator, it is very important to get clarity on what will be waiting for you on the other side. Ask them how they will handle the support that they are offering? When are they going to be building their support team and do they have any thoughts on the composition and experience their team will have? Any serious aggregator will have a straight answer for you and will not leave this as an afterthought with vague placating answers.

Conclusion

It is very easy to be attracted to something shiny, only to find out that it was a mirage when you reach out to hold it…

The point of this article is not that you should never consider selling your practice to a new aggregator.

Some new aggregators (one out of four or five in our experience) will become legitimate entities and will progress to actually buying and owning practices.

These aggregators may present a great option to sell where no others exist.

However, this still leaves a significant percentage that will not amount to much. If you are entertaining an offer from a new veterinary corporate, extra caution needs to be shown and additional questions need to be asked.

Beginning of Financial Year

The end/beginning of the financial year is an important time for most veterinary practices – it is often a quiet time in the clinic, but a busy time in the office and for management. A bit of a checklist could include:

  • Creating a budget for FY2022 – there is a lot of talk about creating ‘budgets’, but what does this really mean in the context of a veterinary practice? Simply creating a spreadsheet, dragging across the previous years’ values and increasing them by CPI is what most people do, but this exercise has little value. A better approach is to speak to an accountant who is familiar with the veterinary industry and create a budget that identifies where your practice is wasting money vs industry averages, and then gradually try to bring your practice in line with those KPIs if your performance is sub-standard. Also, veterinary practices are very seasonal in terms of how busy they are, so it makes more sense to work out budgets on a quarterly basis (3 months, rather than a whole year). Here is a detailed webinar recording on the basics of working out a budget for your practice: https://vimeo.com/429880328/679e4af068.

    But better still, if doing all that number crunching is not for you, we are more than happy to refer you to a proactive accountant who should be more than happy to offer you a service to do all this and meet with you every 3 months.
  • Stocktake – any business, regardless of whether they rely on their practice management software for stock, should be doing a physical stocktake at least once a year. You cannot rely completely on a computerised stocktake, because very often wastage and missed billing means that items on the computer system are missed – and these values add up significantly year after year. That is why even the largest and most computerised organisations in the world still rely on the occasional manual stocktake. It is important that you record the value of this stocktake and tell your accountant before they complete your financials for tax purposes, as this will have an impact on your tax.
  • Analysis of Key Performance Indicators (KPIs) for the past 12 months and goal-setting for the next 12 months – this fits in nicely with your budget planning mentioned above. For example, you may find that at the end of the year that your ‘cost of goods sold’ (all the drugs you purchase, external lab fees and cremations) is 26% of your sales, when the national average is 24%. If your practice sales are $1,000,000, then this means that your cost of goods sold was $20,000 too high – a nice place to start giving you a concrete and realistic target to aim for. 
    Other KPIs you should be looking at involve not your financial statements, but rather the items and services you sell, in particular, the volume of those critical client-facing events that happen in your practice – consultations, repeat consultations and vaccinations. Is your practice, based on its size, performing enough of these? Once again, comparing to national averages will identify areas where your business could be losing tens of thousands of dollars. A good example would be a practice that has $1,000,000 in sales should be performing about 1000 primary consultations a year. If this number is low, then it’s time to investigate where the ball is being dropped; it could be poor reception quality, or poor availability of appointments.
    Once again, if spending hours comparing your practice to regional averages is not your thing, then there is some great veterinary specific benchmarking software available that will do it all for you (www.profitdiagnostix.com).
  • 6-month staff  interviews – at a bare minimum, you should be discussing career progression and performance with your team at least twice a year, and ideally a lot more than that. Critical to having these discussions is knowing how they have performed over the last 6 months, in terms of tangible numbers (such as the revenue they have generated for the practice), but also the intangibles (are they easy to work with, how good are they at taking on feedback). Although, on the surface, this may seem a bit confronting, we so often see newer graduates left without mentorship/feedback and therefore in a position where they never acquire the skills that are needed for a sustainable, happy and well-paid career in private practice. On the other hand, we also see a few well-mentored newer graduates who significantly outperform well-seasoned vets and manage to earn high salaries – so, as a manager, one could argue that it is your obligation to make sure systems are in place to give your younger team members the support and constructive feedback that will allow them to become great at what they do.