Practice ownership: Should you Buy or Set up?

Once a Vet has decided that they want to be their own boss and own a vet practice, the next question that they face is “should I buy an existing practice or set one up from scratch?”

Regularly, Practice Sale Search will be selling a small practice, where the potential buyer will argue that, for the same money, they could set up the practice of their dreams in a great location, with brand new equipment of their choosing.

Their assessment is no doubt true. Setting up from scratch allows the owner to create an ideal work environment for themselves, in that they can choose the location, design, fit-out, equipment and staff. Buying a practice, on the other hand, means owning someone else’s choices, which can mean compromises.

However, while owning a practice in your ideal location, fit-out perfectly in your favourite colours, newly equipped with your favourite brands, may sound hard to beat…there are some significant advantages of buying a practice that you should consider.

1. Established customer base and cashflow
Often, most importantly, a practice that you are buying with an established customer base has a more predictable and immediate cash flow that you can count on. If the vendor stays on post sale (even part time) and you manage the transition properly, there is no reason not to expect the vast majority of the clients will stay. This gives you a cashflow foundation to maintain and build upon (with all your extra energy, skills and ideas, including increased open hours, clinical range, etc.).

On the other hand, a practice that starts from scratch has expenses (loan repayments, rent, staff wages, etc.) and no clients. This in turn means that a practice starting from scratch has a foundation of stress and a desperate need for effective marketing just to get to a financial break-even.

There is a famous business saying that it costs 5 times more to get a new client than to keep an existing one. There is no doubt that acquiring customers for any business can be an expensive, unpredictable process and retaining them is a lot easier and a lot less costly, if you have decent levels of customer service.

2. Opportunity cost of your time
If you are transitioning from being a contractor in someone else’s practice to starting up your own, you need to worry about the opportunity cost of your time.

Starting a practice from scratch means trading productive and remunerative time working at someone else’s practice (with no business overheads to cover) for unproductive and non-remunerative time (with large overheads to cover).
If you buy a practice, on the other hand, the opportunity cost is very different. Buying a practice should mean that any time that you are transferring from your previous place of work is well spent and well remunerated.

3. Softer landing into ownership
Setting up a practice from scratch means learning and building systems and procedures for the operations of your business from scratch. You need to establish protocols for HR (job descriptions, rostering and payroll), IT, sterilisation, ordering supplies, marketing and relationships with suppliers. All this at a time of heightened stress, when you are getting used to a new level of debt, understanding the KPIs of your business and hoping that clients will discover your practice.

Buying a practice means inheriting systems and procedures that can just roll over as a starting point to build upon. Sure, some of the procedures in place may not be ideal and need some tweaks, but this can happen incrementally over time. If a new owner buys a practice, it should come as some relief that it is possible to ‘hit the ground running’ and they don’t need to create every operational aspect of owning a practice from scratch.

Conclusion

If you have decided that you want to get into vet practice ownership and you are trying to decide between buying and setting up, it would be a good idea to review your criteria for success.

If your main criteria for success when getting into practice ownership is convenience of location, the aesthetic and having ideal equipment, then setting up a practice from scratch may well be the best way to go.
If, however, your criteria for success includes:
• reducing the time spent getting your practice going
• reducing financial risk and stress or
• having a more predictable cash flow
… you can’t beat practice purchase as a pathway to ownership.

INDUSTRY UPDATE AUGUST 2021

While COVID-19 lockdowns and their economic impact ravage the country, I think that it may be a good time that we in the vet industry take pause and reflect on how much better insulated our business is from our neighbouring cafes, restaurants and retail shops. We are considered an essential service, allowing us to remain operating throughout lockdowns and restrictions. Both pet ownership and spending per animal have increased significantly over the past 18 months during the pandemic, and it shows no signs of slowing down. We have had uncommon business continuity and indeed many practices have experienced a boom that is unlikely to subside when the virus does.

While our industry is experiencing some extremely frustrating issues (like the current workforce shortage), we can take solace in the fact that Vet practices are proving to be one of the most robust small businesses in the economy during this pandemic.  We are the envy of many at this difficult time.

We have seen some strong months at ValuVet lately, with many requests for valuations coming in pre and post end of financial year.

As always, if you would like an appraisal of your practice, or want to discuss the process/timelines or virtues of getting a valuation done, please feel free to reach out to us at info@valuvet.com.au

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 that we are representing for sale 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.

When Profit isn’t Profit: How to boost your practice valuation by understanding add-backs

So, you’ve decided to sell your practice and after years of blood, sweat and tears, doing whatever’s necessary to build it into the success it has become, you want to make sure you get top dollar for it.

One of the primary indicators of the price that a buyer will be willing to pay is profit, and yet often when a buyer looks at the tax return for a business that is for sale, the profit looks underwhelming.

What many naïve buyers don’t appreciate, is that the profit in a tax return can be (and often is) understated,as it will usually include many legitimate expenses that will either:

  • be personal in nature and go away once the company is in the hands of the new owner, or
  • are “one off expenses” and won’t be incurred again.

To get the best possible result when your practice is assessed for sale, the business owner, their accountant or valuer needs to locate these expenses and add them back to the bottom line, in order to show a buyer the business’s true profit position.

Owner’s Personal Expense Add-backs.

These add-backs include any expense relating to the owner that the business wouldn’t pay if the owner were an employee. Examples of these personal expenses that are sometimes mixed in with practice expenses include:

  1. Owner’s personal non-clinical CPD (including travel, accommodation and meals associated).
  2. Owner’s insurances (TPD, life, income protection, etc., are add-backs. Building and business insurances are not).
  3. Family members (spouses and kids) who might be overstated in the wages and super
  4. Non-business-related travel and motor vehicle expenses.
  5. Non-business-related accounting (for the vendor’s personal or other business interests) that may be mixed in with the business’s accounting bills.
  6. Owner’s personal telephone, mobile and internet that might be mixed in with the business’s telephone and internet.

Non-recurring expense add-backs

Any one-off improvements to the practice that may appear in the P&L and won’t in the future be added back, so as to show a buyer a “truer” profit position. Examples of expenses that fall into this category include:

  1. Equipment purchases
  2. Finance interest, lease and loan repayments (as these will not continue post sale)
  3. One-off repairs
  4. Legal bills

Other common profit adjustments

There are 2 other common and significant adjustments that should be assessed in a Vet’s financials when profit is calculated. These are:

  1. Owner vet’s salary and super.

The owner of a business can choose to pay themselves whatever they want. Often, for simplicity’s sake, a vet owner of a veterinary practice will decide to take a nominal salary and profits, instead of calculating a market salary and super for themselves.

As a result, when calculating the profit of a practice run by an owner operator vet, the vendor’s compensation needs to be adjusted to reflect the “market rate compensation” that a non-owner vet would receive for that clinical and managerial work.

  1. Rent (if the property is owned by the vendor)

Sometimes, the owner of the practice is also the owner of the premises.

Often, when this occurs, the owner can under or overpay rent to themselves if they wish.

To calculate the true profit position, we need to adjust the rent to the market rate that would be charged if the landlord and tenant were unrelated and at arm’s length.

Conclusion

Even with a list of add-back categories, a business owner may find it difficult to locate them. Personal and non-recurring expenses are usually mixed in with the other expenses and need to be found, isolated and quantified (for example – the owner’s personal mobile phone bill expenses are sometimes mixed in with the business phone expenses). However, spending the time to understand expense add-backs is time well spent, as it can make a massive difference to the price that is achievable for your practice upon sale. This article should give you a guide on where to start your search for these expenses, but it is recommended that you check with a specialist Vet accountant or Valuer.

INDUSTRY UPDATE MARCH 2021

Have low interest rates lead to higher valuations for vet practices? Real estate prices have gone up in all major cities, has this been reflected in vet practice valuations?

Our valuations are based on profitability before interest, so no, interest does not influence our valuations. Practices have become busier and more profitable – this has led to an increase in value from a buyer’s perspective; obviously lower interest rates make it easier to borrow money, so this may be one of the factors that has contributed to a lot of younger vets buying into practices over the last 10 months or so. I think also though, because practices have become busier, younger vets are now seeing this as a suitable career path and are more willing to commit to private practice. Also, I guess with time, if the market is full of buyers then this would also drive the value of practices up due to supply and demand, however I have not seen this yet.

Also worth noting is that, in spite of low interest rates, banks are nervous to lend! So, in high value practices, often a single buyer does not seem to be able to raise the finance – banks are treating the vet industry like every other industry and are being cautious – this does not help sales in an environment where high profits often result in a value above which a bank will loan.

The vet industry has seen an increase in spending over the last year, during COVID-19. With job keeper due to end, do you feel it will have an impact on the fortunes of vet practices?

Only time will tell. We run real-time live analytics in practices and we will be monitoring client spend, visits and average invoice value over about 200 full time vet equivalents across AU. We will detect early if this is the case and start strategising. Sudden loss of income and decreased spend is a possible scenario we cannot ignore. However, the optimist in me thinks that the main driver of more work for vets is the ‘work from home’ trend, which is not going to go away in a hurry, so hopefully vets will remain busy.

Protecting Yourself From a Bad Valuation

A practice or real estate sale is usually a high-stakes transaction involving hundreds of thousands, or millions, of dollars changing hands. Quite often, the buyer and seller will base the price paid for a practice on an appraisal or valuation that has been done by an accountant.

…And yet, if a business or real estate is put to market with competitive bids, it is quite common for the price paid to vary from the valuation price. Why is this? And what are the ways that you can minimise your risk when relying on a valuation?

1. Poor or incomplete information provided to the valuer

A valuer is only as good as the information that has been provided and is accessible to them. If relevant information has been withheld or made unavailable, they cannot be expected to be accurate.

Check: If you are getting a valuation done, make sure that the valuers have all the necessary relevant and accurate information. The valuation should list the reference documents that the valuer assessed to come to their appraisal.

2. Timing

The appraised value of a business may be accurate at the time that it is created, but may change significantly over a relatively short period if:

a. The fortunes of the practice change due to key clinicians leaving, physical damage to the premises (fire, flood, etc.), its reputation is damaged, etc.

b. There is a perceived or real change in global or local economic conditions. Examples of this may be interest rate changes, GFC, pandemic causing panic.

c. There are new announced changes in the local area. Examples of this may include key employers investing or divesting in the area, or if there is a development or new infrastructure announced in the area.

Check: If you are basing a transaction decision on a valuation, make sure that the valuation has occurred within the last 6 months. If the valuation was done before, you should be asking for it to be reviewed by the valuer.

3. Poor choice of valuer

Some people will just go to their trusted family accountant to appraise a vet practice. While your accountant is probably very experienced and trustworthy, a vet practice valuation is not just the application of accounting principles. To value a business effectively, the valuer needs to have an understanding of the industry norms of the business they are valuing and have access to information about comparative practice transactions/sales.

If your accountant doesn’t have this experience and exposure to comparative financials, they are likely to miss vital pieces of information or apply an incorrect/inappropriate multiple to their appraisal. An inexperienced valuer would value the practice using the same methodology and formula that they would use for a coffee shop or travel agency (we see this regularly).

Check: If you are basing a transaction decision on a valuation, make sure that the valuation was done by a valuer experienced in the industry being valued. In our opinion, there are only 2 or 3 valuers in the vet industry with enough industry knowledge to be accurate on a consistent basis. Ask specialist lenders/financiers in the profession – if they haven’t heard of the valuer, it may not be the correct one to be basing your transaction on.

4. Terms

There is no price without terms. Price is often a function of risk and much of the risk protection is in the terms of the deal. For example, corporates have been known to offer higher valuations for practices, but these higher prices come with more onerous post-sale conditions (years of post-sale commitment, revenue and profit targets, etc.).

Action: If you are basing a transaction decision on a valuation, make sure that the valuation specifies the basic terms that the valuation is predicated upon (i.e., post-sale commitment, premises lease terms, etc.).

5. Lack of comparable transactions.

Business valuations are only accurate to the extent that the valuer has a thorough knowledge of the market for the business being valued.

The more unique a business is (if it is highly specialised or located in an extremely remote location), the less likely it is that there are comparable transactions for a valuer to use in their assessment. This can affect the ability of the valuer to predict the demand and appetite for this business.

6. Fact VS Emotion

A valuation is usually an objective assessment of the available relevant facts. However, people often do not act objectively in the marketplace. For example:

  • A buyer may fall in love with a business or property and offer more than market rate because of how convenient the location is (close to their home, their children’s school, etc.) live.
  • They may offer more due to “fear of missing out” (FOMO), social proof (e.g., seeing lots of interest at an auction) and search fatigue.

It is extremely difficult for a valuer to factor these external emotional components into an appraisal.

Action: No one can take the possibility of a ridiculous offer into account when valuing a practice but, at the same time, a valuation that gives you a reasonable range is more likely to have taken into consideration the emotion factor.

Frequently Asked Questions About Vet Practice Valuations

A valuation can be one of the most important tools in a business. It can help you with business strategy and planning, it can guide the decision to sell your practice and retirement planning. Somehow though, there is little understanding among vet practice owners surrounding:

  • When should a practice owner get a valuation?
  • Where they should go to get an accurate one?
  • When is a valuation needed and How do you use one in a transaction? AND
  • What influences the outcome?

We spoke to Anne and Paolo Lencioni from specialist veterinary accounting firm APL Accountants, to ask them some frequently asked questions (FAQs) about valuations. 

FAQ 1. When should a practice owner get a valuation?

Answer 1: A practice owner should always get a valuation in well in advance of when they want to sell in order to get some idea of what their business is worth. Getting a valuation allows a practice owner:

  1. To create a retirement plan that factors in the money that they can expect from the sale of their business.
  2. Manage the practice in a way that helps maintain or grow their practice value in the exit timeline. Many practices make management decisions (work less, pay staff more) without appreciating the impact that those decisions make
  3. Appreciate a good offer when it presents itself. Business owners usually have an idea in their head of what they are worth that is either too high or too low. If they are selling and they have underestimated their worth they could inadvertently accept an offer beneath what could have been achieved and sell themselves short.  If they have over-estimated their worth they might not accept a good offer when it presents itself.

We had a senior vet based in Sydney come to us recently who wanted to retire immediately.

He had a buyer and had a value in mind and wanted to get a valuation done to reinforce his perceived value. When we looked through all the financials and documentation, we appraised the practice as less than half what he expected and naturally he was really disappointed. There was very little he could do to change the outcome within the timeline that he wanted to sell. If only he had approached us 3 years ago, there would have been  100 things he could have done to make it worth what he needed (for example, he was under-charging for all services and hadn’t raised his prices for a long time).

FAQ 2. If a vendor has a buyer in mind should they get a valuation done and provide it to the potential buyer to set the price? If the buyer disagrees is it wasted money?

Answer 2: A valuation will help the price make sense to a buyer. It will also help them get the finance the need.  

HOWEVER…

A practice owner providing a valuation to a buyer shouldn’t be seen as the end of the conversation on price… It is quite normal for a buyer to want clarifications, point out what they see as relevant omissions in the valuation methodology or to want to get their own appraisal.

As valuers we are always happy to give clarifications and if there’s a discrepancy between our appraisal and one that the other side of the transaction provide, we make an effort to find out why and where our methodology varied from the other appraisals.

FAQ 3. Do you prefer to be engaged by the buyer or seller or both together?

Answer 3: The way we value a practice doesn’t change depending upon who engaged us. We value objectively based upon the facts of the practice and our benchmarks and market comparisons not based upon the agenda of the party that engaged us.

However, being engaged by both sides of the transaction does sometimes allow the parties to feel more trust and confident about its impartiality and less suspicious about bias.

FAQ 4. Can any accountant provide a Vet practice valuation?

Answer 4: Some people will just go to their trusted family accountant to appraise a Vet practice. This, in our opinion, is usually a very big mistake. Your accountant is probably very experienced and trustworthy as an accountant, but a vet practice valuation isn’t just application of accounting principles. To value a business effectively the valuer needs to have an intimate understanding of the industry they are valuing. They need to know what vets are paid as a market salary, have access to industry benchmarks for expenses and have access to information about comparative practice transactions/sales.

If your accountant doesn’t have this experience and exposure to comparative financials, they are likely to miss vital pieces of information or apply an incorrect/inappropriate multiple to their appraisal. An inexperienced valuer would value the practice using the same multiples/formula that they would use for a coffee shop or travel agency (– we see this regularly). Vet practices are viewed as low risk and as such the Multiple used should be higher than these industries.

COVID19 has highlighted a great reason to use an industry valuer. Most generic valuers have been valuing businesses lower in 2020 due to the business risks associated with COVID-19. As an industry though, vet practices are doing better under COVID-19 and as a result their value shouldn’t be downgraded.

When you are engaging a valuation company to do an appraisal on your vet practice you should ask for their credentials in this industry. How many vet practices they have valued? (We do 2 a week).

There are (in our opinion) only 3 companies that have the industry insight, understanding and experience to accurately to value a vet practice in Australia.

FAQ 5. What do you see as best practice to get a high valuation?

Answer 5: Here are 5 tips to getting a high valuation for your practice

  1. Profit: 80% of the result of business valuation is based on profit.
  • Don’t work less hours per week or less weeks per year in your final years
  • Minimise discretionary spending in your last years.
  1. Key Man Dependence: We use a lower multiple if more than 50% of the invoicing is coming from one vet. If you are preparing the practice for sale, you need to make sure you aren’t doing the bulk of the work; you need to prove it’s sustainable under another vet’s care.
  2. Personal Expenses: A seller also needs to keep good track of personal expenses that they are putting through the business.
  3. Rebates: Keep track of rebates from drug companies that are going into personal bank accounts. Leaving the rebates off means a lower valuation – they really need it in their financials.
  4. Capital expenses: If you’ve done a major renovation/fit-out or massive purchases of equipment and then decide the next year that you want to sell – it’s very hard to recoup the capital expense. In the last 3 years of selling – do repairs, maintenance, but nothing major.

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