INDUSTRY UPDATE MARCH 2021

  1. 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.
  1. 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.

Director’s Comments: Industry Update, November 2020

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

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

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

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

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

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

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

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

Equipment Valuation FAQs

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

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

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

Answer:

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

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

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

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

Answer:

We should start this answer by providing some background.

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

Typically:

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

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

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

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

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

To answer the question succinctly:

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

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

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

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

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

  2. Insurance purposes
  3. Refinancing

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

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

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

Why is this?

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

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

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

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

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

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

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

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

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

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

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

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

Here are some examples:

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

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

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

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

 

Interview Paolo and Anne

COVID19 and Vet Practice Values

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

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

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

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

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

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

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

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

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

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

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

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

Restraint of trade in vet practice sales

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

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

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

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

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

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

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

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

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

Second Practice: Second Entity?

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

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

The arguments for using a single entity:

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

1. Reduced initial outlay

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

2. Reduced recurring accounting and bookkeeping

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

3. Reduced administrative burden and banking fees

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

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

The arguments for setting up multiple entities

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

1. Risk mitigation and asset protection

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

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

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

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

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

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

2. Easier strategic planning

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

This, in turn, can have numerous impacts:

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

3. Simplified exit strategy if selling one of the practices

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

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

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

However, it is important to realise that:

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

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

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

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

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

Conclusion

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

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

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