Restraint of trade in vet practice sales

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

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

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

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

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

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

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

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

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

Second Practice: Second Entity?

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

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

The arguments for using a single entity:

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

1. Reduced initial outlay

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

2. Reduced recurring accounting and bookkeeping

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

3. Reduced administrative burden and banking fees

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

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

The arguments for setting up multiple entities

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

1. Risk mitigation and asset protection

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

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

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

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

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

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

2. Easier strategic planning

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

This, in turn, can have numerous impacts:

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

3. Simplified exit strategy if selling one of the practices

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

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

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

However, it is important to realise that:

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

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

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

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

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

Conclusion

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

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

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

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

By Simon Palmer and Dr Paolo Lencioni

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

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

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

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

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

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

The distortion this creates is:

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

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

  1. A Vendor’s invisible income

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

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

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

  1. A Buyer’s discounted income and discretionary expenses

A practice appraisal can be deflated unnecessarily if a buyer:

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

 

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

 

  1. A Vendor’s invisible expenses

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

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

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

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

Conclusion

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

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

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

 

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

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

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

It was near work and convenient for you.

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

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

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

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

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

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

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

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

2.       Is the neighbourhood angry with Steve?

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

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

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

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

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

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

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

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

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

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

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

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

Have You Considered Rural Practice?

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

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

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

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

Vet Practice Mergers

The practice scene in Australia is changing rapidly, therefore practice owners need to be aware of strategic opportunities, so that the practice can continue to move forward with the industry (if you are not going forward, you are going backwards!). One of the options open to some practices is a practice merger with a near neighbour. So, when is a merger a good way to go, and what are the advantages of the strategy?

With corporate and other groups acquiring practices across the country at a rapid rate, time is running out for some smaller, privately-run practices to stay in the game and compete. So which are the best practices to merge and what are the advantages? The smaller the practice, the more vulnerable they are to competition (they often lack the resources to compete effectively for market share, and can be less profitable than larger practices due to the lack of economies of scale to drive down costs). Hence, we see businesses worldwide looking to expand to raise barriers and to compete effectively – veterinary practices are no different.

Success factors

Practice mergers can occur in both the city and the country so, regardless of location, there are some critical factors that make this strategy more likely to succeed:

  1. Geographically, the two practices should (ideally) share some adjacent territory.
  2. The sum of the two practices should exceed their individual resources on the following:
  • Facilities
  • Client accessibility
  • Service offering and the ability to semi-specialise
  • Return on investment
  1.  The two merging practices should be a good ‘culture’ fit.

In addition to the above-mentioned benefits, a practice merger will open up career opportunities for employees, provide economies of scale over many aspects of practice (e.g., equipment, inventories,

staff costs, purchases – the list goes on!)

Typically (but not exclusively), practices in country towns are good candidates for mergers where there may be two or three practices drawing from the same catchment area. Better to join forces and enjoy all the benefits of a larger practice, than to continue to compete against each other for the same sized pie.

What can go wrong?

Some mergers either fail or do not live up to expectations if insufficient due diligence (or research) was not done at the beginning, leaving the parties with the feeling that ‘it seemed like a good idea at the time!’

Many merger failures are due to a lack of culture fit between practices. For the solution, we must look to leadership here – good leadership can make or break the deal with respect to merging two practice cultures. Culture involves not only the people, but also the structures and procedures (‘the way we do things’) in each practice.

Failure to discard old habits or fix lingering problems can also compromise a merger – again, this comes back to leadership, to identify and eradicate poor business practices inherent in the previous un-merged businesses. Needless to say, in preparing for a merger, it is essential for each practice to eradicate/minimise as many business problems as possible, before moving forward into a larger entity.

Three Phases of a Merger

There are commonly three phases associated with a business merger. The first phase is the concept phase – here, the principals of the practices involved must meet to firstly explore the concept of a merger, then define the benefits and, lastly, develop a plan. Once the decision has been made to proceed, professional business advisors need to be involved. Accounting, legal and management advice should be sought by each party, in order to steer a course through a minefield of ‘merger issues’.

Although third party professionals can sometimes get in the way of the enthusiasm of a good idea, there have been many mergers that have fallen over at the start because the right business advice was not sought initially.

The second phase is the negotiation phase – again, professional advice should be sought here too.  Practice valuations will need to be performed, then equity shares will need to be apportioned to the owners of both entities. A new corporate structure will need to be established in order for the merged entity to go forward – these are all tasks which should be handled by the appropriate professional.

The third phase is the integration phase – this is where the ‘rubber hits the road’ with regards to getting down to business and trading as the new entity. In this phase, the new team members get to work together and establish the new culture. It is often a time of great change, which some team members will embrace (new leaders may emerge) and others will decide that the new structure is not for them. Again, the need for professional help in the form of HR advisors may be required in this phase, to assist in the integration process and to minimise collateral damage. Good leadership is vital in this bedding down phase – most team members can cope with change, provided they are led well from the top.

Once the merger has taken place, hopefully the merged entity can look forward to better use of resources, economies of scale, higher returns and a more secure succession plan for the owners, more professional satisfaction for all team members, improved job security and, not to forget who makes all this possible, an improved service for customers and their animals.

Urgent sale due to Ill Health

We were recently asked to do an ‘urgent’ valuation on a practice for the purposes of a sale, because the owner had suddenly fallen ill and could not continue on. This is a timely reminder that, ‘there but for the grace of God go all of us’, and that, particularly if you are a practice owner, you need to run your business as efficiently as possible at all times.

This will have two main benefits:

1: You will most likely maximise your profit

2: Your practice will be in a much better position for sale, should the need arise.

When I owned my own practice, I always wondered, “what if something happened to me? What would the practice be worth if it had to be sold at short notice, and is my practice ‘ready for sale’ now?” There is an old saying that “the day you ‘enter a business’ is the day you should start planning to exit the business” – a bit like buying a boat I guess, but a lot closer to home! Sadly, some practices are not in a position to sell in the short term – they need time to make critical changes, or risk having to accept a fire-sale price, or just close the doors. Please call us if this is a problem for you

Pricing models for Veterinary Practices

By Dr Hugh White MVSc MACVSc (Director CVE & ValuVet consultant)

There are two ends of the pricing spectrum evident in veterinary practices but three pricing models:

  • those who elect to charge low fees and have a high caseload
  • those who charge high fees, where the caseload is limited to those who can afford their services
  • those who are ‘caught in the middle’ who for perceived competitive or altruistic reasons the owners of the practice believe that veterinary care should be affordable for everyone.

 

Which is the better way to go?

We have often said that ‘you can’t discount your way to prosperity’ and in the main, there is an element of truth in that statement for most practices but as with all ‘truisms’, there can be exceptions. Recently we have seen a profitable practice adopting a low pricing strategy, so how is it able to

survive with lower fees and others not? The main reason is knowing your market – the practice was located in a low socio-economic area (ABS and SEIFA data confirmed this) and the fees and service offering were set strategically to what the local market could afford. The other reason for the success of this practice was that their invoicing policy was to charge fees for all services in detail – fees were

then discounted to meet the expectation created by a fee estimate but they still ‘charged for everything’.

Low fees may mean that more people may attend the practice, therefore cases have to be seen quickly in order to get through each day, and there may not be sufficient time to work up difficult cases, to offer appropriate in-house care or to cater for complicated surgeries – some of these cases may need to be referred on. Cashflow is king so there is a need to ensure that payment is made, otherwise the returns will be insufficient for the owners to pay appropriate wages to their team. High caseload/ low fee practices are often very demanding on employees’ time and require quick thinking, good people skills and sound knowledge. This in turn necessitates employing people who are hard-working, committed and comfortable with pushing their patients and clients through.

 

What are the disadvantages of a low-price strategy?

Many vets find it stressful to have constant, back to back appointments and insufficient time to delve into more complicated cases in detail. Vets may also feel that they do not have enough time to hear their clients’ concerns or to treat their animals properly. Stress and job dissatisfaction create falling productivity, absenteeism, sickness and resignations. In some practices, we see the more senior practice owners shoulder the burden of cases or after-hours workload to compensate as younger associates cannot or will not work at the same pace. If a practice becomes known for high caseloads and insufficient vet support, potential employees will tend to look for other options, which can place the practice in a precarious position.

 

When it comes time to sell the practice, potential buyers may not want to run the practice the same way, but realise that if they buy the practice, raise the fees and charge for everything, many of the existing clients may disappear. Alternatively, higher fee practices can be at risk of pricing themselves out of the market, but the benefits are that that they are in a better position to offer the best possible treatment, which can be rewarding professionally for all concerned. Flexible practices are prepared to tailor

treatment options to suit the clients’ willingness to pay and there will always be some clients who will never use the practice. Extreme high end practices run the risk of declining caseloads in tougher economic times, but most successful practices can maintain caseload by offering realistic prices;

preparing transparent, printed estimates; charging for everything that they provide; and maintaining clear and open lines of communication.

Start of a new year– some questions to ponder

By David Sharp BEcon, ACA

Australia Day has come and gone, you are struggling to keep your new year’s resolutions, and you are

already engrossed in the day to day running of the practice. Before it is too late take some time

and space, and consider the following….you have already done so but put in the too hard basket,

hopefully the following will assist with that decision making process.

 

  1. Should I give myself a pay rise?

The short answer is yes, if you deserve it. It is important the owner takes a commercial market salary from the business for the work the owner does. If you are not sure what that is consider what you would be prepared to pay someone to do your job. After taking into account this salary what is left over is the true profit. Next process is to look at that true profit from the perspective of an investor/owner of the business. Does the profit reflect a good return on your investment? What should the profit be, are you under or over performing, what is the next step to build that profit further. Often business owners confuse profits and salary, the salary is for the work you do, the profit is the return on your investment. If there is no profit after paying yourself a market salary your Practice is most likely underperforming. Time to make some changes!

 

  1. Should I incentivise my staff with bonuses?

The short answer is that bonuses nearly always come with negative consequences. Employees will work

towards a bonus and may neglect those areas that are not affected by the bonus. Another likely outcome is that employees start to assume the bonus is part of their salary package and can become upset if the bonus is not paid.

One solution is to pay bonuses purely on a discretionary basis. A bonus may take into account extraordinary commitment to the Practice or reflect a strong financial result of the Practice for the year. If a bonus is not expected or taken for granted it becomes a very powerful way of saying thank you and acknowledging an employee’s performance.

 

  1. A final question to consider, how can my practice improve my life this year?

Certainly, as accountants we are asked this question by business owners all the time. Based on many years in our own businesses we believe there are 2 main ways:

 

Firstly, how can I spend more time doing the business things I enjoy the most? Secondly how can I have more time to spend with my family & friends?

 

The answer may be easy, but the implementation is always a real challenge. Identify tasks/processes in

the practice that you must be on top of and the tasks/ processes that you enjoy. Work out how to delegate the critical tasks/processes to employees you trust and then supervise and review these closely and frequently. You do not need to physically do the tasks/processes but you must make sure they are being done correctly and on time. This should create discretionary time to spend doing the things you love whether in the practice or at home. One word of caution; you will have to pay employee to do the work you are not doing so as per above, you may need to adjust your salary accordingly!

 

In summary, it is important you consider your practice in the context of your life. The practice must work for you – if you are a slave to your practice it is time to rethink how the practice is run. Invariably happy practice owners end up with profitable practices. If you need someone to bounce ideas off speak with your accountant; they should know you and your business, be a strong point of reference and source of good common sense business advice!

Positioning your practice for sale

In most cases, you can only sell your practice once so if you want maximise the return on your investment you need to make it easy for buyers to see opportunity in buying your practice. Most practices we value are for sale (either to an incoming partner of as an open sale) so the following are issues that we commonly encounter:

 

  1. Start early enough! 3 – 5 years can be a good lead time for setting up a practice for sale. Sadly we encounter practices that are just not ready to sell (even though the owners are) – to sell in the current situation would be to almost ‘give the practice away’. Given a practice

development plan (part of our service) and a bit of time to make some changes, it is possible to make a huge difference to the practice value and often for very little outlay. It makes good sense to get your practice valued (it is never a wasted exercise) as soon as you have decided to sell because if the value is less than you were counting on, at least you will have a benchmark

and hopefully the time available to improve on it.

 

  1. Keep accurate and well-presented financial records. A lot of vets do their own book keeping and with rare exception, this can always be done more professionally and accurately by outsourcing to a qualified person who is able to communicate with and keep your accountant

happy. When selling a practice or for ongoing financial monitoring, it helps if your accountant can present your books with at least a 2 year comparison.

 

  1. If you are putting money in your back pocket (it’s tempting not to if it’s your own business) then stop immediately. When valuing a practice we can only account for the money on the books, not what might be going elsewhere. Apart from being illegal, there is no good business reason why you will profit in the end from redirecting practice funds.

 

  1. Vets are chronic under-chargers for their services and in most cases it is the practice principal who holds the practice back on this one. If you have not done so recently, participate in a fee survey (I am happy to recommend MPV as being well constructed, informative and statistically sound). This will at least give you some idea what you are missing out on and give you an opportunity to selectively adjust your fees to a more competitive level.

 

  1. HR issues will affect staff morale, productivity and ultimately the value of the business. If you have existing staff issues, it is best to sort those out before handing the practice on. The new owner will not be impressed if he or she has to inherit problems that hold the practice back – they may quickly come to the conclusion that they have paid too much for the

practice.

 

  1. Keep some KPIs (key performance indicators) on your practice activities and performance – it places the vendor in a much stronger position with regards to justifying a ‘price’ for the business if you can exhibit practice growth over a number of key practice areas. If I were purchasing a practice, at the very least, I would want to know how many ‘active clients’ had visited the

practice in the last 12 months; how many invoices were written and what the practice turnover (ex GST) was for the same year period. Practices that show negative growth will be marked down of course but much less so if good records are kept, so the source of the problem

can be identified.

 

  1. Be transparent with staff once you have decided to sell – the truth always comes out eventually (often with a certain amount of mis-information, thus creating morale problems) and it is far better to control the situation with the right information and at the same time reassuring

your team that you will do everything to ensure the continuity of their jobs after the sale. In my experience, most practice purchasers do not want to ‘rock the boat’ when then take over and provided there are no HR issues left unsolved or staffing inefficiencies that need correcting for the business to operate profitably, they are only too happy to go forward with the existing staff.

 

  1. You will get the best price for your practice if the business is able to operate without you. In other words, there should be sufficient practice management systems in place that the practice literally runs itself. Very few practices ever reach this level (some do) but you need to manage the practice like a business and be prepared to delegate various duties to appropriate staff members or outsource if you have to. The best test for this is to go on a decent holiday and see if the practice income is maintained.

 

ValuVet can perform an assessment on your practice to identify areas of weakness that need to be fixed in order to maximise practice profitability before sale. Most practice owners put a lifetime of hard work into running their practice and for many, it forms a goodly part of their superannuation so there is nothing wrong with maximising that investment when the time comes – it is your right to do so.