Confidentiality Agreement FAQS

By Simon Palmer and Harry Nicolaidis

If you are looking at buying a veterinary practice, it is likely that you will be asked to sign a Confidentiality Agreement or Non-Disclosure Agreement at some stage. 

There are a lot of misconceptions about these agreements, what they mean and if they are enforceable. In this article, we address some of the frequently asked questions that arise from these agreements.

  1. Why are confidentiality agreements necessary in a practice sale transaction?

During a practice sale, it is likely that a seller will share information with a buyer that they would not like shared in a wider context.

This confidential information might include the financials of the practice, the details of its marketing efforts, payroll information about the staff, etc.

For the seller to feel comfortable about sharing this information, the purchaser needs to agree to treat these disclosures confidentially.

  • Does signing a confidentiality agreement mean that you cannot share the information with your spouse or advisors?

Buying a business will almost never be completed without the buyer discussing information regarding the deal with spouses and advisers (bank, accountant, lawyer).

A confidentiality agreement usually has provisions to reflect that the confidential information may be used and shared in specific circumstances. That is, shared with their necessary advisors (bank, accountant, lawyer, business partner, etc.), for the purposes of considering a specific opportunity. If they don’t, then the buyer should either seek an amendment or get a separate NDA for their spouse and advisors.

  • What happens if the confidential information that you have received becomes public knowledge – are you still bound by the agreement?

Typically, a confidentiality agreement will have exclusions for information that is or becomes publicly available or generally known to the public.

  • Is a confidentiality agreement only in place to protect the seller?

In a business sale transaction, confidentiality agreements are usually in place to protect the seller alone.

However, there are many reasons that a buyer will also want a confidentiality agreement in place.

A vet looking at a veterinary practice to buy may be reluctant for their current boss to find out that they are looking, as there may be an implication that they intend to stop working at their current job to pursue the purchase. 

For this reason, every Practice Sale Search practice for sale also includes a separate confidentiality agreement from the seller, to give a buyer peace of mind that the buyer’s identity will be treated confidentially.

  • Is there a difference between a confidentiality agreement and a Non-Disclosure Agreement (NDA)?

In a business sale interaction, there is unlikely to be any material difference between a confidentiality agreement and a Non-Disclosure Agreement. Irrespective of what they are called, both have the effect of protecting confidential information provided by one party to another.

  • I have heard that NDAs and Confidentiality agreements cannot be enforced. Is this true?

This is incorrect; significant penalties can absolutely be incurred if people misuse or inappropriately disclose information provided under a confidentiality agreement.

However, I think this question misses the point of these agreements.

The principal purpose of putting a confidentiality agreement in place is to guide appropriate behaviour. The fact that it creates legally enforceable obligations is ancillary to that purpose.

If you are sharing sensitive information, you would want a confidentiality agreement for four reasons.

  1. First and foremost, it is a written acknowledgement from the recipient that they recognise that the information received is commercially sensitive.
  2. Secondly, you want acknowledgement that the information should not be shared. unnecessarily, should be kept securely and that unauthorised disclosure could cause harm.
  3. Thirdly, you want it to act as a deterrent in place for people who would otherwise be careless by disclosing this sensitive information.
  4. Finally, so that if there is unauthorised disclosure or misuse of this confidential information such that a loss flows from it, there is a legal pathway to appropriate compensation and recourse for that loss.

Hopefully the first three points will mean that the confidential information is secure and the fourth point – recourse- is rarely if ever necessary.

Why the Staff will Stay

It is quite common for practice owners to be fearful of how the staff will react if they learn that their practice is for sale.

While it is, of course, always possible that a practice could experience some staff attrition when it changes hands, it is, in fact, extremely rare.

Believing that the staff will quit when they hear that the practice is being sold is to believe that the only reason that the staff is there is because you are the owner, that your ownership is somehow so good that no one could fill your shoes and that staff will believe that they are better off leaving, rather than even trying to work for the new owner. This way of thinking is perhaps a little narcissistic.

As good a boss as you are, you can rest easy as there is probably a multitude of reasons why your staff work for you and will stay when you sell. For example:

  1. Financial

Simply put, for most people, quitting your job usually represents more financial risk than staying.

Chances are that your staff are working for you, not for a love of the job or for a love of the business owner, but out of some financial necessity. While it may be the right time and financial conditions for the owner to retire or try something different, it would be a huge coincidence for your staff to reach that same juncture at exactly the same time.

  1. Staff who stay maintain their current salary.

There are no promises that they will get the same or better terms elsewhere.

  • Staff who stay maintain their current leave entitlement accruals.
  • Staff who quit could lose their long service leave entitlements (depending upon the state that you are in, how long you have worked for the practice and your reason you are leaving).
  • Sick leave (now called personal/carer’s leave) is accrued at a rate of 10 days per year (For full time, pro rata for part time) and these days are cumulative. Any outstanding sick/personal/carers leave that an employee has on resignation is forfeited and not paid out. For long-term staff, this can be a huge amount to just give up.
  • Convenience

People are often geographically restricted by where they can work. It usually needs to be within a certain distance from where they live and their kids go to school. It is rare that there will be an equivalent or better position, with equivalent or better pay available at the time, within the geographical limits of where they will consider.

  • Respect and job competence

Staying at their current location means a transference of respect from their old boss and team to the new boss. They can continue to work in an environment where they are proficient with the tools/software that are available, how to use them and where everything is kept. They know the strengths and weaknesses of the team, whom they can count on for assistance and whom they can’t. They are familiar with the equipment in the office, the patients, reps, suppliers, neighbouring businesses.

Starting at a new practice will mean “earning their stripes” from scratch, proving their worth and starting to earn the trust of their new boss and team, while at the same time learning how to do their job in a new environment, with new procedures, new tools, new unknown team-mates and, as a result, with compromised competence, at least initially.

In short, if your staff are currently happy with their jobs, leaving it would usually mean less financial security and losing leave entitlements, to work in a position that may not be as convenient and that they will most likely be less competent at.

Why would they put themselves through such an ordeal just because you are selling?

The truth of it is, that if your practice is for sale, most staff will be far more fearful of leaving their job than they are of the new owner.

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 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).

    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.