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.

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

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.

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.

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.