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To realise the full value of a veterinary business, it takes smart planning and a focus on operational efficiency. By Cameron Cooper
Selling your veterinary practice can make or break you, emotionally and financially.
Get it right and you should set yourself up for retirement, or the next phase of your life. Get it wrong and you and your family could come under intense pressure.
“The most common mistake is that people don’t plan their exit strategy,” says Paolo Lencioni, a former vet who is now a director of APL Accountants and ValuVet, which offers brokerage services to veterinary practices.
He advises a three-year exit or succession plan. This allows the practice to address budgetary issues such as having too many staff, overusing locums, paying above-average wages, or holding too much stock—all of which can hurt the pre-sale value of a practice.
Dr Rob Adams is the founder of HPB VetBrokers, a specialised business brokering service for veterinary practices in Western Australia. He says a lot of vets nearing the end of their careers start to wind down, lose focus, let their expenses blow out and ignore falling profits. “The practice is in decline, and obviously it’s a lot harder to sell as a result,” Adams says. “So vets should use the last couple of years to work their butt off and increase the value of their business.”
Most vets considering an exit strategy will choose between the following four options.
1. Selling to a partner who is already in the practice
Lencioni says a scenario whereby a younger, existing partner takes over the practice may provide continuity and surety for the business, staff and patients.
A potential drawback with this option in the current tight lending environment, however, is getting finance. “Banks are very nervous to loan buyers more than $1 million and a lot of practices are valued at more than that,” Lencioni says.
A possible solution is an incremental buyout whereby a partner may buy, say, 50 per cent of the business with a view to purchasing the remainder within three to five years. Lencioni warns that there should be contract clarity with such options; make it clear how much the partner will buy and when the exiting partner will leave. “You can have a scenario where the older partner owns 50 per cent of the business and thinks, ‘Hey, I’m on a pretty good wicket here. I’m not working that hard and I can cut back my hours and let the younger person take all the responsibility.’ And the younger partner ends up with a passenger.”
Adams adds that two partners entering into such an agreement must be able to work well together. “It’s like marriages,” he says. “A lot of partnerships break down because people don’t get along with each other, or they don’t have the same goals or work ethic.”
2. Selling to a corporate group
The rise of corporate raiders has changed the veterinary industry in Australia over the past two decades.
Selling to such a group may suit some vets who want a decent payout, or the chance to stay on in the business with the associated advantages of more marketing and HR support.
It may not be for everyone, though. Adams says corporate groups typically want to snap up larger practices with turnover of $1.5 million-plus. They also often call on the existing owner to stay on for at least a couple of years as part of an earnout clause to help the transition for the new owner, as well as staff and patients. “That’s often the killer because most vets, when they decide to sell, just want to get out,” Adams says.
Lencioni says selling to a cashed-up corporate can solve financing issues and make for a relatively easy exit. However, he also thinks the earnout clause—which could, for example, involve an 80 per cent upfront payment with the residual 20 per cent being contingent on the performance of the practice±can be problematic.
“If you have a business owner who is taking home $400,000 a year and they become an employee for three years and earn, say, $100,000 a year, you can see the opportunity cost that if they’d just held that practice for an additional three years, they’d have been taking home an extra $300,000 a year. So those multipliers can make it unfavourable to sell to a corporate.”
3. Selling to another vet who is not in the practice
Such a scenario is most common with smaller practices where the financing may be manageable for a sole operator who wants to come in and do things his or her way.
“The biggest challenge is finding someone who is happy to run a practice on their own,” Adams says. “But they can reap the rewards if they step up.”
With any sale, one of the big risks is cutting corners with legal costs and failing to put in place proper contractual protections. “It’s good to get a balanced contract so both sides are happy,” Adams says.
Smart asset management before any sale is also crucial to ensure the departing vet gets a decent return on his or her investment.
“There’s no point buying an ultrasound a week before you sell the practice because it won’t have had time to produce any profits.”
4. Closing or winding down
Vets rarely just shut the doors and abandon a practice, according to Adams. They want some payoff for their years of hard work.
The exception could be in some rural or remote areas that have trouble attracting professionals. “If you’re in a country practice and all the goodwill is with you and there just isn’t a buyer and you want to get out, that’s when you may just have to walk away,” Adams says.
In 12 years of assisting vets with exit strategies, Lencioni has never seen one just shut up shop. However, the scarcity of professionals willing to live in country areas highlights the need to start a succession plan well before the vet wants to retire or leave the practice. “You really have to think a long way ahead.”
Whichever sale option a vet chooses, Lencioni says it is wise to approach a valuation expert to assess the value of the business now and to ask them what is required to optimise the sale a few years down the track.
“If you make improvements, every extra dollar you make in profit will be roughly worth $5 more that the practice sells for,” he says. “So if you increase profits by $100,000, that will be an extra $500,000 in your pocket.”