Frequently Asked Questions about Vet Practice Valuations13 Jan 2021 - Simon Palmer & Paolo Lencioni & Anne Lencioni - Vet Practice Sales
A valuation can be one of the most important tools in a business. It can help you with business strategy and planning, it can guide the decision to sell your practice and retirement planning. Somehow though, there is little understanding among vet practice owners surrounding:
- When should a practice owner get a valuation?
- Where they should go to get an accurate one?
- When is a valuation needed and How do you use one in a transaction? AND
- What influences the outcome?
We have put together the following frequently asked questions (FAQs) in order to shed some light on these topics.
FAQ 1. When should a practice owner get a valuation?
Answer 1: A practice owner should always get a valuation in well in advance of when they want to sell in order to get some idea of what their business is worth. Getting a valuation allows a practice owner:
- To create a retirement plan that factors in the money that they can expect from the sale of their business.
- Manage the practice in a way that helps maintain or grow their practice value in the exit timeline. Many practices make management decisions (work less, pay staff more) without appreciating the impact that those decisions make
- Appreciate a good offer when it presents itself. Business owners usually have an idea in their head of what they are worth that is either too high or too low. If they are selling and they have underestimated their worth they could inadvertently accept an offer beneath what could have been achieved and sell themselves short. If they have over-estimated their worth they might not accept a good offer when it presents itself.
We had a senior vet based in Sydney come to us recently who wanted to retire immediately.
He had a buyer and had a value in mind and wanted to get a valuation done to reinforce his perceived value. When we looked through all the financials and documentation, we appraised the practice as less than half what he expected and naturally he was really disappointed. There was very little he could do to change the outcome within the timeline that he wanted to sell. If only he had approached us 3 years ago, there would have been 100 things he could have done to make it worth what he needed (for example, he was under-charging for all services and hadn’t raised his prices for a long time).
FAQ 2. If a vendor has a buyer in mind should they get a valuation done and provide it to the potential buyer to set the price? If the buyer disagrees is it wasted money?
Answer 2: A valuation will help the price make sense to a buyer. It will also help them get the finance the need.
A practice owner providing a valuation to a buyer shouldn’t be seen as the end of the conversation on price… It is quite normal for a buyer to want clarifications, point out what they see as relevant omissions in the valuation methodology or to want to get their own appraisal.
As valuers we are always happy to give clarifications and if there’s a discrepancy between our appraisal and one that the other side of the transaction provide, we make an effort to find out why and where our methodology varied from the other appraisals.
FAQ 3. Do you prefer to be engaged by the buyer or seller or both together?
Answer 3: The way we value a practice doesn’t change depending upon who engaged us. We value objectively based upon the facts of the practice and our benchmarks and market comparisons not based upon the agenda of the party that engaged us.
However, being engaged by both sides of the transaction does sometimes allow the parties to feel more trust and confident about its impartiality and less suspicious about bias.
FAQ 4. Can any accountant provide a Vet practice valuation?
Answer 4: Some people will just go to their trusted family accountant to appraise a Vet practice. This, in our opinion, is usually a very big mistake. Your accountant is probably very experienced and trustworthy as an accountant but a vet practice valuation isn’t just application of accounting principles. To value a business effectively the valuer needs to have an intimate understanding of the industry they are valuing. They need to know what vets are paid as a market salary, have access to industry benchmarks for expenses and have access to information about comparative practice transactions/sales.
If your accountant doesn’t have this experience and exposure to comparative financials they are likely to miss vital pieces of information or apply an incorrect/ inappropriate multiple to their appraisal. An inexperienced valuer would value the practice using the same multiples/formula that they would use for a coffee shop or travel agency (– we see this regularly). Vet practices are viewed as low risk and as such the Multiple used should be higher than these industries.
COVID19 has highlighted a great reason to use an industry valuer. Most generic valuers have been valuing businesses lower in 2020 due to the business risks associated with COVID-19. As an industry though, vet practices are doing better under COVID-19 and as a result their value shouldn’t be downgraded.
When you are engaging a valuation company to do an appraisal on your vet practice you should ask for their credentials in this industry. How many vet practices they have valued? (We do 2 a week).
There are (in our opinion) only 3 companies that have the industry insight, understanding and experience to accurately to value a vet practice in Australia.
FAQ 5. What do you see as best practice to get a high valuation?
Answer 5: Here are 5 tips to getting a high valuation for your practice
- Profit: 80% of the result of business valuation is based on profit.
- Don’t work less hours per week or less weeks per year in your final years
- Minimise discretionary spending in your last years.
- Key Man Dependence: We use a lower multiple if more than 50% of the invoicing is coming from one vet. If you are preparing the practice for sale, you need to make sure you aren’t doing bulk of work, you need to prove its sustainable under other vet’s care.
- Personal Expenses: A seller also needs to keep good track of personal expenses that they are putting through the business.
- Rebates: keep track of rebates from drug companies going into personal bank accounts. Leaving the rebates off means a lower valuation, they really need it in their financials.
- Capital expenses: If done major renovation/fitout, massive purchases of equipment and then decide the next year they want to sell – it’s very hard to recoup the capital expense. In the last 3 years of selling -do repairs, maintenance but nothing major.