Stock Valuation FAQs23 Aug 2021 - Simon Palmer & Paolo Lencioni & Anne Lencioni - Vet Practice Sales Vet Practice Valuations
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?
A1. 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?).
A2. 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?
A3. 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?
A4. 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)?
A5. 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.