The Fog of Raw Financials

18 Oct 2022 - Simon Palmer - Practice Sales

For those of you unfamiliar with vet practice financials, you may be forgiven for thinking that if you’ve seen one, you’ve seen them all. That they all follow a similar structure or template, and that the practice’s income and expenses will always be labelled somewhat consistently from practice to practice. The truth of it is that the structure and quality of vet practice financials can vary enormously.

  • Vet practice structures sometimes utilise service entities which change how the financials should be interpreted.
  • Expenses that buyers/banks often want to see separately are sometimes lumped together.
  • Expenses are sometimes put into non-specific/non-descript expense categories, which are a shorthand that makes sense to the person doing it, but not to outsiders.
  • Personal expenses may be mixed into the financials, diluting the profit of the practice (personal insurances mixed in with practice insurances, personal mobile phone and travel mixed in with those of the business).
  • Many non-recurring expenses may be mixed into the financials, diluting the profit (one-off repairs, signage, website creation, etc.).
  • The owner may not be paying themselves market-rate rent, or a market-rate salary
  • Sometimes, other financial interests may be going through the same financial entity (investment property, other practices or businesses run out of the same ABN).

When we are involved as vet brokers, it is our job to work with the vendors and their accountants to provide clear financial statements to a prospective purchaser that best represent the practice and facilitate the sale.  But how can you navigate a practice’s financials when this isn’t the case?

As a potential buyer

If you are assessing practice financials that are not clear, it is almost always a mistake to become suspicious or upset. The seller has almost certainly not deliberately created a ‘fog’ to misrepresent the practice. Realise that:

  1. When an owner shows a buyer their financials, it is often the first time they have shown them to anyone outside their innermost circle. There are feelings of exposure, sensitivity and sometimes embarrassment that come with this exposure.  Be sensitive to this and don’t criticise the quality of the information provided.
  2. Sometimes, it is the inexperience of the buyer’s accountant with vet practice accounting that is causing the issue.
  3. A vet practice owner sometimes puts their head down to focus on practice operations and delegates and/or abdicates responsibility for the financial documents to their bookkeeper/accountant, who is allocating expenses, with little oversight and direction.
  4. It is not uncommon for raw practice financials to need clarification and expense add-backs, in order to be able to see the true profit. You cant always take financials on face value. They often need somebody with experience to help interpret them and you will possibly need to ask for more info from the seller.

While some owners are intimately aware of all of their practice’s figures, don’t put them on the spot with questions when you meet them, point to an expense line on a Profit and Loss that seems strange, and expect them to have answers.  Politely email any questions or necessary clarifications afterwards.

As a Practice Owner:

Often, for the sake of expediency, a practice owner will send out their raw financials to a prospective buyer to progress a deal, without realising that:

  • Buyers are often inexperienced with financials and may have questions and need clarifications. Don’t take their questions as a lack of confidence or a suggestion that the financials lack integrity.
  • How they name expenses and structure their financials is not how everyone does it.
  • A Profit and Loss report often shows a lack of profit for tax purposes, and this can lead an inexperienced buyer to believe there is a lack of profit, where profit actually exists in abundance.
  • A lack of clarity can lead to a lack of confidence. A seller should take the time to list the items in the financials that are non-business or non recurring and be prepared to spend time answering further questions on the financials as that way they probably will get a better price.
  • Sometimes, a buyer will be too embarrassed to ask questions when they don’t understand financials and will just give up.

Before you put your practice on the market, make sure that you take the time to ensure that your financials are up to date, clear and that you can account for all add backs. If you aren’t sure, send them to a practice broker or valuer for their opinion. While spending this time and expense may be frustrating and might slow things down initially, it will be worth it when your buyers are able to see the true value of what you have built.

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