Are Veterinary Practices Still Selling?
We have all heard that corporate acquisitions have been low for more than a year now, but does that mean that it will be difficult for you to sell or retire if you own a veterinary practice? And what does it mean if you are currently an employee but you want to get a foot on the ladder of business ownership?
We continue to value more and more veterinary practices each year, the appetite for acquisition still exists – but you may have to reconsider the way that you achieve this because “walk in walk out” sales are much more rare these days.
A “Walk in walk out” sale occurs when the seller sells their entire business, gets all the money upfront and has no ongoing commitment to carry on working in the business anymore. Traditionally this has been happening quite a lot in the profession until recently. The balance has been tipped by the simple fact that it is extremely rare to find a GOOD practice that values for under $1.2 million. Approximately 1.2 million dollars is also the amount that a specialist veterinary lender will loan to someone who wants to buy a veterinary business. So it’s not the case that younger vets do not want to buy a practice, it has to do with the fact that the traditional form of succession that the profession has been accustomed to is changing because private buyers cannot raise the finance for this type of purchase.
Is this a bad thing? Well it can’t be, because we are dealing with a situation created by the fact that veterinary businesses have become a good investment and are very valuable. It’s good to be working or investing in an industry that has high value. It does however mean that the veterinary profession has to change their mindset about the direction of the profession in the future.
Most of the valuations we are currently doing are for veterinary professionals to buy PART of a practice – in other words they are going into business together with the original owner. This means that the original owner cannot retire immediately, but it does mean that they have ongoing support from an enthusiastic business partner who is actively involved in the business and can roll up their sleeves when things get busy or staff are absent. Note that is is a very different scenario to remaining in the practice for 3 years after a corporate buy out, where the main pain point is that a corporate partner does not roll up their sleeves and do the hard yards when things get busy.
With the increased compliance requirements particularly over staffing and the somewhat unpredictable nature of the labour force these days, we feel that this is a key driver in moving practice owners to sharing their business and responsibilities with more people. Basically, its time to accept that we have to start working together and the one man dictatorship style of business is becoming too hard to sustain.
With this change, we also have to accept that the types of risks we face in these sorts of acquisitions are different. The main new risk being the ongoing relationship between the different owners and this becomes one of the most important things in the business. But another very important risk that the profession has suffered from starts to vanish – and that is the risk of “key person dependency” which is prevalent in most one-person owned practices these days.
The ongoing relationship between the parties can be mitigated and managed by a few really important things. And with these in place higher returns and profits for sustained periods of time can be achieved:
- With this type of succession, both parties need to be good operators. So if you are selling, make sure your incoming partner brings something great to the table to drive the business forwards. Likewise if you are buying into a practice, make sure you buy into one where the original owner is a great operator and can run the business at high profit margins – you don’t want a passenger.
- Set clear rules around how the relationship will be managed. You need to have this discussion before even contemplating a buy/sell. Sit down together and figure out what the important things will be that could break down the relationship. For example will there be a required minimum number of hours worked for each partner? What will be the wage/hourly rate you agree on for partners?
- Once the above is decided, get it all written in a shareholders/partnership agreement
For those of you who are interested, we have a recording in 4 parts of a very comprehensive webinar series dealing with this. It does take a few hours to go through, but if you are looking at investments of over $1m, its worthwhile to get to up to speed on this type of succession plan:
Simply go to aplaccountants.info and click on ‘Learning Lab’. You will be prompted to login or sign up. Please note that it is preferable to use an email address with your business domain. The free ‘Learning Lab’ module contains popular content and may be updated at any time. Currently, our Learning Lab module contains our four part Succession Planning series from May 2023 (Part 1 – Ultimate exit plan and strategically structuring, Part 2 – Essential tax considerations including Capital Gains Tax, Part 3 – The Ins and Outs of Valuations and Part 4 – Potential problem areas – Sale contracts and shareholder agreements).
