In this interview with Dr Tony Thelander we discover a little bit about the business of selling a business…
Hi Tony, Thanks for being apart of today’s interview. Lets start with a bit about yourself… How/When did you get into practice valuation?
After a lifetime of poking my nose into other peoples’ practices, building 2 hospitals myself and 10 years as one of the ASAVA’s Accredited Hospital inspectors, I began doing part-time consulting for Dr Jim Martin (the founder of ValuVet) in 2002. Jim retired in 2006 and sold me the business which I then took on as full-time and still run today.
When is it worthwhile to perform a practice valuation?
The most common call for our valuations is for succession of veterinarians who wish to retire or to bring in partners but other common calls are for Family Law reasons (divorce), practice mergers, finance approvals from banks, bench marking purposes and for corporate restructuring.
I’ve heard people say a PV can be done by multiplying an annual profit by 3-5. Why is this inaccurate and what else needs to be considered?
What is involved with a PV?
Most valuation methodologies involve a capitalisation of a profit figure but there are as many variations on this theme as there are valuers, it seems. In addition, there is a great deal of subjectivity in ‘Cap Rates’ and the trick as I see it, is to narrow the assumption gap by actually visiting the practice and also valuing goodwill and equipment as separate assets because they have different returns on investment. This said, depending on what valuation methodology you adopt, Cap Rates of 3 to 5xs profit for our industry are used commonly by many valuers – I would venture 3xs in the country and 5xs in the city but these are rules of thumb and very subjective – there are so many factors that need to be considered in each situation.
What is the difference between having any accountant value your practice vs a vet or veterinary financial specialist?
Most accountants are qualified to perform financial valuations on businesses but they fall short when it comes to industry knowledge, however accounting knowledge is vital to the valuation process. ValuVet solves this problem by having a veterinarian as a consultant to assess each practice and then engaging a highly experienced (in the industry) charted accountant in the accounting considerations – combining the best of both professions!
What does the perfect practice look like?
No such thing! But I have seen some really good businesses. The most profitable practices are the ones whose owners have a vision for the practice and apply good business systems to run them. Good businesses seem to be able to retain staff and have no trouble attracting high quality employees. In addition, some practices (by accident or design) are well located geographically and in respect to demographics and competitors. One of the most profitable practices we have values was surrounded by 4 corporate practices.
Is buying a practice like buying a house? Should a buyer look for the ‘worst business in the best area” to find value for money?
Yes, there are some similarities between purchasing a business and purchasing a house and the secret is to find that hidden gem. The best practices to buy are those that have the potential to grow to the next level so these may be (often) small practices that are well located and sitting in a good demographic area – they may be run as single vet practices and often by senior veterinarians who may be nearing the end of their career – often these practices are relatively poorly equipped, poorly marketed and have only a basic (undifferentiated) service offering. Best of all, they may still operate on a card system. Practices such as these may not be attractive to corporates but have huge potential for an energetic young veterinarian to seize the opportunities and develop the practice to its full potential.
If you want to buy a practice is it possible to find a practice or are all practices being bought by large groups now?
Most privately owned practices change hands internally by bringing in a partner when the senior veterinarian wishes to retire – in this case, the young vet is often given every assistance to join the partnership because of the need for ‘fresh blood’ and the need for succession. Approximately 80% of practice sales change hands in this fashion so the practices never get to go on the open market. The remaining 20 % of practices sales consist of corporate purchases and a percentage of practices can end up on the open market because they have no internal successor to buy in and they do not fit the profile for corporate purchase. There are a number of these practices currently on the market and most are reasonably priced, however often they are in less desirable locations with respect to the demographics of potential purchasers.
How important is the staff in a valuation, and how does a change of ownership effect staff retention?
When you sell a practice, you sell the staff as part of the business. Some practices are almost entirely run by staff so inheriting the staff with the practice can be very important in this instance.
How do staff react to a practice sale?
We are all human and none of us likes change but my observation is that most staff will value their jobs sufficiently to at least give the new owner a go. A good vendor will go in to bat for his team in a practice sale scenario. Invariably there are always one or two casualties among the old staff members who cannot cope with the change of new ownership, new processes, new computers etc. In short, the responsibility for staff attrition lies with the new owner and his/her ability to manage staff and their expectations.
Thank you Tony!
Tony will be one of the educators at the Exit Strategies Day in Sydney on November 4th. He will be joined by APL accountants, Meridian Lawyers, Practice Sales Search and Vera Pickering to discuss how to prepare to leave practice ownership and what comes after a lifetime of pet and client services. Book Now to attend this one-day event