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Deciding To Sell Your Veterinary Practice?

Deciding To Sell Your Veterinary Practice?

August 05, 2022
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You have had a dynamic veterinary practice for several years, but after consultation with your family, spouse, or business partner, you have decided it is time to sell. It is a big step, both an exciting and frightening life-changing event, and the decisions you make from here on out can be vital to getting the most out of your sale, financially and emotionally.

 

WHY ARE YOU SELLING?

There are numerous reasons why you might choose to sell your practice. Maybe you are interested in a career change or have decided it is time to retire and explore those hobbies you enjoy full-time. Or, selling your practice might not be something you necessarily want to do, but in life, things happen, and you have extraneous circumstances appear. These may include divorce, incapacitation, financial struggles, health problems, substance abuse, or other unforeseen dilemmas.

 

VALUATION OF YOUR PRACTICE

The first thing to assess is how much the practice is worth. Unfortunately, this is not a simple answer, but it isn’t rocket science either. In veterinary practice appraisal, fair market value is the standard of value commonly used in tax matters. Learning the value of the business requires calculating the terminal cash flow. To calculate the value, determine the net amount after asset disposal (the elimination by selling or scrapping, primarily, long-term assets that contributed to generating profits, for example, technology, machinery, company vehicles, etc.), and all other expenses and taxes get paid. Business owners use one of three fundamental approaches: income, market, or asset.

 

INCOME APPROACH

The most popular approach used is the income approach. This approach, based on the cash flow, determines the value of the practice based on the profit. Cash flow is an excellent indicator of future growth and provides potential buyers insight into the level of risk. There are three types of risk. 

 

Size risk typically affects smaller businesses. The smaller your business is, the harder it is to sell and the easier for a buyer to walk away or walk away without paying in full.

 

Geographic risk shows the impact of the practice on the local economy.

 

Keyman risk determines if the business relies too heavily on a solo practitioner or a small group who creates significant value.

 

MARKET APPROACH

This approach, also called the comparable analysis approach, is a complex method that assesses the value of the practice based on similar competitors in your area. This technique is applied to determine a price tag to attach to the veterinary clinic. The challenge of using this approach is that most acquisitions are private, and accurately evaluating the practice can be somewhat of an obstacle.

 

ASSET APPROACH

This approach uses the net asset value (NAV) to evaluate how much the current tangible assets are worth. And this includes goodwill, the fair value of a business less the market value of its liabilities. Goodwill is an intangible asset determined by the reputation of the practice, the clientele, and future estimated customer satisfaction.

 

EBITDA – Earnings before interest, taxes, depreciation, and amortization.

Aside from profitability, EBITDA has the potential to show the ability to repay debt. EBITDA provides a more realistic number for a potential buyer to examine profitability, excluding rent and other factors that won’t influence profitability.

 

EXTERNAL AND INTERNAL FACTORS THAT DRIVE VALUATION

 

TYPE OF PRACTICE

Multiple extenuating factors drive the valuation of your practice - one of those is the size of the animals treated. Studies indicate that “small animal” practices are usually the most valuable. You might think this doesn’t make sense since large animals are more expensive to own, but a larger volume of smaller animals passes through veterinary practices. Large animal practices require a more specialized clientele like farmers or equestrian enthusiasts.

 

PHYSICAL ASSETS

The type of physical assets within a practice plays a significant role in its valuation. An investor would be more interested in a business with modern furniture and up-to-the-minute equipment and amenities. In time, furniture and medical equipment may sooner or later need to be updated. But, if the practice already has new amenities and equipment, it lowers the risk. It can be costly to modernize an office.

 

LOCATION, LOCATION, LOCATION

The hyperbolic expression related to real estate – when investing in real estate, there are three things to consider: 1) Location! 2) Location! 3) Location!

 

Location is vital when it comes to real estate and managing a business. A practice in or near an urban area with sufficient traffic and shopping opportunities is desirable for an interested buyer because there is a confidence that there will be regular visitors to the practice.

 

Other factors might come into play like level of competition in the area, demographics, transferability of both practice and professional goodwill, quality of the staff, and whether they may continue with the new management or leave. These are concerns that a business owner should take into consideration. Some things are out of your control, but being prepared and having a contingency plan for possible obstacles can lessen the stress and even unexpected costs that could appear.

 

POTENTIAL BUYERS

With the value of your practice and price identified, it is time to find a potential buyer. Selling your business is not easy, but it doesn’t have to be a nightmare either. If you have a partner, they might be interested in purchasing your stake in the business. You might also get approached by private equity groups looking to diversify their real estate portfolio or a veterinary network interested in expanding. According to Vetport.com, corporate groups run over 15 percent of veterinary practices in the US. And it is estimated that more than 50 percent will be corporatized by 2030. These are significant statistics that veterinary practice owners should pay attention to because it is fair enough to argue that most owners are experts at treating animals but not so much when it comes to the valuation of their practice. Corporate groups acquire businesses for a living and understand how to work the numbers in their favor. Veterinary practice owners should consider consulting an accountant or other financial advisor and understand how the process works.

 

LETTER OF INTENT

Once you have a potential buyer interested, it is optimal to draft a letter of intent (LOI), establishing a line of communication between you and the interested party. The LOI is not a legally binding agreement indicating a sale but can protect both parties from soliciting options from another buyer until a specified amount of time has passed.

 

DRAFTING THE CONTRACT

You have spent considerable time and resources preparing to sell your business. Now it is time to have a contract drafted. This part of the process is essential. It is also the point where you get the attorneys involved. The contract is a legally binding agreement between two parties, you and the buyer. Contracts can become complicated so having a professional guiding you through the process is critical.

 


** OTHER FACTORS TO CONSIDER

How to present this sale to your staff?

Are you prepared emotionally for giving up what you worked so hard to build?

Sell 100% of your practice today or sell to an associate veterinarian over a period of years or some other method that would help you transition comfortably, benefitting you both financially and emotionally.

 


Important Disclosures

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Marketing Solutions

Tracking #: 1-05308052

 

Sources:

IRS - Veterinary ATG

How to sell your practice (veterinarypracticenews.com)

Sell Now or Later? | Today's Veterinary Business (todaysveterinarybusiness.com)

7 Steps to Selling Your Small Business (investopedia.com)

Close or sell your business (sba.gov)

4.48.4 Business Valuation Guidelines | Internal Revenue Service (irs.gov)