While every veterinary practice ownership transaction is different, after over 100 successful transactions we have noticed a few common pitfalls and traps for the owner/seller. Whether your exit is imminent or 15+ years from now, here are a few to watch out for on your path forward, a list of what not to do.
- Give Staff Raises
We’ve encountered a number of veterinary owners who prior to selling will give raises to the staff. There is always a myriad of reasons – no raises in a long time, wanting to reward loyalty before leaving, and as a way to ensure employees are taken care of, etc. All nice sentiments but this can definitely impact a transaction and purchase price.
A raise can be appropriate if it is earned and a part of a regularly scheduled event or if your staff are currently being paid below local economic or profession standards. However, any bump in salary that is not planned for with a corresponding increase in revenues will reduce the profitability of the practice and thereby it’s value. If you feel you need to reward certain dedicated employees, it’s better to provide a closing bonus to them out of the sale proceeds.
- Change Your Accounting Methods
It is best to avoid accounting system changes such as moving from cash to accrual accounting, re-categorizing expenses differently than you have done recently, changing accountants who then shift your structure, etc. Buyers and their lenders will analyze a practice’s financials and they expect verifiable results. They will assess the cash flow to determine 1) if the value is fair and 2) where risk/opportunities lie. Inconsistencies in expenses and shifts in organization can make buyers and lenders wary about the reliability of the earnings projections. This could result in a lower offer price or worse, it could turn the buyer off the practice altogether.
- Make Significant Change to Employee Benefits
Unless you are reducing the expense to the practice, making significant changes in employee benefit plans should be avoided for the reasons provided in #1 and #2 above. Also keep in mind, continuing employee benefit plans is at the discretion of the new owner. Depending on the trend in the benefit costs, it may or may not be sustainable for the new owner post-closing. Receiving a benefit only to have it taken away could create friction between the staff and the new owner which could set everyone up for failure.
- Purchase Excess Inventory or Deplete Inventory
Almost all practice value determinations include an operational level of inventory in the practice price. This means that a “normal” inventory level must be present at closing. Most contracts will provide for a physical count of the inventory prior to closing. If there is an excess amount or if the inventory has been depleted the closing can be disrupted and/or purchase price adjustment may be warranted.
- Purchasing High-End Equipment or Engaging in New Leasing Arrangements
The practice earnings (profits) drive the value of the practice, period. Purchasing new equipment may increase a practice’s attractiveness to a potential buyer but it is not likely to increase the value of the practice – unless the equipment is used to generate new revenues which lead to greater earnings. When you are planning an exit, such investments may make sense if you have the time to produce the return on the investment.
On the leasing side, having lease agreements can create complications during a practice sale transaction, even when the lease “pays for itself” through details in the agreement. While there are exceptions, in most transactions, the leases are paid off at closing. They do not transfer to the new owner. Just because the lease agreement is transferable or assignable does not mean that the buyer will accept the transfer and the obligated relationship. Entering into new binding agreements during your exit planning should be done cautiously and with great attention to detail.
- Starting to Coast Before You Exit
The practice value is based on what the practice is currently doing. Having easy potential to increase revenues by expanding hours, increasing marketing or providing more services definitely adds attractant value for a buyer, but it does not add $$ value. Buyers aren’t interested in paying owners for the work that they will do to make the potential real. Practice owners that start coasting (cutting back hours, limiting services provided, etc.) can risk impacting the practice value significantly which can make for a very different exit that expected.
- Not Having Your Practice Valued
It is the owner’s responsibility to set the price of the practice. Ideally this would come from a veterinary practice appraiser. However, an owner is entitled to put any price on their practice that they want. Doing so though does not mean a buyer will pay it. While there is still the occasional fool, almost all buyers will test the price with their advisors, lenders and accountants. If the purchase price is not realistic, the negotiations can come to a standstill, with both parties now distrustful of the other. Additionally, for the seller, it’s a poor way (and poor timing) to find out that their practice (a major retirement asset) is not worth as much as they thought.
Related to this is sharing the practice financial and operational data with the possible buyer before your valuation is complete. As the owner/seller, it can be challenging to commit to a transaction before you have all of the details involved in your decision. Value the practice first, commit to an exit and then begin the process with your buyer. Resist jumping ahead in the sequence.
- Ignoring Facility and Equipment Care & Maintenance
Whether the facility is going to be leased or sold, the buyer will most likely have a building inspection performed and will test all of the equipment. When multiple issues surface a buyer can start to wonder about the conditions of things that are not so visible. It can be overwhelming to a potential buyer to realize that not only will they have the new challenge of business ownership but that they will also have to deal with the hassle of facility repairs. This can often add a new round of negotiations prior to the closing which often result in purchase price adjustments. As you plan your exit, engage a building inspector and fix the issues long before transaction process starts.
- Sharing the News Prematurely
This is an exciting and transformative event for all involved. Sharing the news before it becomes real though, can create many issues for your staff, your clients, and your community and for the buyer and the transition.
A pending practice sale can cause a lot of unrest and speculation among staff which sometimes translates into employee turnover. If clients find out, some may start looking for another veterinarian rather than wait and give a new buyer a chance. The practice needs to remain stable and financially healthy while the right buyer is found. Once a buyer is located, there will be plenty of time to answer questions and provide assurances before the transition actually happens. Have a plan for the announcement.
- Waiting too Long to Plan
This is a very common mistake. Don’t wake up one day and decide “now is the time to sell!” There are many details to prepare including appraisals (practice and real estate), building inspections, tax implications, and the retirement plans such as cash flow, health insurances, and what you are going to do with you time. Additionally, if you do not have a buyer already, you may need to find one on the market. We have our buyer list with over 450 people waiting for a practice but if none of them want to move to where you are, it may take some time to find the one who does.
Exit Planning Mistake Avoidance
A successful sale and transition is a life-changing event for all involved. It is worth making the time to plan your ideal exit and then a back-up plan or two. Make your decisions with full knowledge of the relevant facts and you will have a plan that once put into place, will get you where you want to be, when you want to be there.
David McCormick, MS, CVA and Sherry Everhart, RVT are veterinary practice appraisers, brokers and practice management consultants at Simmons Mid-Atlantic. They can be reached at 888.881.7084.