Selling your veterinary practice is a huge milestone that can feel overwhelming. And, while every veterinary practice ownership transaction is different, after over 100 successful transactions, we have noticed a few common pitfalls and traps for the seller. Whether your exit is imminent or 15 years from now, here are, a few answers to questions you likely have that will teach you what to watch out for on your path forward.
1. Should I Give My Staff a Raise?
We have encountered many veterinary owners who give raises before selling their veterinary clinics. There is always a myriad of reasons — no raises in a long time, wanting to reward loyalty before leaving, and ensuring employees are taken care of are a few reasons. These are all admirable sentiments, but handing out raises can impact a transaction and purchase price.
A raise is appropriate if earned as part of a regularly scheduled event or if your staff members are paid below local economic or professional standards. However, any unexpected salary bump with a corresponding revenue increase reduces practice profitability and value. If you feel you need to reward certain dedicated employees, it is better to provide them a closing bonus out of the sale proceeds.
2. Can I Change My Accounting Systems?
It is best to avoid accounting system changes such as moving from cash to accrual accounting, re-categorizing expenses differently than you have, or changing accountants who then shift your structure. Buyers and their lenders analyze a practice’s financials and expect verifiable results. They assess cash flow to determine if the value is fair and where risks or opportunities lie. Expense inconsistencies and organizational shifts 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.
3. Should I Update My Employee Benefits Programs?
Unless you are reducing practice expenses, you should avoid making significant employee benefit plan changes for the reasons provided in #1 and #2 above. Also, keep in mind, continuing employee benefit plans is at the new owner’s discretion. Depending on benefit-cost trends, 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.
4. Should I Change the Amount on Inventory Kept on Hand?
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, and most contracts provide for a physical count of inventory beforehand. If there is an excessive amount or if the inventory has been depleted, the closing can be disrupted, or purchase price adjustment may be warranted.
5. Should I Purchase New Equipment or Sign Long-Term Lease Agreements?
The practice earnings or profits drive the practice value. Purchasing new equipment may increase a practice’s attractiveness to a potential buyer, but it is not likely to increase the practice value — unless the equipment generates new revenues, which leads to greater earnings. When you plan an exit, such investments only 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 the agreement details. While there are exceptions, the leases are paid off at closing in most transactions and 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.
6. Should I Change My Patient Hours Before Closing?
The practice value is based on how the practice is currently doing. Increasing revenue by expanding hours, increasing marketing, or providing more services adds attractant value for a buyer, but it does not add monetary value to the practice sale. Buyers aren’t interested in paying owners for the work they will do to make the potential real. Practice owners who start coasting by cutting back hours or limiting services provided risk impacting the practice value significantly, making for a very different exit than expected.
7. Should I Have My Practice Valued Before Having It Listed?
It is the owner’s responsibility to set the practice price. Ideally, this would come from a veterinary practice appraiser. However, an owner is entitled to put any price they want on their practice, although it does not mean a buyer will pay it. 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.
Similar is sharing the practice financial and operational data with the possible buyer before your valuation is complete. As the 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.
8. Do I Need to Make Repairs or Continue Facility Maintenance?
Whether the facility will be leased or sold, the buyer will most likely have a building inspection performed and test all equipment. When multiple issues surface, a buyer can start to wonder about the conditions of things 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 before the closing, resulting in purchase price adjustments. As you plan your exit, engage a building inspector and fix the issues long before the transaction process starts.
9. Do I Need to Wait to Tell My Staff and Clients?
This is an exciting and transformative event for all involved. However, sharing the news before it becomes real can create many issues for your staff, your clients, and your community and, therefore, 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, especially among associate doctors. 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 you find the right buyer. Once you locate a buyer, there will be plenty of time to answer questions and provide assurances before the transition happens. Have an announcement plan and use discretion during the preliminary stages.
10. Do I Need to Plan Ahead?
This is a very common mistake. Do not wake up one day and decide, “Now is the time to sell!” There are many details to prepare, including practice and real estate appraisals, building inspections, tax implications, and retirement plans such as cash flow, health insurance, and how you will occupy your time.
Additionally, if you do not have a buyer already, you may need to find one on the market. At Simmons, we have our buyer list with people waiting for a practice, but if none of them want to relocate 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 taking the time on your exit planning and then making a backup plan. The experts at Simmons help you make decisions knowledgeable 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. Find your regional team, and contact us today. Do not wait to start planning your exit from veterinary practice ownership.
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