Nikki Nitz, CPA, CMA
We’ve all heard the saying “buy low, sell high.” This is the perfect recipe for any investor. It is no different when it comes to selling your veterinary practice. But unfortunately many of you wait too long.
You want to sell at your peak levels of performance in order to obtain the highest value for your practice. The days of your practice “automatically” growing are in the past. You now have to work hard in order to see the practice growth levels of just a few years ago.
This work requires energy. All too often we appraise practices where the owner has run out of energy. They don’t have the desire to put in the effort to keep the practice producing at peak levels. Their attention may have shifted to other things they enjoy in life such as a hobby or grandkids. Maybe they are simply tired. No matter the reason if the attention and energy are not brought to the practice it begins to decline in value.
Practice value is driven by profitability and desirability. I recently valued a practice where the owner was proud as a peacock for increasing the revenues of the practice 7.5% from 2012 to 2013. The problem is that the expenses of the practice also increased resulting in no additional profits. Even though the revenues of the practice increased significantly there was little change in the value. Value does not come from revenues it comes from profits.
Some of you find yourselves needing to sell at a time in your life when selling is the last thing you want to deal with. Don’t be the owner who drowns in the valley. Have a succession plan. We can’t always predict what God has in store for us. Be prepared.
Three practices I have recently worked with are not necessarily drowning in the valley but they are certainly not selling at their peak.
- Practice #1: Owner recently remarried and shortly after the honeymoon started having medical issues. After two years of battling and a bone marrow transplant, he is a survivor. His practice however has declined in both revenues and profitability throughout the process. The longer the owner is not present in the practice the profits are declining and so is the value of the goodwill.
- Practice #2: Owner had a stroke 1 ½ years ago and has not been present in the practice since. The practice generated nearly 12% revenue growth this past year. Fantastic! However, the owner was better able to control expenses than the current staff causing profitability of the practice to suffer greatly from his lack of presence.
- Practice #3: The call no one wants to receive: two sons left to sell their father’s practice that has recently passed away. Neither son is a veterinarian. The doors of the practice have been closed for several days and the clients are requesting records be sent elsewhere. Every minute that goes by without a veterinarian in this practice results in a dramatic decline in value. Not only are no profits being generated, the value of the client records is being shifted to competing practices. This becomes known as a “fire sale” and certainly selling in the valley.
As we brokers have predicted, we are starting to see a shift in the market. For the past several years it has been a seller’s market. There have been many more buyers looking to purchase than there have been practices for sale. Much of this has been a result of the economic downturn. Practice owners who would have sold 2008-2012 have been holding on waiting for their retirement accounts to rebuild and their practices to build value. This has created a backlog of sellers.
The tide seems to be turning. We are experiencing higher levels of practices coming on the market. From pure economics the market eventually will shift to a buyer’s market. The question is when? I predict very soon. There are a large percentage of practices owned by baby boomers that will all be reaching retirement and looking to sell in the next 10 years. This is going to flood the market with practices for sale. Buyers are going to be able to cherry pick the practices that are in the best locations and are financially healthy. The best will sell. Many will not and the doors will simply close.
Often I have conversations with owners that tell me they want to hold on for just a couple more years. I encourage you to think long and hard about this decision. If you wait a couple more years are you at peak performance levels? Will the market be more of a buyer’s market then? Or might you maximize your value and chances of selling if you sell now?