In this article, Mark Harwood, a Partner at Hazlewoods LLP, will give an insight into some the things that you should consider when selling a veterinary practice.
More options than ever before
For those practices owners considering selling, there are more options than ever before. We are seeing:
· More buyers for all types of practices. Corporate growth remains strong and there are sometimes appropriate independent buyers as well.
· Higher valuations in some cases.
· A greater need to take up to date advice than ever before because the market is changing so rapidly.
In this article, we will focus on selling externally although many of the principals apply equally to internal change of ownership.
In planning to selling your practice, some of the key questions to pose include:
· What attracts purchasers?
· How do I best position my practice to attract purchasers?
· Which purchasers buy which type of work? There are now more options for mixed practices, as well as those that focus solely on Small Animal, Farm or Equine work.
· How is my practice valued?
· How can I enhance the value of my practice?
· How should the sale be structured?
· What tax planning is best for me?
· Can or do I need to stay on working at the practice post sale? etc.
EBITDA is the main valuation technique and stands for Earnings (i.e. profit) Before Interest, Tax, Depreciation and Amortisation. A full market rent needs to be incorporated for the practice properties as well as ensuring that equivalent market rate salaries plus employer’s NI for the owners are factored in. One off/exceptional costs should also be excluded.
A multiple is applied to the EBITDA to calculate a Gross Enterprise Value, which normally means goodwill and equipment.
All too often the approach to calculating the Gross Enterprise Value is seen as formulaic. In practice, the reality is far from that. There is great sensitivity in assessing the underlying EBITDA, such as considering the current “run rate” turnover, whether costs are at a sustainable level and what market rate staffing costs should be incorporated for the owners etc.
Multiples vary due to a whole host of factors, e.g. mix of work, competition, variability of financial performance, reliance on the owners etc. What was an appropriate multiple one month is not necessarily an appropriate multiple today – the market is moving that quickly. A buyer may also decide to pay a higher multiple for one practice compared to a similar one elsewhere if they consider it be a particularly good strategic fit for their wider strategy.
Sitting down with your advisor to identify potential purchasers is crucial. Mapping out a potential purchaser’s existing practices can be helpful to assess what their buying strategy may be.
Structuring and tax
As a seller, your advisor needs to be clear with potential purchasers about what is for sale. This may sound obvious, but understanding the differences between a company sale and that of the business of a sole trade, partnership or LLP is paramount. We referred to Gross Enterprise Value above: this is only one aspect of a practice’s value. How other assets, e.g. stock, client debts, bank balances and liabilities e.g. amounts owed to suppliers and HMRC, hire purchase, bank debt, directors’ loan accounts etc will be dealt with and valued needs to be understood.
If the sale is not structured carefully, then the tax arising on sale may not be minimised as much as it could be.
Being supported in negotiations and understanding the particular nuances of how different buyers engage in this process and what it means for you is invaluable.
You should carefully consider what is important for you, i.e. consider the whole package, not just price. This can include:
· Length of transition working.
· Salary and other employment terms, e.g. holiday CPD allowance etc. – particularly important if you wish to stay working longer term post sale. This needs to be considered in conjunction with the EBITDA as a higher salary means a lower EBITDA.
· The rent you will receive if you plan to lease properties to the new business owner.
The market for buying and selling veterinary practices continues to evolve at a very rapid pace. We have touched upon in very broad overview only some of the key areas. There is no substitute for detailed and advice tailored to your and your practice’s circumstances.
N.B. This release has been prepared as a guide to topics of current financial business interests. We strongly recommend you take professional advice before making decisions on matters discussed here. No responsibility for any loss to any person acting as a result of this material can be accepted by us.
About the Author: Mark Harwood
Mark has been with Hazlewoods since 2003 and works solely with veterinary practices. Mark advises on a whole range of matters including profit improvement, tax planning, valuations, ownership change and buying and selling practices. He also regularly writes for the veterinary press and lectures to the profession.