21 Oct Building the dream: part three – planning the perfect exit strategy
Deciding to sell your veterinary practice will probably be one of the biggest life choices you ever make. If you have the luxury of time, as Vicky Robinson explains, planning your sale will make a considerable difference to the financial outcome …
DURING THE PAST few years, we have witnessed colleagues benefiting from what seemed an abundant and bottomless corporate buying frenzy, and those who exited during that time definitely enjoyed great rewards. We now see the multiples declining, which we knew had to happen, and we have heard plenty of “bubble bursting” warnings. Having said that, any of the corporates will still pay more than a fair price for a profitable and well run practice.
Whoever you decide to sell to, be it independent or corporate, it makes sense to optimise the value and pass on an efficient and high-performing business.
An ideal preparation period is three years. A good starting point, whatever your intention, is to get a market valuation, but you need to consider all your options.
You can sell to one of the corporates, which has many advantages, including financial. It might be that you have associates in the practice who would like to gradually take ownership, and a staged buy-out could be planned if this is an option. To make these decisions, it’s helpful to know your true current business value (goodwill and equipment), the estimate of a corporate offer (enterprise value) and how you could maximise that offer over time – and over what period of time that makes sense for you personally.
Assuming you have a three-year window, once you have your valuation, you need to get your personal and financial goals down on paper and explore your options for the future. From this, you can develop a timeline for your exit and, most importantly, consider life during the transition period, life after practice, or life after ownership – as you may well decide to continue to be a vet in your old practice.
How long are you willing to stay involved, and how is this going to feel for you? You might have to deal with selling your identity to some degree, a consideration most vets I deal with haven’t actually considered. At this point, it’s good to have someone to bounce these personal issues around with; a mentor, a trusted friend, a spouse or a business coach, as it’s always useful to be challenged and questioned by someone who is able to be impartial, objective and has your best interests at heart.
What’s it worth?
Your valuation is calculated and your business will be given an earnings before interest, tax, depreciation and amortisation (EBITDA) value – then a multiple calculates the sale value. However, caveat venditor (seller beware), this is not as simple as it sounds.
Traditionally, we would have seen a goodwill multiple of between four to five times, plus fixtures, fittings and equipment, and stock.
Corporate offers tend to be higher based on enterprise value – fixtures and fittings included. Also, you may have heard stories of the ridiculously high multiples the corporates offer, but unfortunately not all are true.
Each corporate buyer has its own way of calculating the EBITDA of a practice, which considers many factors individual to that corporate, such as collateral revenue sources, referral value, outside lab fees, out of hours or location, which affects their valuation model.
It’s also quite common for non-veterinary brokers and accountants to tell their clients what they believe the business value to be, without factoring in a salary to replace the owners and a rent (if the building is owned and you aren’t charging yourself a rental value for it). So, the business needs to be valued on what it would cost to run without you, replacing you with, say, a £60,000 to £70,000 salary, for example, and stripping out anything you may take personally.
Three years and counting…
Once this value has been calculated, a consultancy can also benchmark against its achieved corporate sales to give you a reasonable idea of how a sale might pan out in the current market.
It can then identify areas where improvements can be made in turnover, profit and in saleability and help you to create an exit strategy – this is different to a growth and sustainability strategy. You will have a clear roadmap to manage the practice for revenue and earnings growth over the next three years.
Committing something to paper and having a written and structured plan has a lot of power. Many times, we’ve had vets write a business plan with us – under duress – maybe not really looked at it, found it years later only to realise most of it happened. Of course, working your plan backwards and structuring actions into one-year and 90-day plans makes life much more predictable, measurable and achievable.
Your finances are not the only consideration in planning your exit strategy. Key to an easy, high-value exit is ensuring the practice runs independently of you as an owner and manager and makes it much more valuable to anyone considering a purchase.
If you are one of those owners who can take a three-month sabbatical and your absence goes unnoticed on the accounts, and team harmony remains, then you have achieved a very attractive and sustainable business model. To some, this may sound an impossible task. Of course, the larger the team you have the easier it is to achieve.
However, whatever the size of the practice, building a management team, delegating management responsibilities and sharing business information will not only create a truly independent business, but also provide a working environment that is attractive and empowering, which will also help with recruitment and retention.
Two years to go…
With the plan, people and processes in place, now is the time to invest in practice infrastructure. If you own the buildings, now is a good time to have a good clean-up and clear-out; repair cosmetic damages and carry out painting and landscaping.
Obviously, it wouldn’t be wise to spend unnecessary amounts you won’t see a return on, but ensure the practice is presentable and easy to maintain.
Make sure there are no environmental concerns (buried gas tanks or x-ray chemicals). A simple thing, such as forgetting an asbestos certificate (if relevant), can cause undue delay on completions.
Resolve any real estate planning and zoning compliance issues, as these might impact transfer.
Ensure any facility lease has a life of at least five years (a corporate acquirer would prefer a 15-year lease normally), is renewable and is transferable. Overseas, corporate (SAS and SIPP owners) and absent landlords can be particularly difficult to negotiate with – you will need plenty of time.
Your team can help with updating protocols and standards, and you can check your equipment is maintained and serviceable, and you have a sound plan on charging correctly for its use. Check equipment leases for duration and for pre-payment penalties.
Finally, make sure employee contracts are up to date with latest legislation. Be aware of any onerous or restrictive clauses, and that you have secure assignable, non-compete agreements with associates.
Take advice from your accountant, who will probably suggest you consider incorporation to a limited company if you haven’t already done so – this can have considerable tax advantages, but timing is important; the earlier the better, perhaps?
One year to go…
Review your own personal financial needs following the sale with your financial advisor and update your valuations.
Ensure you have factored in post-sale tax and costs associated with the sale and be sure preparing for sale at this time is still the right thing for you.
You might now consider a commercial property valuation for sale and rental if you own property. Currently, you should expect between seven and eight per cent of the property value as an annual return, so many see this as a sound pension investment.
It might be that you’d prefer to take your money out and use it elsewhere, in which case if the buyer doesn’t wish to own the building, it’s not difficult to find investors who are interested in acquiring commercial property with a reliable tenant.
Engage an experienced veterinary broker who knows both the market and the buyers. This massively reduces the stress of negotiation and usually increases the sale value greatly.
Check and compare the brokering fees and what is included – like most things, the simpler the better. With good planning, the actual sales process can be complete in three to four months.
Maximum financial value comes from high turnover and good profitability. However, ease of transfer and good business systems will improve the final figure and reduce the stress of sale.
Of course, at the end of this three-year planning process of practice improvement, you may find you have a highly profitable business that is run by your happy team, you aren’t working very hard at all and you can reap the benefits of what you’ve created for a while longer.
By Vicky Robinson