01 Sep Selling up or passing it on: what are the best options?
Making the right choices when selling on a veterinary practice is never easy – especially against the backdrop of a pandemic that has had such seismic impacts across the sector. But there are still options for those planning their exit strategy and here Vicky Robinson takes a close look at what those options are…
The question posed in the title can have very differing answers, depending on who you are asking.
With so many stakeholders to consider in this sale or succession equation, how do you go about making the right decision?
Who takes priority?
 The incoming partner or director buying the shares
 The outgoing retiring partner or director selling their shares
 The incumbent partners or directors faced with the decision of succession or sale
It has been an interesting and challenging year so far, and no one could have predicted the events and circumstances we have found ourselves in. During the past few months we’ve heard varied comments from practice owners: “I’d walk away in the morning if someone would give me a few quid for it”, “I’m pleased I sold when I did” and “my team have just been amazing and June was our highest turnover month ever”.
You may fall into one of these camps, or have had a completely different experience, but I certainly believe there can’t be many more resilient and robust businesses than veterinary to be in right now (except perhaps personal protective equipment and Zoom). While I’m sure you could pick up a small hotel for a bargain price, veterinary practice is still a great investment.
The bubble might have burst, but it’s still bouncing around
We experienced extraordinary sales figures in 2018, which we know are unlikely to return, but we have five strong acquirers in the UK – some active across Europe. As I’m writing this at the beginning of August, we are experiencing a buying wave that happens from time to time as the corporates seek new funders themselves. This will quieten in the autumn, but who knows what’s next, and one thing is for sure, if you have a reasonably sized profitable business, you’ll be offered a good price for it.
But how do you decide what is best for you personally? First, let’s look at the options.
In the traditional (pre-corporate) world, multi-owner independent practices would take in a new partner or director when a senior vet wanted to retire. This was a great opportunity for a younger vet to attain ownership, secure future income and hopefully long-term career satisfaction.
However, while this scenario may sound philanthropic, it’s the one I’m having more and more “conflicting” conversations about.
Unfortunately, partnership opportunities are few and far between now, given the high percentage of corporate ownership, leaving fewer practices to offer them. When a directorship or partnership opportunity does arise in a practice, the current owners are often forced into the dilemma of making a decision to sell the shares at “market value” at four to five times earnings before interest, taxes, depreciation and amortisation to the incoming partner or sell out completely to a corporate for a much higher multiple.
For the outgoing partner, succession at the lower price may not be the “best” option, depending on how important or necessary money is at this stage of your life. There can be cases when opting to sell shares to new or existing partners, as opposed to a corporate, could mean the difference of several hundreds of thousands of pounds or maybe even a million or more.
No matter how altruistic you might be, the chances are you have family who might see things differently.
Don’t get me wrong, there are still (a few) vets who will say they don’t need the money, and they want to give the younger vets the chance that they had, which is more than heart-warming. The less heart-warming and contentious conversations are when the outgoing vet could really use that extra corporate money in their pension pot, having worked hard for many years, but being forced to realise very much lower value by agreeing to a succession plan with the younger partners. Of course, the younger partners who block the corporate sale do so for their own very good reasons. They may have 10 or 20 years left to work and don’t want that to be in a corporate environment.
The other choice may be that these younger partners could agree to a corporate sale, bank their share of the money, serve their time and move on or start up again. That is a big decision for most, and takes enthusiasm and energy, together with the confidence and knowledge to accomplish.
Whatever the decision it is rarely a clear win-win situation, and some clear, impartial and pragmatic advice from a good consultant or trusted advisor with the interests of all concerned can be invaluable.
Share and share alike
If the thought of selling your practice to a corporate really doesn’t appeal and yet your team can’t raise the finance to buy you out, another option is a vendor-initiated management buyout (VIMBO), which could be a fruitful alternative for those looking for a business exit strategy.
A VIMBO is virtually an identical process to a management buyout, with one key difference; the vendor (selling company) is the one making the approach to the management team rather than the other way around. A finance package is typically proposed by the seller to allow the transaction to complete. This often involves using some of the business’ cash resources as an immediate lump sum before using its future profits to fund the purchase on deferred terms.
The purchaser of the business in a VIMBO transaction would normally be a newly formed company (“Newco”), which would satisfy the purchase price with a combination of cash and loan notes issued by Newco to the retiring owner. The cash element of the purchase price might be raised by Newco by a third party lender, such as a bank, and could be secured on book debts or other assets of the business. Sometimes, the business itself has cash reserves that can be used by Newco to fund – or partially fund – the cash element of the consideration.
The loan note element would usually be payable over three to five years depending on the cashflow requirements of the business.
The sale qualifies for entrepreneurs relief so, as the retiring owner, you would pay tax at 10% on the sale proceeds. This is far more tax efficient than the owner retaining the business, and extracting income through salaries and dividends from the business post-retirement. However, in order that the retiring owner can enjoy this favourable tax treatment, the VIMBO transaction will require prior clearance from HMRC.
The benefits of a VIMBO are evident; a company owner can initiate the deal on his or her terms and immediately realise cash. Going forward, their financial risk in the business is minimised, yet the value in it can be crystallised through cash or loan notes that continue to be paid for a designated number of years – enabling you to maintain an equity stake. The upshot of which means you can share in any future profits and oversee the succession of the business to the management team.
Often used by retiring business owners as a way to pass their company down to the next generation, sellers can also take advantage of entrepreneurs’ relief should they meet the criteria and receive clearance from HMRC. This not only makes a VIMBO a tax-efficient way of disposing of a company that is no longer required, but also allows for a smooth transition process between the current and incoming owner.
Your practice might be somewhat smaller than the ones commanding these great figures – a couple of vets or just you and some part-timers. In the current market it’s less likely (although not unheard of) that turnover below £500,000 a year will get significant corporate interest.
However, there’s almost always something to sell so, no matter how small the business is, don’t just close it – it could be an opportunity for someone. Other buyers are out there and we’ve had gratifying experiences “matchmaking” start-ups, start-agains and entrepreneurs with these smaller practices.
On that note, we have seen enquiries from new start-ups rising considerably over the past couple of years. Three years ago we’d get probably two to three a year that were serious, but now we speak to more entrepreneurial vets than that each month and we know many more are about to spring up independently around the country.
How do you know what to do for the best?
Selling up or passing it on is probably the biggest decision you will make in your practice ownership lifetime.
I find most vets I speak with are almost completely selfless; worry about what will happen to their team (who are like family to them) and their clients (who are their friends); and put themselves last, despite having worked far too many hours for nowhere near the financial reward other types of business owners would expect. They didn’t become a vet to make money and find it uncomfortable accepting it.
If I can offer one piece of advice it would be this – make sure you investigate all your options before dismissing any; make an informed decision rather than an emotional one.
Lack of financial awareness, knowledge of business terms, legal jargon and negotiation can seem daunting and outside the comfort zone.
If this is you, or you have other concerns or difficult decisions to make, it’s important that you look at all the options available to you at this time, think them through carefully and talk with your advisors; there may be more than you’d considered. What’s important to remember is you only get to do this once, so make sure you get the right outcome.
If you find yourself in a dilemma over your best exit options, we are always happy to talk to any independent practice owner, and give free and impartial advice. We’d love to hear from you and help the independent community stay strong.
By Vicky Robinson
Special thanks to VBJ – pages 8-12 in their September 2020 edition.