Monday, 15 October 2018
VetScript Editor's pick: October 2018
All business owners should think about succession planning, but few do. Matt Philp gets tips for you to get started.
When it comes to succession planning, Margie Murray is very much the exception that proves the rule. The Practice Manager at Mosgiel-based Murrays Veterinary Clinic has been actively discussing the long-term future of the business with her co-owner – and husband – Donald, a mixed animal veterinarian, for several years. Rest assured, there will be no last-minute panic in the Murray household when they eventually make the call to retire.
But that level of preparedness is rare. As Margie points out, veterinary practice owners are constantly being reminded by their business advisors of the importance of planning for their eventual exit, but few heed that wise counsel. It’s a puzzle. “We know we should be doing it, so why aren’t we?”
The disconnect intrigued her. So when Margie, whose background is in business administration and financial management, decided a few years ago to embark on a Master of Professional Practice, she made it the focus of her thesis – namely, ‘What are the barriers to succession planning among small to medium-sized New Zealand businesses?’ In the process of answering that question, she gained plenty of insights on how veterinary practice owners ought to approach succession planning – the when, how and why of it.
As the title of Margie’s thesis suggests, this is an issue that goes well beyond the veterinary industry – in fact, it bedevils most trades and professional industries (although, not accountants, you suspect). Dentists, pharmacists, GPs and others all tend to avoid thinking in any detail about what will happen to the businesses they’ve spent their lives building, in many cases right up until the eve of retirement.
“It’s pretty common for most professionals to be poor at it,” says Shaun Phelan, National Manager of Business Advisory Services for Medical Assurance Society (MAS). “That’s because they spend most of their time being professionals, rather than thinking about their businesses and things like succession planning.” Margie’s research, which involved extensive interviews with business owners in the veterinary and various other industries, suggests there are three major barriers to succession planning, with concerns about staff being the first stumbling block.
Owners, she says, can doubt their employees are capable of taking on ownership or shouldering more responsibility. Lacking that confidence, it’s difficult for owners to step away from the day-to-day operations to work on, rather than in, their businesses.
As well, “owners may have a conflict between being a good employer and achieving what they want for themselves,” she adds. “They feel that if they plan an exit strategy, they’ll be letting their employees down.”
A second barrier is an inability to let go. “For many people, their business is them, and they are the business. There are a lot of emotional and psychological barriers to saying, ‘I don’t want to do this any longer’.”
Lastly, there’s the problem of a lack of business knowledge among potential successors. As well as interviewing owners in the 50-plus age range, Margie canvassed younger veterinarians and other professionals, and found that many don’t have any understanding of business systems, the amount of compliance involved, the cost of running a practice, and so on. “There also seems to be a lack of support in the industry for people who are wanting to buy in to a business, or to start their own. That came through very clearly.”
On the question of a lack of business nous among younger veterinarians, Margie wonders if the veterinary school programme is already too packed to squeeze much more in there. But, she says, “there is an opportunity post-graduation to look at how to train people in running a business” and, as of 2017, there is a Student Veterinary Business Group that aims to help fill some of those gaps (see VetScript April 2018).
Margie also mentions a dwindling appetite for ownership. She thinks young veterinarians are iffy about the extra responsibility and work burden, and are reluctant to take on more debt.
The typical structure of veterinary practices doesn’t necessarily help, according to Shaun. "Often you’ll have a practice with a small number of owners compared with the total staff of veterinarians – say a 14-veterinarian practice with only two owners. For a young veterinarian looking to become a business owner, a 50% share in what is quite a large practice can have a significant cost.”
Yet veterinary practices are still being bought and sold on a regular basis in this country – albeit, increasingly by corporates. So why is failing to plan for succession such a problem?
“Because if you don’t plan, you’re not going to get the best price for your business,” answers Margie, who stresses that it’s all too common for a seller’s expectation of value to be very different from a potential buyer’s take on what the business is worth.
There are also emotional consequences to not preparing. “If you haven’t thought about having something else in your life, it becomes very scary to suddenly leave a job you’ve enjoyed.”
Shaun says it’s best to think of succession planning as being about nurturing business wealth. As opposed to exit planning, which is something you do closer to retirement, succession planning entails “building up your business, keeping it current, making sure it has good performance and that you’re growing the value – and, in particular, growing it so that you can walk away from it and it maintains that value”.
That’s a crucial point. “A lot of professionals think their business can’t survive without them. But if it totally depends on them, then their business has no value. Succession planning is about planning for a day when the business is successful without them.”
When should you start planning, and how should you go about it? It begins on the day you become a business owner,” he says. “You should always be thinking about the future of the sector. How is veterinary practice changing? What’s happening in the marketplace? You have to keep up. You also need to be thinking about what is going to be happening in 10 years, because that’s what you want to set up for – it’s not about the now, it’s about the future.”
He notes that New Zealand has an ageing professional population, and a significant number of practice owners will be retiring within the next decade.
“You should be saying, ‘Who are the future business owners going to be?’ If that is young veterinarians, then what is going to attract them to business ownership?” Tweak your business accordingly to make it more appealing.
Note, too, that succession planning shouldn’t be focused solely on retirement. Health scares, the death of a business partner and other major life events can all upset the best-laid plans.
“You need to address what you need to do if something like that happens, and account for it in your practice agreement,” says Shaun. “You should have a structured process about what happens, when.”
Margie stresses the need to start having conversations with potential successors as early as possible.
“If you have a prodigy in your practice, or more than one who is showing strong interest, you should have a very clear communication about what you want to achieve. For example, if you’re thinking that you want to get out of the business in five years, then sit down together and plan what is going to be achieved at what point during the next five years, so there is clarity of expectation. Have your business advisor, accountant and your lawyer involved to make sure everything is written down.”
And, remember, it’s not just about dollars and cents. “You have to have a life plan as well,” she says. “If your whole life has been about your veterinary business, you need to think about something else you want to do and achieve in your life. Check your lifestyle goal, plan for that, and everything else will follow.”
Succession planning tips from Shaun Phelan, National Manager of Business Advisory Services, MAS.
For business owners
Succession planning should be part of your strategic planning and starts by considering questions such as:
- do you have any practice owners or key staff who are looking to retire in the next 10 years?
- do you have a plan in place for this transition?
- have you planned for unexpected events, such as the death or permanent disability of one of the principals, or a breakdown in the relationship between the working owners
Next, make sure that you have a current practice or shareholder agreement in place that covers such events, as well as clearly stated rights and responsibilities of the working owners.
Then think about what would make your practice more attractive for a future potential buyer.
Here are some questions to prompt your thinking:
- If yours is a small practice, should you consider amalgamation/merger with other nearby practices?
- Are the practice premises modern, and do you have an equipment replacement plan in place to ensure the practice is not run down?
- Is your practice changing with the needs of your clients and patients, your profession and technology advances?
- Do you have good staff and management structures and systems in place?
- Has the practice gained accreditation standards?
- If your potential successors are younger veterinarians, have you considered their specific needs and constraints should they become future owners?
For potential buyers
MAS wants to encourage and support its members to become business owners. If
you are thinking about veterinary practice ownership, here are a few things to consider as part of your due diligence, before you look at the financials:
- Do you understand what you’re looking to purchase? Is it an entire veterinary practice, a partnership, or shares in an existing company that owns the practice?
- If it’s a shareholding, will it be an equal share with others, or a minority or majority interest?
- If it’s not sole ownership, what are the rights and obligations of the working owners? And does the partnership or shareholder agreement include the following?
o How each owner’s share in the practice is determined.
o Financial arrangements, including working owner remuneration and profit distribution.
o Governance and management of the group and decision-making processes.
o Exit and succession planning arrangements in the event of a sale, the death of a principal or a compulsory exit through default.
There are some other things to think about:
- What is the reason for selling? What reputation does the seller have, and what will they be doing after the sale?
- Are there any significant competitive threats and how is the practice placed to withstand them?
- What are the growth opportunities?
- Are leases, major contracts, franchise arrangements, etc, about to expire?
- Does the client/animal base, together with the existing type of veterinary services provided, suit your personal requirements? How current and accurate is the client and animal register?
- What management structures and systems are there? Who has what responsibilities and decision-making authorities?
- Is the physical layout of the practice modern, practical, efficient and attractive? And is the building in good condition and well maintained?
- What is the general attitude towards compliance issues in the practice? Are current statutory compliance requirements being met, and is the practice accredited?
- Will the current owner stay on in the business for a while to show you the ropes?
There’s a lot to consider! And once you are comfortable with these aspects, you will want to know that you are paying a fair market price. It’s then time to take your veterinarian hat off and put on your investor hat.
Each transaction will have different value factors for a buyer (eg, location, work flexibility and security, ability to shape services provided, practice in a specialist field). The main thing that will help you determine the value of a practice is not what you could earn working as a veterinarian, but what you might expect to get on top of that.
The MAS HealthyPractice service provides information to help with strategic and succession planning together with practice and shareholder template agreements. If you have any questions on practice ownership, give the MAS Business Advisory team a call on 0800 800 627 or email firstname.lastname@example.org.