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11/13/2018
1
How to Buy a Veterinary Hospital
Presented by: Terence M. O’Neil, CPA, CVAKatz, Sapper & Miller
November 13, 2018
www.petpoisonhelpline.com | Bloomington, MN | Pet Poison Helpline ©2018
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Financial Protection
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Speaker Introduction
Terence O’Neil, CPA, CVA
Katz, Sapper & Miller
The information presented herein is general in nature andshould not be acted upon without the advice of a professional.
© 2018 KSM Business Services, Inc.
Buying a Veterinary Hospital Business Valuations
November 13, 2018
Terence M. O’Neil, CPA, CVA
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Fundamental Steps in the Appraisal Process
▪ The Big Picture
▪ No Bull
▪ Snake in the Grass
▪ Finding the Treasure
▪ The Web
▪ The Package
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The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties have reasonable knowledge of the relevant facts.
(Revenue Ruling 59-60)
What Is Value?
Fair Market Value Definition
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▪ Valuation Report – Complete analysis of company, market, industry, competition, and many other factors.
▪ Calculated Value Report – Valuation analyst and company agree on the specific valuation methods, valuation approaches, and procedures to be performed.
Valuation Versus Calculated Value Report
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▪ Critical items to discuss amongst parties at the beginning:▫ Deal structure:
- Asset versus stock sale?- Seller financing?- Asking price?- Real estate – sell or lease / seller debt covenants- Assumption of debts?- Exclusivity terms – length- Confidentiality agreement
Upfront Matters to Consider
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▪ More critical items to discuss amongst parties at the beginning:▫ Seller tax consequences – they need to know the net after tax cash flow. Has seller
discussed the possible sale with tax and legal advisors?▫ Covenants – solicitation and competition for seller▫ Buyer – obtain pre-approved financing?
Upfront Matters to Consider
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Valuation Purpose
▪ Shareholder redemption or buy-in (buy – sell)
▪ Sale
▪ Merger
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▪ Five years financial statements & YTD
▪ Five years tax returns
▪ Five years practice management year-end reports and YTD
▪ Associate DVM contracts
▪ Fixed asset schedule
▪ Inventory schedule
▪ Employee census
▪ Summary of employee benefits
▪ Fee schedule
Information Request
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▪ Customer concentration
▪ Maintenance agreements
▪ DVM production by doctor
▪ Owner DVM production
▪ Owner discretionary fringe benefits
▪ Listing of other non-recurring or extraordinary expenses
▪ Pending litigation
▪ SWOT analysis (usually done together)
Information Request
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Window-Dressed Business
▪ Review of financial information
▪ Trends
▪ Fees
▪ Equipment additions
▪ Method of accounting (and or change thereof)
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▪ Competition
▪ Pricing comparison
▪ Client zip code analysis – where are the clients coming from?
▪ Economic study of geographic area – trends▫ Median income▫ Education▫ Population growth, stagnant, or declining?
Demographic Study
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▪ Executed? ▪ Term▪ Non-compete terms – enforceable?▪ Non-solicitation terms▪ Non-hire terms▪ Compensation terms ▪ Hours expectation▪ “On-call” terms▪ Benefits▪ Any other non-documented understandings?
▫ Associates promised an opportunity to buy?
Associate DVM Contracts
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The Big Picture
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▪ What is being appraised?
▪ When is the appraisal’s “as of” date?
▪ Why is the appraisal being performed?
▪ How is value to be defined?
▪ How will the appraisal be performed?▫ Full appraisal▫ Limited appraisal▫ Calculation▫ Hypothetical
Define the Assignment
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▪ Appoint management
▪ Determine comp
▪ Set policy
▪ Acquire and liquidate assets
▪ Negotiate contacts
Attributes of Control - Control vs. Minority
• Make acquisition
• Liquidate
• Sell treasury stock
• Declare dividends
• Change bylaws and articles
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The Big Picture – Define the assignment
No Bull
Snake in the Grass
Finding the Treasure
The Web
The Package
Fundamental Steps in the Appraisal Process
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No Bull
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▪ Management interviews▫ Practice management▫ DVM chief of staff▫ Is business turnkey?▫ Culture of hospital▫ Standards of care▫ Associate DVM ACT analysis
Gathering the Non-Financial Data
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Purpose of Management Interview
▪ Assess risk and qualitative factors influencing value
▪ Observe assets
▪ Judge competency of management
▪ Interview others
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The Big Picture – Define the assignment
No Bull – Gather the data
Snake in the Grass
Finding the Treasure
The Web
The Package
Fundamental Steps in the Appraisal Process
27 © 2018 KSM Business Services, Inc.
Snake In The Grass
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▪ Identify non-GAAP accounting issues
▪ Identify unusual or non-recurring items
▪ Identify unusual or non-essential assets
▪ Identify trends
▪ Identify differences from industry norm
▪ Specific comparison to guideline comparisons
▪ Assistance in analyzing forecast
Purpose of Analyzing Company Financial Statements
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Determining Risk
▪ Business risk
▪ Financial risk
▪ Liquidity risk
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Quantitative Risk▪ Size
▪ Growth
▪ Liquidity
▪ Profitability
▪ Turnover
▪ Leverage
Qualitative Risk▪ Management
▪ Diversification
▪ Market position and market share
▪ Supplier dependence
▪ Lack of access to capital
▪ Private company managed to minimize tax
▪ Public company growth through acquisition
Determining Risk
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▪ Size – revenue, assets, equity
▪ Growth – compound versus average
▪ Liquidity – current, quick
▪ Profitability – GP percentage, NI percentage
▪ Turnover – inventory, A/R, fixed assets, WC, TA
▪ Leverage – total debt/total assets, IB debt/equity, EBIT/interest
Ratio Analysis
Dupont = ROE =
ProfitabilityNI
Sales
TurnoverSalesAssets
LeverageAssetsEquity
X X
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The Big Picture – Define the assignment
No Bull – Gather the data
Snake in the Grass – Analyze the data
Finding the Treasure
The Web
The Package
Fundamental Steps in the Appraisal Process
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Finding The Treasure
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▪ Review of historical data
▪ Typical adjustments▫ Owner compensation▫ Owner family members on payroll▫ Owner fringe benefits and discretionary expenses▫ Rent▫ Depreciation & amortization▫ Non-recurring expenses▫ Interest expense
Normalize Earnings
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Earnings to Capitalize
▪ Earnings to use for valuation
▪ Most recent year
▪ Simple average
▪ Weighted average
▪ We will discuss illustrations later
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▪ Income approach▫ Discounted future returns method – projection then discount▫ Capitalized return method – multiply normalized earnings by an amount that
equates risk, companion typically 5x
▪ Market approach▫ Comparable public company method – NA but need to be consider VCA
information or other consolidator▫ Private transaction method – Brokerage supplied data
▪ Asset approach▫ Net asset value method▫ Liquidation value method
What Are Commonly Used Valuation Approaches?
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▪ Use of empirical data to support risk assessment using a multitude of methods, studies and data gathering
▪ Ability to assess risk
How Does A Valuator Develop Discounts/Capitalization Rates?
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Risk Versus Return
RETURN
RISK
U.S. Treasury Bills
Long-Term Bonds
High-Quality Growth Stocks
Lesser-Quality Stocks
Privately Held Stocks
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Risk-free rate 2.0%
General equity risk premium 8.0%
Small stock size premium (tenth decile) 5.8%
Specific risk premium 6.0%
Cost of equity capital for subject 21.8%
Determining Discount Rate Using the Build-up Method – AICPA Method
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Multiple Rate
of of
Earnings Return
1.0 100.0
2.0 50.0
3.0 33.3
4.0 25.0
5.0 20.0
6.0 16.7
7.0 14.3
8.0 12.5
9.0 11.1
10.0 10.0
11.0 9.1
12.0 8.3
13.0 7.7
14.0 7.1
15.0 6.7
16.0 6.3
Determining Discount Rate Using the Build-up Method – AICPA Method
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Determining Discount Rate Using the Build-up Method (TO Method)*
▪ Can the buyer accomplish the following:▫ Finance the deal?
▫ Repay the bank over – reasonable term and rate?
▫ Pay the taxes?
▪ If any of the above are answered “no,” the business is overvalued.
▪ We will illustrate the above methodology later
* See Excel spreadsheet
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▪ Evaluators judge company risk versus public market
▪ Revenue size
▪ Growth limitations?
▪ Industry risk and commonly used multiple of 5x
▪ Associate DVM’s
▪ Leverage
▪ Concentration of customer base
▪ Key person dependence or small management base
▪ Workforce
Company-Specific Risk Premium
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▪ VCA - Price to earnings ratio Jan. 12, 2016 – 25.03▫ Forward P/E ratio – 22.79 (one year)
▪ Companion net before corporate adm. – 13%
▪ Broker databases
Market Approach
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Asset Approach
▪ Net asset value method▫ Generally used for holding
type entities
▪ Liquidation value method▫ Generally used for
companies with poor financial performance- Orderly liquidation - Forced liquidation
© 2018 KSM Business Services, Inc.45
The Big Picture – Define the assignment
No Bull – Gather the data
Snake in the Grass – Analyze the data
Finding the Treasure – Apply Valuation Methodology
The Web
The Package
Fundamental Steps in the Appraisal Process
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46 © 2018 KSM Business Services, Inc.
The Web
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▪ Historical growth and profitability
▪ Synergy
▪ Size/market share
▪ Geographic protection
▪ Management strategy
Factors Affecting Value
▪ Customer diversification
▪ Growth potential: • Top-line and bottom-line
▪ Competitive position
▪ Value of similar companies
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Informed Conclusion
Estimate of Value
Marketability
DiscountIndustry Outlook Key
Management
Evaluation
Financial Analysis
IRS Rulings
Court Cases
Ratio Analysis
Restricted Stock
Studies
Methodology
Cap/Discount Rates
Minority Interest
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The Big Picture – Define the assignment
No Bull – Gather the data
Snake in the Grass – Analyze the data
Finding the Treasure – Apply Valuation Methodology
The Web – Arrive at a conclusion of value
The Package
Fundamental Steps in the Appraisal Process
50 © 2018 KSM Business Services, Inc.
The Package
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▪ Summary letter
▪ Company description
▪ Sections summarizing▫ Relevant valuation theory▫ Methodology▫ Procedures▫ Analyses▫ Conclusions
▪ Valuation synthesis and conclusion
▪ Exhibit section
▪ Listing of data and documents utilized
▪ Limiting conditions statement
▪ Appraisal certification
▪ Appraiser professional qualifications
Valuation Report
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52 © 2018 KSM Business Services, Inc.
See Examples of Valuation
▪ Separate Excel spreadsheets▫ Variables and affect on
value▫ Excel spreadsheet for
members to use to analyze a hospital
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▪ Trends▫ Lending▫ Sellers▫ Demographic of graduates▫ Increased competition▫ Industry challenges▫ Consolidators
▪ KSM negotiating tactics
Other Matters
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▪ Selling never makes financial sense!!
▪ Sellers must… Know your number!!
▪ Debunking the myth ▫ Sale to associate model 9x v. 6.5x
▪ Consolidator exits? ▫ Private equity firm strategies▫ What happens in 3-5 years?▫ Number of retiring veterinarians
Consolidator Issues
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▪ Term Sheets▫ Lease terms ▫ Employment term▫ Seller financing – installment sale▫ Retained equity – seller stock
Consolidator Issues
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▪ Earn outs▫ Revenue contingent▫ Net Income targets
- Employee benefits- Corporate overhead allocation- Pricing- Information systems- National vendors
Consolidator Issues
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▪ Mars acquisition of VCA▫ See spreadsheet of analysis▫ Monthly Payment plans▫ Trupanion next ?▫ Technology
- Telemedicine- Black box of data- Leverage of DVM’s
Consolidator Issues
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▪ How to structure sale to non – licensed Veterinarian
▪ See example
Consolidator Issues
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▪ Trends▫ Lending▫ Sellers▫ Demographic of graduates▫ Increased competition▫ Industry challenges▫ Consolidators – approximately 25 - 30
▪ KSM negotiating tactics
Other Matters
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61 © 2018 KSM Business Services, Inc.
Terence M O’Neil, CPA, CVAPartner
317.580.2294
62 © 2018 KSM Business Services, Inc.
Questions?
Contact www.avmalife.orgCustomer Service: 800-621-6360
Regarding this webinar contact:
Katrina Geitner, [email protected]
This Photo by Unknown Author is licensed under CC BY-NC-SA
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Thank you for attending!
CE credit FAQs
1. When will I get my CE certificate? We’ll email it to you within 24 hrs.
1. I attended the webinar but wasn’t the person who logged in. Can I still get interactive CE credit? Yes. Send your name and email address to [email protected] by 1pm CST on November 14th, 2018 (strict deadline).
3. Can I watch the recorded webinar online for CE credit? Yes. You can receive non‐interactive CE credit. Go to the “For Vets” page on our website, www.petpoisonhelpline.com for more info.
Comments? Questions? Email us! [email protected]