ROBIN FREDERICK LINDE
BSc (Genetics) ; BVSc ; Cert Business Management (Potch)
Whether you like him or not, PM is always the first one to greet you when you arrive at work. PM is in the consulting room, reception, dispensary ….. If it is not to help, then to haunt you!!
At the end of the month he becomes extremely vocal not to mention the end of the financial year. You would think he is a secret agent for SARS because if you ignore him during that time SARS comes knocking at your door!! You don’t always have time to attend to PM. You may starve him for weeks, he just not goes away!! The more cachectic he becomes the poorer the practice performs and you wonder why??
Some principals embrace PM and give him all the attention he needs, even more! They even employ a practice manager to attend to PM in all his glory. These practices seem to prosper somehow!!
So much for PM, your practice cat.
VETERINARY BUSINESS MANAGEMENT
I hope to enlighten you in the forthcoming publications, on certain aspects of practice management.
To start off I will discuss the most common question I get from practice principals (and also colleagues wanting to buy shares in a practice.
“How do I value my practice??
In doing so I would like to repeat what they mention on certain TV reality shows:- DO NOT TRY THIS AT HOME!!
VALUATION OF A VETERINARY HOSPITAL
INTRODUCTION –
Ask your auditor, bank manager/consultant or lawyer and each will come up with a suggestion or formula to evaluate your practice.
My stay in the UK, buying and selling my practice, convinced me that the so-called
Excess Earnings Capitalisation Method
Recommended by the AVPMCA (North American Management Association of Veterinary Practice Management Consultants and Advisors) i.e.:-
1. Average profit over the past three years
2. The difference between the assets and liabilities and
3. Goodwill of the practice – and this is where it differs from advisor to advisor because it is very subjective and cannot be measured objectively. A subjective interpretation of external factors that will influence the future of the practice will only be accurate if the evaluator knows the practice and demographics of the surrounding area.
The above is also supported by Mercader Pere, MANAGEMENT SOLUTIONS FOR VETERINARY PRACTICES pg. 63
CALCULATION:
These figures are taken from year-end audited financial reports. No other figures are added or subtracted
1. Profit over three years and adjusted profits:- The three year period is to see whether the practice is showing growth (or not)
In your case-
|
Feb 2013 |
Feb 2014 |
Feb 2015 |
|
Turnover R 6,131,302 |
R6,849,918 |
R8,607,342 |
|
Annual fee increase |
11% |
25% |
|
Profit R 1,513,937 |
R1,603,406 |
R2,063,943 |
There was excellent growth over the three year period with an average of 18%. This is typical of a mature practice with the addition of a profitable assistant.
The average taxable profit for the three years is R1, 727,095 before member’s remuneration
Adjusted profit – normally practice expenses are geared to the maximum to reduce the profit to pay as little tax as possible. This is done all legally, however to sell your practice you have to maximise your profits to be able to get a good price for your practice.
I had to scrutinise all expenses and added/subtracted those then to the taxable profit which is called the
ADJUSTED NET PROFIT.
In this case I did the following:-
|
Average taxable profit |
R1,727,095 |
|
Less salary for two partners R50K each |
-R1,200,000 = R527,095 |
|
Plus Depreciation |
+ R88,270= R615,365 |
|
Minus 5% of fixed assets for reinvestments |
+ R34,756 = R580,609 |
|
Plus interest paid |
+R2,817 = R583,426 |
|
Minus Interest received |
0 = R583,426 |
Thus the adjusted net profit is R583, 426
2. The difference between the Assets and Liabilities
As per Feb 2014 financial year report –
|
Current assets (drugs debtors etc.) |
R856,983 |
|
Fixed assets ( furniture etc. at cost price excl motor vehicles) |
R695,124 |
|
Total assets |
R1,552,107 |
Assets minus liabilities = R1, 552,107 – R560, 316
Net value of tangible assets=R991, 791
*The loan accounts were not taken in consideration.
3. Goodwill
All practices have a number of tangible assets and intangible assets, the adjusted profit of a practice is the return the owner gets against the assets of the business. One part of this return will come from the tangible assets and the other part the intangible assets. On the tangible assets one can expect double the return compared to a conservative investment. Here the safe return on your investment can be expected to be 10%.
There from the calculations above your value of the tangible assets are the combination of the fixed assets plus the current assets less liabilities. This is then invested at 10% interest per annum.
=R991, 791 X 10% = R99, 179
Subtract that from the adjusted profit
R583, 426 minus R99, 179 equals R484, 247 wh ich gives you the profit attributable to the intangible assets called excess earnings
You then use this excess earnings figure and then you apply a capitalisation rate (a multiplication factor of between 1 and 6 to determine the goodwill of the practice.
Factors influencing the determination of the capitalisation factor are the following:
• Revenue trend over the last three years
• Future ability of the business to retain its goodwill
• Practice location
• Quality and loyalty of staff
• Facilities
• Socio- demographic profile of the area
• Management quality
• Quality of medical care
This is very subjective and only a colleague with extensive experience and insight in various practices can get close to a realistic factor for each and every practice.
For this Veterinary Hospital I am of the opinion that, along with these abovementioned factors known to me I would apply a capitalisation rate of 2.5
Excess earnings of R484, 247 X 2.5 = R1, 452,741
Thus the practice goodwill R1, 452,741
The net value of the practice is
VALUE = NET VALUE OF TANGIBLE ASSETS + GOODWILL – R991, 791 + R1, 452,741 = R2, 444,532.
The capitalization method of excess earnings allows the value of goodwill to be quantified and. Once added to the value of the tangible assets (equipment and stock) will give us the total value of the business
REFERENCES
1. McCormick, L. Contemporary issues of veterinary practice evaluation and sale transactions. Veterinary Clinics of North America, Small Animal Practice Management, March 2006. Elsevier Saunders, pp. 297-327.
2. Sheridan, John (www.veterinarybusinessbriefing.com)
3. Fernandez, P. Valuation methods and shareholder value creation. Academic Press, 2002 San Diego, CA
4. Wutchiett, C. What is your hospital worth? Veterinary Economics, April 1998.
5. AVEPA – hills Pet Nutrion, 2006, Estudio de Cumplimiento (Compliance Study)
6. Mercader, P. Management Solutions For Veterinary Practices 2011.Grupo Asis Biomedia, SL
The next article I will be discussing Key Performance Indicators KPI’s and Benchmarking 8
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