Business Analysis

Business Analysis

Practice succession: Minimize value-reducing liabilities It’s not easy to measure the value of intangible assets and the cost of liabilities
Aug 01, 2004

Veterinary practice succession planning, a career-long endeavor, is based in the philosophy, policies, procedures and protocols that sustain the practice's economic microcosm.

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In the first of this three-part series, we initiated discussion of valuation concepts, appraisal standards and cultural attributes that impact the intangible value of the practice — its goodwill value. This article continues the discussion of asset value and also of associated liabilities that reduce value.

The component practice assets are a good starting point for understanding how the building blocks of a practice combine synergistically in providing a current income stream and long-term appreciation. We categorize veterinary practice assets into two primary types: tangible and intangible.

Tangible assets are those that can be touched, felt or held — assets that are concretely discernible to the five senses. Intangible assets cannot be felt or easily perceived, but can represent issues of material value. Measurement of value is more challenging than with tangible assets.

Within the intangible asset grouping, goodwill is of primary importance. Sometimes called "blue sky," it represents the earnings capacity of the practice operating entity. In the last article, we listed a variety of leadership and ownership criteria affecting the intangible value of a veterinary practice, measured through its inherent profitability. Additional intangible factors that impact goodwill value include:

  • Practice location
  • Going concern attributes
  • Practice name
  • Practice reputation
  • Market position
  • Customer/client names
  • Personnel assemblage
  • Management skills and know-how
  • Favorable lease terms
  • Industry's economic outlook
  • Competition
  • Practice philosophy of client and patient care
  • Practice ethics
  • Practice standards of care
  • Practice systems, protocols and policies.

The deliverability of goodwill value can be affected by various practice factors. A discount from total valuation might be made due to stock restrictions and/or the lack of control inherent in a minority interest in a closely held practice. Departure of key management personnel or clinicians with specialized skills or reputation could result in a discounted price. Distressed sales resulting from divorce, disability or death can all impact goodwill value and negotiated price.

Goodwill deliverability must be secured by adequate non-compete agreements with present and past employees. Deliverability also hinges on retaining key personnel during transition, if not permanently.

Assets that are not exactly intangible or intangible can be termed "netherworld." [Owen E. McCafferty, CPA, CVPM, (440) 779-1099, from various past writings about veterinary practice valuation. This author also wishes to acknowledge McCafferty's immeasurable and significant contributions to the veterinary profession in regard to practice management, economics and valuation.]

Accounts receivable, computer software licenses and computer data or patient records fall within this meaning.

Tangible assets include personal property and real property. Personal property, or personalty, comprises the following assets in a veterinary operating entity:

  • Professional and medical equipment
  • Office furniture, equipment and fixtures
  • Computer hardware
  • Drug and professional supply inventory
  • Office and janitorial supplies
  • Tangible portion of patient records.

Real tangible property, or realty, includes land, land improvements, buildings and building improvements. Most often, realty is held outside the veterinary operating entity and is valued as a separate asset. However, the veterinary operating entity's value hinges closely on real estate value. Goodwill (as an expression of capitalized excess earnings) is impacted by the fair rent required for facility use.

Rent represents the investment return expected on the real estate. A higher rent infers greater real estate value, and results in lower expected excess earnings for a given level of practice gross income.

Investments and cash equivalents held by the veterinary operating entity are additional assets that must be considered. Emergency clinic stock is a common example of an asset held by veterinary practices. Rarely does its historical cost reflect current value. Investments in mutual funds or other stocks should also be valued at present worth when determining overall practice value.