How to Buy a Veterinary Practice
How to find and finance the purchase of a veterinary practice with Rangewell's support
Whether you're attempting to purchase a competitor's business or just looking to buy an existing practice rather than establish a new one, you'll need support to ensure the process goes smoothly. This guide will walk you through the major steps involved in buying a veterinary practice, including how to successfully raise finance to fund your purchase.
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As a qualified vet, you face two choices when it comes to ownership: establishing your own practice from the ground-up, or buying a veterinary practice from an existing owner. The latter choice is a sensible one due to the strict regulations that govern vet clinics in the UK, making it harder to start from scratch.
Compared to starting a new practice, buying an existing one carries compelling benefits:
- Gain access to an existing customer base and brand reputation, which means you can save on marketing costs.
- A team of trained staff who know the business and customers.
- Acquire a full complement of the tools and equipment required for the business, meaning you won’t need to purchase them individually.
- Begin generating revenue immediately rather than slowly building your income.
Setting up your own veterinary practice is certainly possible, but it is not without risks. Many areas of the country already have vets. Setting up in business on your own could mean moving into a very competitive market where you might struggle to gain enough clients to establish a profitable practice.
It would also require substantial investment, with no guarantee of success. Many lenders are wary of lending to startups for this very reason. Buying an established vet is a safer investment, but is obviously dependent on you being able to afford the asking price. Fortunately, banks and independent lenders are willing to step in and support you, provided your application meets their expectations.
Let’s delve into the process behind buying a vet and how to finance it.
An overview of the buying process
Let’s quickly recap the buying process behind acquiring a veterinary practice to give you a rundown of the main considerations you’ll need to make. We explore many of these elements further down in this guide, so keep reading for more information or contact Rangewell to enquire about financing your purchase today.
- Research: finding the right practice and assessing its financial viability
- Business planning: structure a business plan that reflects your intended plans for the business and includes financial projections
- Finance: unless you have all of the capital needed for the sale, you’ll need to secure finance from banks or other lenders. Approaching them early allows you to gauge potential offers and get advice on the purchase.
- Negotiations: enter into negotiations with the seller to buy the practice.
- Due diligence: both the lender you’re working with and your legal teams will perform their own due diligence to ensure the practice is compliant to legal requirements and financially viable. This includes assessing property criteria such as freehold or leasehold conditions etc.
- Completion: once all parties are satisfied, the sale will be completed and you’ll become the new owner.
Finding a practice
The first step in buying a veterinary practice is to find one for sale – either from business listings, through an agent or through word of mouth. In some cases, you can also approach a local veterinarian to ask if they’d consider selling – but we’d recommend using a legal third-party for this.
Once you’ve found a suitable practice, you should assess its business potential using the same criteria a financial lender will apply when performing due diligence. These include:
- Location: is the premises located in an accessible area? Is there parking available nearby for people transporting their pets? What about public transport?
- Market: how many competing businesses are in the area? What sort of demographics are the existing customers and potential client base?
- Performance: have you got access to the sales figures for the business? How is it performing and what projections are available across the next few years?
- Staff: how many employees are there at the practice? What experience do they have? What salaries will you have to continue funding?
- Equipment: what equipment will be included in the sale, what will you have to purchase individually and finance yourself?
- Premises: does the sale include the freehold for the premises, or will you take on the renital contract as a leasehold? Will you be able to extend the lease with the landlord?
Asking all of these questions early will help you plan better. Once you have answers, you can create a robust business plan which can be used to form the basis of an application to finance providers. Rangewell can help you create your business plan, or edit it to better suit lender expectations.
This is also the stage in which you may want to appoint an independent appraiser to help you determine an offer price. The asking price is subjective to the seller, whereas the fair market value may be different. To avoid losing out, hire independent support before you negotiate.
Buying a veterinary practice as a sole trader, partnership or company
Depending on how you’re going to structure your business going forward, the buying process can be very different. Sole traders, for example, become personally liable for any liabilities and commitments within a business. The three options as a buyer are:
- Sole traders: a sole trader assumes the sole rights and responsibilities of the business, becoming personally liable. Sole traders seeking finance will be assessed on their personal backgrounds and may have to provide securities from personal assets. Sole traders cannot pursue equity sales.
- Partnerships: similar to sole traders in terms of responsibilities and liabilities, partnerships are collectively responsible for the management of the business and personally liable.
- Companies: limited companies are viewed as separate legal entities from their owners, meaning you won’t be personally liable for liabilities and commitments. The company itself owns the business and is legally responsible for it. Only companies can pursue equity sales.
Existing veterinary practices can also explore an option known as a ‘hive-up’ which is the same as a share sale, except at the completion of the share transfer there is also a business asset transfer. This means you’ll be able to acquire and absorb the company without having to operate two separate entities.
Asset sales vs equity sales
Buyers can negotiate with sellers to pursue two different types of sale. Sole traders and partnerships can only pursue asset sales, whereas companies can choose an equity sale instead.
An asset sale sees the business’ assets, goodwill, premises, stock, employment contracts and any other material assets transferred to the new owner. A change of operator is then registered and the sale is completed.
An equity sale, also known as a share sale, instead sees the owner of the vet company change but the assets and business itself remain owned by the same company. This means there’s no change of operator.
There are various tax advantages and disadvantages associated with both transaction types, so you’ll need to consult an accountant or tax professional before the purchase. Rangewell can help you here, we’re happy to refer our recommended expert partners who will support you in making the right choice.
Freehold vs leasehold
When buying a veterinary practice, understanding whether you’ll be buying the business and the property it is operated from as a freehold or taking on the rental agreement as a leasehold, is absolutely essential.
A freehold property is a much more appealing purchase, but will carry a far higher asking price. Subject to a solicitor ensuring there’s no outstanding mortgage payments or other liabilities on the property, you’ll be able to acquire the business itself, its assets AND the premises. This also increases lender interest, presenting a less risky proposition thanks to the security provided by the property itself.
A leasehold, on the other hand, can be a riskier investment. The main factor is how long is left on the lease – as a business operating from a premises with a short lease has far less stability. The landlord may not agree to extend the lease to the new owner, or may have plans to sell off their property entirely. If the vet you intend to buy operates from a leasehold, doing the right research into the conditions of the lease and whether you can extend it will be vital to securing a good lender offer.
If the property has a short lease, Rangewell can help you overcome the issues and finance it successfully, but you’ll need to get in touch with our team early to get preparations underway.
The financial considerations for veterinary practice buyers
Buying an established practice may seem expensive, but it’s often more cost-efficient than starting from scratch. When you look at the cost of acquiring premises, equipment and marketing - and keeping your business afloat until it becomes profitable, you may find that you are spending more than it would cost to buy a small practice.
Starting with a practice that is already viable is a short cut to profitability as it will already have an existing client portfolio, an experienced team and equipment to perform veterinary operations, so you’ll be able to immediately generate income as soon as you step into ownership.
It’s also far easier to raise the finance required to buy a practice that is already trading than to fund the development of a new business. Lenders will be able to look into the business you want to purchase to see its financial records and forecasts, giving them an idea of both your ability to repay the loan and the risk of the investment.
How much do you need to buy a practice?
The cost of buying any business is a matter of negotiation. Looking at the turnover is a good place to start - the cost of buying a business will usually reflect the turnover it currently enjoys and the profits it generates.
There’s more to asking prices than revenue, however. The seller will incorporate other factors into their desired price, which include:
- The experience of the current owner - this is the main strength of the business and is likely the cause for its reputation
- The goodwill and client list it already commands
- The price of physical assets such as equipment, but also the cost of the property
Remember: the asking price is a matter of opinion. To ensure you’re paying the fair market value, we’d advise appointing an independent appraiser - and that is before the real negotiations take place.
Take a good look at the accounts, with the help of a professional accountant. You need to be certain that the practice you're considering is valued fairly, and that the earnings after purchase should be sufficient to cover your loan payments and all the other costs.
So, a practice generating £1.5 million of revenue might actually be valued at £1 million, with £350,000 in net asset value and £650,000 in goodwill. The earnings available to the new owner, the return on their investment, might be £100,000 after paying the operating expenses, and the loan repayments. After tax, it should provide a reasonable, if not spectacular income.
If the figures suggest that buying the practice would be affordable, you should look at the potential for growing the business. Investing in marketing may be an additional expense, but as a new owner, with energy and ideas, it might be possible to achieve growth of around 5% per annum. Not all of this would equate to personal income - growth will mean additional costs for staff and equipment - but it could provide bright prospects for the future.
The question is - how can you raise the funds you need to buy the business? This is where financial lenders step in to help you achieve your dream.
Commercial loans for veterinarians
The simplest form of business finance is a commercial loan. There are two types of commercial loan: secured and unsecured.
Secured loans can provide a high level of funding, but must be supported by security, such as your home, that the lender would take and sell if your practice was unable to make repayments. This reduces the risk to lenders, and allows them to reduce the cost to you with rates that can be as low as 2% above base rate, and ten or more years to repay.
A secured loan may be the most cost-effective way to buy a practice. There is, in theory, no limit to the amount you can borrow, provided that you can provide sufficient security - which must be worth more than the sum you are borrowing.
If you don’t have a suitable property to use, it may be possible to raise funds with an unsecured business loan. These operate much like a personal loan, although the creditworthiness of the business will be the key factor in the lender's decision making. Costs will be higher than with a secured loan, and the amounts available might be very much smaller. You might also be limited to repaying over an agreed term under 5 years. These limitations might mean that an unsecured loan is not adequate to buy a large veterinary practice.
If you don’t have sufficient funds, and are not able to provide property as security it may look as though buying a practice is out of your reach. At Rangewell we can work harder to find the funding solutions you need.
Commercial mortgages for buying a vets
Commercial mortgages aren’t too different from mortgages on a personal home, and they can be a solution if the practice you are buying owns its premises.
We can work with you to find a commercial mortgage on the property which will help you buy the business. The lending institution you approach will advance a certain percentage of the property’s value, which will be repaid monthly, along with interest. By structuring the loan carefully, the mortgage can buy the business as well as the property - although you will still need to provide a proportion - perhaps as much as 25% of the cash yourself.
Interest rates are calculated based on a variety of factors, including the practice size, profitability, and credit score, as well as the size of your deposit. Commercial mortgage terms can range from as little as three years to as much as thirty, although most veterinarians aim to complete their purchase within ten to fifteen years.
Bespoke finance for your vet purchase
There are other solutions. A Goodwill Loan, for example (also known as a Capital Withdrawal Loan or Cash Out) uses the goodwill built up in the practice as security. It can bring you a sum comparable to its annual turnover, with repayment terms of up to 15 years. Interest rates will be agreed when the loan is taken out and, although they will be variable, are likely to remain significantly more favourable than with other types of lending.
If the practice has assets - such as vehicles or advanced equipment - it may be possible to use them as security to raise further cash with asset refinance.
Whatever your circumstances, the first step in acquiring the practice you want may be to call us at Rangewell. We can help you take any prospective business purchase and secure a finance package that supports your goals. We’re experts in veterinary practice finance, so contact us today to see how we can help.