The Victorian Supreme Court has found a four year restraint period to be reasonable and enforceable against a former key employee of an IT company. 

The Court has ordered the IT specialist to be restrained from working for a competitor business and soliciting other employees of Southern Cross to join his new employer for the entire four year restraint period until June 2020.

One of the key reasons behind the lengthy restraint being upheld was due to the fact that in June 2016 the IT specialist sold his 40% share in Southern Cross for $3.5 million as part of a share sale agreement.

In exchange for selling his shares, the IT specialist also agreed to remain with Southern Cross as an employee.  However, whilst working for Southern Cross during the restraint, he also commenced employment with a competitor, Blue Connections Pty Ltd on a one day per week basis and $5000 per month in salary.

Restraints reasonable
On the question as to whether the restraint was reasonable, Justice Michael McDonald emphasised the IT specialist had received a large amount of financial consideration in exchange for his entry into the restraint and stated “there is nothing exceptional in a four year restraint in the context of a goodwill case where the vendor received a substantial amount of consideration”.

Further, His Honour also relied on the fact the IT specialist continued to receive a salary from Southern Cross as an employee after the sale of his shares and therefore determined the four year restraint against the IT specialist was reasonable in the circumstances.

Restraints excessive
His Honour also concluded the meaning of ‘restricted business’ and ‘business’ under the share sale agreement’s definitions was confined to IT procurement and associated IT managed services.  His Honour stated “a competing business will only be a restricted business if it is engaged in activities which are the same as those undertaken by Southern Cross as at 28 June 2016” which in this case covered the activities the IT specialist was undertaking with his new employer.

We note that this ruling had features beyond that of some actions concerning restraint in relation to those who have sold veterinary practices.

Restraint clauses for veterinarians
Veterinary buy/sell agreements should limit the period and distance of restraint as we note some excessive restraint clauses have not been enforceable. It is necessary to demonstrate actual financial damage to the purchaser of a practice if enforcing restraint. Restraint periods should commence from the day that employment in the formerly owned practice ceased.  Restraint should not be confused with breach of an employee’s duty of care to an employer.

The staffing problems corporate veterinary practices are experiencing are expected to worsen.  We can imagine the difficulty of a corporate HR manager faced with numerous demands to find vets for practices having difficulty filling rosters with too many part timers.

However this also represents opportunity for those vets able to work full time on a long term basis who may be much better off long term starting their own practices – even better if two full time vets start a practice in partnership near a large corporate practice.  They are likely to generate significant practice growth. Vets who take advantage of this situation are expected to end up much better off financially.  Synstrat can guide and assist.  Call Graham Middleton or David Collins 03 9843 7777.

Many country vets who sold practices to Apiam may only work for the duration of their contractual obligation having received their buy out payment and may prefer  retirement rather than the rigours of being at call within a  large animal/mixed animal practice.  As a result, many former owners may retire within a short time span and create a shockwave through rural practice. Those vets who are able and willing to work full time and do call outs are likely to be best off starting practices with at least two full time vets. 

Synstrat is confident that it can demonstrate that vets prepared to work hard would be much better off starting their own practices rather than working for a corporate long term.  Call Graham Middleton or David Collins 03 9843 7777 for further information.

Unlike industrial or mining processes where human beings can be replaced by ever bigger machines, a veterinarian can only do one surgery, one consultation or one farm call at a time.  Practices which rely on lots of part time vets present a relationship problem as clients complain that they rarely see the same vet twice.

Please speak to Graham Middleton or David Collins by calling 03 9843 7777.  In their absence please speak to Jenny O’Brien who will arrange a time to discuss.

Read the article at http://www.synstrat.com.au which has recently been circulated.  For objective well-reasoned practice valuations which assist in dispute resolution contact Synstrat – Graham Middleton on 03 9843 7777.

Cenversa is a public unlisted company.  Its recent share trades have been at a price of 80 cents.  A lot of vet practice owners own shares in Cenversa.  However its share register is dominated by Managing Director Lionel Bloom, his relatives and his superannuation fund.

2017 Financials
Revenue was $144,769,866, up from $131,364,318 in the previous financial year, an increase of 10.2%.

Profit before income tax was $2,126,946 and we note that there was a loss of $1,667,413 in 2016 after some abnormal/extraordinary write-offs in that period.  Net profit after tax in 2017 is $1,357,751.

This profit is disappointing for a company of its size and turnover, but as its turnover is growing by a lot more than the combination of population growth and CPI increase it is clear that Cenversa is increasing its market share.

It has warehouses and support centres in all states except South Australia.  A share issue during 2017 was terminated when it did not achieve the required take up of shares in South Australia which it had specified. 

There are 74,256,315 shares on issue and with the recent share price of 80 cents this represents $59,405,052 of market capitalisation.  It’s apparent that the profit before tax of $2,126,946 represents a poor pre-tax and of course poor post-tax return on earnings.  Post tax return of $1,357,751 divided into the market capitalisation represents a Price Earnings (P/E) ratio of 43.75.  However the growth in turnover suggests that Cenversa has been following a strategy of increasing its market share rather than concentrating on profit.  We understand it to be the third significant business in the pet supplies market after Lyppard and Provet. 

Where to?
Major shareholder and Managing Director Lionel Bloom is reticent about his long term plans but a likely scenario is that Cenversa will continue to spread its shareholding mainly among veterinary practice owners and achieve sufficient shareholding spread to undertake a compliance listing on the Australian Securities Exchange ie, the sharemarket.

To do that successfully, Cenversa will also need to change strategy from continuing rapid sales growth to expanded profit in order to have a P/E ratio compatible with maintaining a solid share price at normal market multiples for a distribution business. For the present and immediate future concentration on growing market share is a sound business strategy but to justify its current share price it needs to have an after tax profit of about three times the 2017 figure. 

It makes sense to increase the number of shareholders by share placements but not to make the placements conditional on gaining a specific number of shareholders or dollar value in South Australia.

Marketing strategy 101 is that overwhelmingly businesses achieve their best growth in the areas where they are already strongest.

It sounds counterintuitive, but like the parable of the ice-cream vendors on the beach on a warm summers’ day, the best place for a second ice-cream vendor to set up was right alongside the first one.

Cenversa will achieve its best results by continuing to build performance in its best markets.

Over the years many vets have stuck pins in a map for the addresses of their clients.  However those who get best results concentrate on treating their existing best clients with special care, not by letterboxing the spare spots on the map because there are likely to be good reasons such as traffic flow why pet owners in those areas use vets located elsewhere.

The best place to start a new Veterinary practice is close to a large corporate practice.

Cenversa’s revenue growth over the past six or seven years has been impressive but it must address its profitability in order to achieve a realistic price to earnings ratio.

Personal disclosure
Graham Middleton owns Cenversa Ltd shares in his family superannuation fund.

For those vets up to the challenge of sustaining a veterinary career, Synstrat’s two publications, 50 Rules for Financial Success as a Veterinary Surgeon and Buying and Selling Veterinary Practices are available free of charge. Email your postal address to vet@synstrat.com.au

 

Best wishes to all vets,

Graham Middleton