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Remember back when you were a new owner? How fresh and exciting everything felt? As the head DVM, you were the one getting to make all the decisions, establish the clinic culture, and treat each patient with compassion and care.
Fast forward, and you have contributed countless hours to enriching the veterinary industry. You have cared for pets and their owners and have now decided it might finally be time to start the transition process. But where do you even begin?
Remind Me Again, Why Is It Veterinarians Sell Their Practices?
Veterinarians decide to sell their practices for many different reasons. Some have had full careers and are ready for the restful days of retirement. Others experience changes in their personal lives that cause them to decide to sell. Still others are entrepreneurs at heart and, having launched one business, are ready to start another.
Whatever your story might be, selling your veterinary practice is a big step. As you navigate the intricate sales process, surround yourself with people you trust and industry experts who can give you sound advice.
We Can Work Together to Establish the Value of Your Veterinary Practice
The first step in selling your practice is figuring out how much it is worth. This will help you determine the purchase price and get a fair deal. The trick is that practice valuation is not a simple A + B = C calculation. Assessing value, whether you own a veterinary hospital or a small animal practice, requires a robust understanding of the market and your practice’s financials.
It can be helpful to assess the value of your practice generally before seeking a professional appraisal. To do this, you want to think through several areas of your clinic:
- How large is your practice, and where is it located? The size and value of real estate will contribute to the value.
- What is the reputation of your veterinary clinic? Strong relationships with your clients and colleagues (and strong online reviews) increase value.
- Do you specialize in a particular area of veterinary medicine? Small animal practices tend to be valued higher because there are so many pet owners in the United States.
- What is the quality of your assets?
- How skilled is your staff?
By looking at each of these areas, you can get a general sense of how your clinic is doing. But it’s easy to think your clinic is more profitable than it actually is.
Determining an accurate value for your practice requires complicated financial calculations. The good news is that we’ve done this many times before. We can set you up with the right people and information to make appraising your practice straightforward.
Factors That Can Affect the Value of Your Practice
Two significant factors affect the value of your practice: profitability and risk.
Profitability: It’s natural to assume that because your practice can pay its bills and your salary, it is making a profit. But appraisers define profitability differently than the average person.
The industry definition of profitability is the earnings before interest, taxes, depreciation, and amortization (EBITDA) minus the average cost of equipment, rent, and the owner’s salary. Before calculating profitability, though, it’s important to adjust the EBITDA to align with a fair market. This will give you a more accurate assessment.
Profitability = adjusted EBITDA – costs
It makes sense that the higher the profitability, the higher the value of the practice. But many owners are surprised that their profitability is significantly lower than expected. Why is this?
What looks like a successful practice on the outside—outstanding facilities, new equipment, top-rate technology, and a large staff of qualified veterinarians—all actually reduce profitability. That doesn’t mean those things aren’t significant. It’s just that they all have to be subtracted from your adjusted EBITDA to calculate profits.
Risk: A corporate buyer will want to see that your practice makes a profit and consider all the risks associated with it. This includes assessing the tangible and intangible assets of your clinic.
- Tangible Assets: items that can be physically touched and assessed, such as equipment, supplies, facilities, etc.
- Intangible Assets: that which cannot be physically touched and evaluated, such as your clinic’s reputation, location, the quality of your clients, etc.
There isn’t a one-size-fits-all calculation for risk, but rather different aspects of the business that need to be valued and weighed. These include:
- How consistently has your revenue grown in the past?
- What are your practice’s projected future earnings?
- Does your practice have a strong reputation in the area?
- Is there a lot of competition in the area?
- How qualified is your staff and what is your retention rate?
- What is the state of your equipment?
- Where is your practice located, and what are the lease terms?
- How effective are your clinic’s management systems?
- How stable is your practice overall?
All of these factors contribute to the risk of owning the practice. A potential consolidator needs to know that it has the potential to generate a strong ROI if they purchase the clinic, and that includes understanding the risks involved.
Different Approaches to Valuing a Practice
There are several different ways to approach valuing a veterinary business.
The first method is a Market Approach. This compares your practice to similarly-sized businesses in your area to see how much they sold for. Basing your practice’s value on others is the most straightforward approach, but it’s also the least accurate. This can be an excellent place to start, as it gives you a ballpark estimate. Still, it’s best to supplement it with another, more accurate approach.
The second method is an Asset Approach. Appraisers will calculate the fair market value of all your assets, including tangible assets (like your physical building) and intangible assets (the reputation of your practice). This approach is the easiest to understand and provides a good baseline for both the buyer and seller.
The third method is an Income Approach. This uses your practice’s previous financial statements, projected future earnings, and other financial information to estimate the clinic’s value. This approach can be complicated and requires at least three years of detailed financial records.
The Serious Part – The Financials
Alright, now you understand the two factors of value (profits and risk) and the different approaches professionals take. How do you then calculate your practice’s value?
You first need to figure out your net income. You subtract all expenses (like salaries and supplies) from your total revenue from all operations (patient visits, surgeries, etc.).
Net Income = Total revenue – total costs
Next, you need to calculate your adjusted EBITDA. To do so, you need to gather a few pieces of key information: your profit & loss statement, interest expense documentation, tax documents, depreciation expense documentation, and amortization expense documentation. From each of these documents, you’ll pull the information you need to complete the following calculation.
EBITDA = Net Income + Interest + Taxes + Depreciation +
After that, calculate the seller’s discretionary earnings (SDE), which is the EBITDA + the owner’s income and benefits. This shows you how much you, as the owner, benefit from the practice annually.
Lastly, look at market conditions to set an appropriate multiple. From there, you can assess the value of your practice.
Don’t be Fooled by Veterinary “Rules of Thumb”
As you can see, calculating the value of a veterinary practice can be incredibly complicated. As such, people have come up with several “rules of thumb” to try to simplify the process. You might have heard the following:
- “The value of a vet practice equals 85% of its annual gross revenues.”
- “A vet practice’s value is the average of the previous three years of revenue.”
And while that might feel like a breath of fresh air—ah, yes, that I can easily calculate!—these rules of thumb are unreliable and misleading. They do not account for the things that make each practice unique or the economic reality of the market. So, while it may feel easier to calculate based on a rule of thumb, it does you no good in determining your practice’s actual value.
Veterinary Practice Valuation
How Long Does it Typically Take to Sell a Vet Practice?
Let’s say you have correctly assessed your clinic’s value and are ready to sell. How long can you expect the process to take? It generally takes six to eight months, including three to four months to get to know the potential buyer. This is the beginning of a long-term relationship, so you want to take your time and do your due diligence in research and relational development.
If you decide to move forward with a buyer, it is, on average, three to four months from signing the Letter of Intent to officially closing the deal. You want to give the process enough time to make it an incredibly smooth transition.
Our Advice for Practice Owners Looking to Sell
Get professional advice.
There is a reason veterinary school and training take so long—you have become an incredibly skilled veterinarian through your years of training and experience. Similarly, accountants, appraisers, and practice sales advisors have spent their careers learning the ins and outs of profits, risks, and value assessment. Seek professional advice when calculating the value of your practice. We were not meant to do this alone.
Keep those finances in order.
Whether you decide to sell your practice tomorrow or in ten years, it is essential to stay on top of tracking your finances. It’s even recommended that you recalculate your EBITDA every three years to help you maintain a sustainable and profitable practice that will be attractive to corporate buyers.
Don’t sell yourself short.
You have poured your life into building your veterinary practice. And it’s crucial to step into the process of selling it with confidence and courage. You should be paid a fair price for everything you have created, and don’t let anyone tell you otherwise.
Contact AmeriVet for help every step of the way. From valuing your veterinary business to creating an exit strategy, we are here to help make the transition process as smooth and seamless as possible.