Veterinary Practice Valuation

Prognosis: Your outcome depends on the valuation.

A veterinarian takes a lot of factors into consideration before making a diagnosis. And then does the same before coming up with a prognosis. The same is true for determining the value of a veterinary practice.

So here’s the deal: No one expects a financial expert to be able to do the job of a veterinarian—or vice versa. But the outcome for both the seller and the buyer can be much more satisfactory if each of them has a basic understanding of each other’s business methodology and tools.

Starting the valuation process

A good place to start is with this diagnostic assessment of how much your animal practice might be worth. It can help you get organized and prepare for the sale of your practice. It will likely be an experience of considerable consequence in your career and life. We want it to be a very healthy and satisfying one for you!

EBITDA

So let’s begin with a thorough, step-by-step check-up. This includes an essential exam called the EBITDA. As the wise old adage goes, your veterinary practice value is worth what someone is willing to pay for it. And what the typical buyer is willing to pay is likely going to be based on the profitability of the practice. Most veterinary practice appraisers use the adjusted metric of Earnings Before Interest, Taxes, Depreciation, and Amortization—minus the estimated average spent each year for equipment. Appraisers use the acronym EBITDA for short. They arrive at the EBITDA after making appropriate adjustments to the income statement. This makes it a meaningful number; it indicates the operating profit of a practice and whether or not it’s financially sound. Obviously, the higher the profit, the higher the sale price will be.

The appraisal process

Next, an appraiser will take a look at two other key things. The first is a practice owner’s SDE—which is the acronym for the Seller’s Discretionary Earnings. It’s calculated by combining the EBITDA with the practice owner’s income and benefits. The second is the practice owner’s Net Income. This defines the earnings after the deduction of all the practice’s expenses.

Additional factors that determine the value of your practice

Now for all the other factors that go into determining how much your practice is worth. A head’s up: This is where things might get subjective and feel less cut-and-dried. To put things in perspective, for a potential buyer, it might only be all about money, because a successful veterinary practice can be an attractive investment opportunity. Whereas a veterinary practice owner might be inclined to make many decisions that prioritize patient care over profitability. Let’s be clear: Both buyer and seller are right! So to arrive at a fair market value, the goal should be to find common ground where both sides are satisfied. For the veterinarian practice owner who wants to get to that sweet spot, here’s a “Must” list of things to take into account:

• Make sure your bookkeeping is transparent. If it’s not, bring in a CPA to get things in shape. Another option is to use a software program that will help you do it yourself.
• Organize, organize, organize! Have your financial statements, your tax returns, and cash flow statements at your fingertips.
• Decide how you want the potential new buyer to pay you. There are quite a few possibilities (including some innovative “hybrid” variations) possible. So do your research and see what’s out there. Start by talking to your CPA. You can also contact AmeriVet; we might be able to offer you some ideas you’re unlikely to come across with other partners.
• There are 3 fundamental valuation methods used when coming up with a sales price for a veterinary practice.
  1. The Income Approach, which is by far the most popular and common. It focuses on the cash flow, the capitalization rate, and the benefit stream. Taken all together, this kind of information is what helps a potential buyer determine the level of risk and growth prospects they might take on.
  2. The Market Approach, which can be impractical. It’s a valuation that’s based on comparing your practice with those that are similar in your specific market. This approach has an inherent flaw because it relies on accurate, available data from publicly-held companies. And, since most veterinary clinics are privately owned—not publicly-held—businesses, there’s not a lot of useful information out there.
  3. The Asset Approach, which focuses on the Net Asset Value (NAV). This is a tally of how much the tangible assets of a veterinary practice are worth. It also includes what is referred to as ‘Goodwill.’ This takes into consideration the fair value of a practice’s assets, while subtracting the market value of any liabilities. Goodwill is an intangible asset and includes things like reputation, the value of your client list, patient medical records, the value of new future clients, an experienced, well-oiled staff, operating capabilities and procedures, etc. Don’t make the mistake of underestimating the value of intangible assets! It can sometimes account for up to 85% or more of a successful practice. So an accurate assessment of the intangibles is important.
• The valuation of a practice will take into account the Net Tangible Assets. This term refers to the fair market value of property owned by a practice that can be seen, weighed, touched, measured, estimated, etc. Some examples? Accounts receivable (after being adjusted for collectability), leasehold improvements, real estate, equipment, supplies, and product inventory.
• Right now is the right time to think about how to make the practice look especially appealing (financially!) to a potential buyer. Think about ways of improving profitability, value, and efficiency. Enlist the aid of staffers at every level of your practice; they may have some good ideas and suggestions you haven’t thought of.
• A potential buyer who might become the new owner could be very interested in knowing if you want to stay on at the practice—or leave. And what your desired timetable would be. So this puts you in the position of making the decision of what your future could look like—and how soon it might arrive. If you want to stay, consider what kind of role you want, how much your salary would be, and what kind of benefits you’d have. Be very aware: There are so many options and variations that it might start to feel somewhat overwhelming. If you want some help in sorting it out, contact AmeriVet. We can help you ask all the right questions—so that you can get the answers that are right for you.
• Where your practice is located—the region, the community, the neighborhood, even the street and the block—can impact the valuation. By the way, practices in urban / suburban locations tend to have a higher value than those in rural areas.
• What kind of client demographic you serve—and how many of them there are—can be significant when it comes to the valuation of a practice.
• Do you work primarily with small animals or large animals? In general, small animal practices are easier to sell and go for higher prices. That’s simply because more people have small animals as pets, so the customer base is deeper and wider. Also, it’s easier to find and hire staffers who can work with small animals.
• The animal practice with current technology, furnishings, and amenities in an attractive setting is naturally going to have a higher value. A potential buyer is most likely going to consider the time and money it would take to update a practice’s facility.
• A specific dollar amount can’t be put on the reputation of an animal practice, but that doesn’t mean it doesn’t have real value. You can be quite sure that a potential buyer is going to check into what is being said about your practice. The buyer will examine sources like social media and online customer reviews, as well as have conversations with others in your market and in the veterinary industry. You need to be up-to-speed on what others think of you and your practice.
• The size of an animal practice makes a big difference when it comes to coming up with a fair market value. In all likelihood, a small clinic with only one veterinarian is probably not going to be worth as much as a larger animal hospital with multiple locations, several veterinarians, and many associates.
• The valuation of a veterinary practice—at the time you put it up for sale—can also be dependent on some things which you have little to no control over. The state of the national economy, the veterinary industry as a whole, the economy and demographics of the community and / or the neighborhood where your practice is located, even the time of year can all make a difference. At AmeriVet, we make it a point to be aware of the status of this kind of thing. So contact us if you want to know what we know!
• If you’ve done any research, we can make an educated guess that you’ve probably come across one or more of these so-called Rules of Thumb when it comes to the valuation of a veterinary practice:
  1. A veterinary practice valuation is equal to 85% of one year’s gross revenue.
  2. A veterinary practice valuation is equal to one year’s gross revenue.
  3. A veterinary practice valuation is equal to the average of the last three years of revenue.
  Well, we’re here to tell you that all those thumbs should be broken, once and for all! They’re only pie-in-the-sky theories based on tradition and the word-of-mouth of non-experts. They are not reality. That’s because they all have the same fatal flaw: They start with the false assumption that all veterinary practices are alike. We know that’s not true. And so do you.

If you’ve gotten this far, congratulations! You should now have some insight into why a veterinary practice appraiser could evaluate two practices that generate the same amount of revenue. And land on radically different purchase prices.

Partnering with AmeriVet

Of course, if you want to get into the nitty-gritty of what your own practice might be worth, here’s what we encourage you to do: Start by learning a little bit more about AmeriVet. See if you think we could work well together. Take a look-see at our website. Check out our social media. And feel free to ask around about us, too. You might be surprised at how much we understand about what’s ahead for you. And how much AmeriVet could help you arrive at a realistic prognosis.