Whether you are a veterinary practice owner, or a veterinarian looking to purchase an established veterinary practice, you want to know the value of the practice. This includes evaluation of many aspects of the practice, such as:
A profitable practice generally has written policies and procedures. It also has written guidelines for compliance with federal and state veterinary practice regulations.
You may think that things are going along quite well. You enjoy your patients and the clients that bring them to you for care and treatment. You are earning money, living a comfortable life, and paying your bills. You are not sure if you need to have a value placed on your practice.
Even if you are now content, financial experts recommend veterinarians periodically value their practices for profitability and growth. Plus, there are several other reasons you may want to pursue having your practice valued.
If you are a veterinarian looking to buy an established practice, you want to be sure to conduct due diligence with the help of your CPA and legal counsel. Part of that due diligence is valuing the practice that you want to buy. You want to be sure you agree that the practice is worth the value placed on it by the selling veterinarian.
You will see or hear this term used frequently in discussions about valuing a veterinary practice. It is the definition of profitability used by many veterinary practice appraisers and means the adjusted metric of “earnings before interest, taxes, depreciation, and amortization.” Then, expenses spent each year are subtracted from that figure. The final sum is the operating profit of the practice.
Calculating the profitability figure is not easy and generally requires the assistance of a CPA, an attorney, or another financial expert. It requires close analysis of tax returns and financial statements along with adjustments for items like interest paid on debt, services provided to family members and friends without charge, and perhaps perks provided to employees and staff.
EBITDA shows not only the profitability of the practice but also the ability of the veterinarian to repay debt.
There are three main fundamental approaches to placing a value on a professional practice: income, market, and asset.
This is the most common and straightforward approach. It focuses on the cash flow of the practice and the ability of the practice to generate income. Tangible and intangible assets are not part of the equation. Under this approach, there are three possible views:
This income approach focuses on the profit and loss statement. This must be carefully evaluated because it is possible for the practice to be generating enough income to provide the veterinarian with a comfortable living but does not generate much more than that, so it is not really profitable, or at least not as profitable as it could be.
With this valuation approach, the value of other similar veterinary practices in the same geographical area is compared. It accounts only for collections and not profits. This makes it difficult to actually determine the value. One practice may have higher collections, but expenses may be such that it is not as profitable as one with lower collections.
This determines the value of the practice based on the practice’s net asset value (NAV), which considers the current value of each tangible and intangible asset.
Tangible assets include things you can touch. For example:
Intangible assets are things you cannot touch. The main intangible asset of a veterinary practice is goodwill. Goodwill is a subjective evaluation and can be divided into two parts: practice goodwill and professional goodwill.
In some practices, if there has been just one owner, it is possible the goodwill is so related to the specific doctor, that in order to transfer the goodwill, the selling veterinarian needs to be willing to introduce the new doctor to the clients. Part of this introduction includes a statement by the seller such that it inspires the clients to have confidence in the new owner of the practice.
When considering the professional goodwill of the practice, the value depends on the likelihood of the clients continuing care with the new practice owner. Clients want to know that the compassionate and quality care they have come to expect for their pets will continue.
There are several factors that influence the value of the practice. Some of the most notable ones are:
Small animal practices are the most valuable. Even though veterinarians naturally charge more for large animal care, there is not as much volume. Most people have at least one small animal that needs routine care and care for common diseases and injuries. In order for a large animal practice to be successful, it must be near a large number of farmers or equestrians.
State-of-the-art equipment with up-to-date furnishings increases the general value of the practice. A veterinarian purchasing a practice does not want to risk needing to replace equipment and furniture.
Urban areas with a lot of foot traffic are more valuable. This generally means a constant flow of clients. Locations that are in the country and not near urban centers are less valuable.
Word-of-mouth about how well the clients are treated plays a big role in fostering a good reputation and therefore, increases the value of the practice.
A larger practice with more than one veterinarian is more valuable than one with a sole practitioner. If there are multiple doctors, the practice will continue even if one of them becomes ill or leaves for some other reason.
The veterinary practice valuation process is technical, numbers-based, and somewhat complex. Selling or buying a veterinary practice is an extremely important life decision. You do not need to risk doing it alone.
Our veterinary legal team at Dental & Medical Counsel has many years of experience working on behalf of veterinarians who are solo practitioners, in partnerships, or part of large groups. We know the importance of having an accurate valuation of the practice. Contact us today to schedule a complimentary consultation with veterinary attorney Ali Oromchian to learn more about how we can help.