Selling a veterinary practice can be an exciting and complicated process. Whether you are retiring, changing careers, or simply want to see your efforts pay off, understanding how valuations work is key.
This article will explain what a valuation is, why it’s important, and the steps involved in calculating the value of a veterinary practice. By the end, you’ll have a better grasp of what goes into selling a veterinary practice and how the valuation can affect your decision-making process.
What Is a Veterinary Practice Valuation?
Valuation of a veterinary practice is the assessment of the value of a veterinary clinic or hospital. And this broad meaning of the word includes all the financial characteristics of the clinic, its revenues, its assets and debts, and the consumers’ need for the veterinary services provided by the clinic.
Just like any business, the value of a vet practice sales is not simply based on the building and equipment it owns. It also includes intangible factors like the reputation of the practice, its client base, and the skillset of its team. A valuation helps ensure that you’re selling your practice for what it’s truly worth.
Why Is a Valuation Important?
The valuation of a veterinary practice is one of the critical factors when selling the same business. It also assists to decide what price you are going to set for the practice and it is a good check to guarantee that you are offered a good deal.
If a reasonable approximation of the current value of your practice isn’t obtained, it is possible for you to over or underprice your practice.
The evaluation is also very important for the buyer. It also lets them know if they are investing in a sound venture as well as enlightening them on the prospects and of assuming the practice. Fair valuation helps to make both the buyer and the seller have equal gains of the transaction.
How Are Veterinary Practices Valued?
Thus, the valuation of the veterinary practice is not straightforward compared to what the revenue or profit statement showed. There are a number of ways as to how this value can be arrived at. Commonly, these methods are based on the monetary indicators but can also contain other factors such as tendencies on the market, and the practice’s further evolution.
Some common methods used to value a veterinary practice are explained below.
Income-Based Valuation
The income approach is probably the most popular of the three general methods used to value a veterinary practice. This method has into consideration the performance of the practice in terms of income and profit making. It is a market based on the fundamental concept that it is the ability of a business to generate earnings in the future.
The key here is the Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) of the practice. This figure is a measure of the revenue generation of the practice with total control of the varying tax rates, the amount of interest to be paid on the loans or even the facet of depreciation of the equipment.
Generally, a business appraiser determines the value by multiplying the practice’s EBITDA. To compute, a multiple is based on comparable veterinary practices that can be found in the market and then adjusted due to location, reputation, and future growth potential.
Market-Based Valuation
The market-based method is another for establishing veterinary practice value. It simply matches the practice up against comparable businesses recently sold in the same market; the sale price of a comparable practice becomes a kind of benchmark, useful in trying to determine an estimate for your own business.
The appraisers applying this approach will usually take into consideration factors such as the size of the practice, the number of clients, and the location. They will also assess how well the practice is managed and the stability of its revenue. The objective is to find practices with similar characteristics to establish a reasonable value range.
Asset-Based Valuation
An asset-based approach provides value to tangible, physical properties in the practice of the business. This includes the building, furniture, equipment, inventory, and the likes – all the property owned by the practice. It may also look at the other non physical assets such as; the brand identity of the practice, goodwill and reputation within the community among others.
The amount of liabilities in this method is another important component. This refers to debts or loans which have yet to be paid. Therefore, in the case where a practice has high levels of debt, it would be subtracted from its assets, and the remainder is considered the net value of the practice.
This approach is commonly used for practices that are underperforming or where the buyer is mainly interested in tangible assets. However, it does not always give an accurate picture of the practice’s future earnings potential and is often used in combination with other methods.
Cost-Based Valuation
The cost-based approach is not as common in veterinary practice sales but can be applicable in some situations. It measures the cost of rebuilding the practice from scratch. This approach assesses how much it would cost to construct a similar practice with the same equipment, technology, and personnel.
It’s also used for new practices as well as for those with high-cost specialized equipment or other costly, proprietary technology that would have to be replaced. In this regard, it forms a baseline estimate, with no regard for the actual future potential of the practice or clinic, making it less attractive for established practices with steadier revenues.
Discounted Cash Flow (DCF) Valuation
The discounted cash flow method is more complex. It requires considering the future potential the practice possesses. The application of the method includes computing the probable future cash the practice would produce and subsequently discounting it to the current value.
This helps find out just how much the practice will be worth today, solely based on its capacity for generating profits in the future.
The DCF method is often used for larger practices or those with a strong track record of consistent revenue. It is a more complex method and requires detailed financial projections and assumptions about future performance.
Combination of Methods
In some cases, business appraisers will be able to use all the methods that have been explained above to come up with the final business appraisal. In doing so they get a better view of what practice is worth through the use of the different methods.
For example, they may set the starting amount by using the income based approach, then adapt it to the benchmarking studies or tangible assets.
It has to be pointed out at the same time that none of the approaches is ideal and that the last value is going to be partially a matter of discretion. He stated that the purpose is to determine an accurate value for a practice and identify a market value that befits the practice.
How Long Does It Take to Value a Veterinary Practice?
The valuation process can take anywhere from a few weeks to a couple of months, depending on the complexity of the practice and the method being used. The process involves gathering financial documents, conducting an in-depth analysis of the practice, and possibly seeking input from other experts in the field.
If you are selling your practice, it is advisable to begin the valuation process as early as possible so that you will have enough time to prepare for the sale. This early valuation will also give you a chance to set reasonable expectations on the price you will get for your practice, avoiding any surprises later.
Conclusion
The process of selling requires the valuation of a veterinary practice. It is a complex process but is necessary. The proper valuation method will help you set a fair price, which is satisfactory to both buyers and sellers.
With an understanding of the different methods of calculation for the value of a practice and the factors that determine the final price, you can approach the sale with confidence.
FAQs
- How do I know if my veterinary practice is worth selling?
You should sell the practice if it is financially stable and there is demand for veterinary services in your area.
- Can I sell my veterinary practice if I have significant debt?
Yes, but the debt will be considered during the valuation and could lower the sale price.
- How do I find a buyer for my veterinary practice?
You can work with a business broker, reach out to potential buyers within the veterinary community, or list your practice through industry networks.
