It’s a common question we’re asked time after time by veterinary practice owners. So, do you need to pay for a veterinary practice appraisal? It depends. There are a few scenarios where it does not make sense to spend the money on an appraisal, and other situations where an appraisal would help tremendously. Let’s first understand what an appraisal is and the type of results they usually provide to owners.

Veterinary practice appraisals typically yield a materially lower value than the value a corporate buyer would pay for a practice. Appraisals evaluate the cash flow that a practice produces and determines the level of debt a veterinary buyer could reasonably obtain from a bank based on that current cash flow level (not including the growth potential). The “result” of an appraisal generally falls between 4-6x cash flow or EBITDA. Now, that’s a reasonable valuation result for a 1 to 1.5 DVM-practice where a corporate buyer is not interested in purchasing it anyway. However, for a 3+ DVM-practice with $1.5 million or more in revenue, this appraised value is selling yourself short: this “result” is viewed as a discount to what a corporate buyer would pay.

With this background – let’s review some situations that both require and do not require a veterinary practice appraisal:

Larger practice, selling to corporate: If your practice’s revenue is more than $1.5 million, employs 3+ doctors, and you plan to sell the clinic to a corporate buyer…then there is no reason to pay for an appraisal. If you sell the practice yourself (at your own risk) or if you use a broker/advisor (your best option), the market will tell you the valuation and you’ll save $5,000+ by forgoing the appraisal.

Larger practice, selling a portion of the business to an associate: In this case, usually the owner is trying to keep a strong associate at the hospital long-term by providing them the opportunity to buy ownership. With this strategy, the most logical decision is to pay for an appraisal to determine fair value, instead of negotiating the price between you and the associate. Note: An appraisal will come in at a lower value than a corporate buyer would pay, however, the goal in this scenario is not to maximize value but rather to ensure stability.

Smaller practice, selling to a veterinarian: This is a circumstance where an appraisal is absolutely warranted and required. When neither principal in a transaction fully understands how to determine fair market value, the appraisal can set the price more rationally than a negotiation between the DVM buyer and the DVM seller.

In summary, should you pay for an appraisal? Ask yourself these two key questions:

  • Do I want a corporate consolidator valuation level as the result? If you do, then do not pay for an appraisal.
  • Do I want to sell all or a portion of the practice to an associate veterinarian? If you do, then pay for an appraisal.

There may be other situations outside of the cases laid out here where an appraisal proves useful. We recommend treating the above examples as a useful guide to asses those more unique scenarios.