Note: We recommend reading our article that breaks down key deal terminology before diving into this piece.
As much as we’d like them to be, veterinary practice valuations aren’t based on a simple formula. Many factors are taken into account when arriving at your hospital’s final price tag: macroeconomics, microeconomics, practice characteristics, consolidator priorities, investment cycles, among many others. You’ll hear us reiterate that valuation is an art and a science because it’s true; While formulas are involved in calculating your practice’s ultimate value, the “art” comes in the form of other components buyers weigh to arrive at a business’s worth.
But let’s start with the two major areas that impact valuations: macro- and micro-economic aspects. There are macro- and micro-economic forces at work, combined with current veterinary industry dynamics, that affect your practice’s market value. Keeping an eye on these economic conditions can give you a “big picture” understanding when it comes to determining your veterinary practice valuation. We’ll review.
We’ll come out and say it: the reality is that your practice’s value is truly based on macro-economic forces at a point in time, irrespective of your financial performance. A practice with $2 million in revenue and $400,000 of profits in 2012 would have sold for less than half the price (about 5x EBITDA) it would’ve sold for in 2021 (about 12x EBITDA). As many know, market value for veterinary practices has increased dramatically in the last 10 years. While valuation is based on the individual practice’s financial and business prospects, it’s also a reflection of the veterinary industry and the global economy.
Over the past decade, investor interest in the veterinary industry has grown at a staggering rate. They’ve realized that the industry experiences strong, steady growth over the years. Plus, it’s recession resistant–hospitals can deliver consistent, profitable results even through a pandemic. (Note: You can learn more about why investors are so attracted to the veterinary space here.)
It goes without saying, but you cannot control the macro-economic forces impacting the industry. In 2022, we expect overall valuations to trend downward from their peaks in late 2021. This is due to rising interest rates, a slowing in industry revenue growth (after 2020 and 2021 had unusually high growth), the war in Ukraine, and a possible slowing in the overall economy. The same practice we mentioned above that would have sold for 12x EBITDA in 2021 would likely sell for 10-11x EBITDA in the first half of 2022. Why? Purely because of macro-economic forces.
For a practice owner, reading the tea leaves is not so simple. In 2018 or 2019, a practice with $400,000 in EBITDA would have received 9x EBITDA. At the time, this seemed like the top of the market before we witnessed the unprecedented multiples in the latter-half of 2021. However, once a peak is achieved, which it seems to have reached in 2021, there is always some urgency to move before pricing comes down again.
Striking at the right time? Of course it’s important. However, the decision on when to sell needs to be when you are ready in your life for the transaction. Remaining cognizant of the macro-economic forces around you can inform your thinking but should not be the only factor.
Your practice’s financial performance is something you have more control over than the macro-economic forces impacting the market. Profit levels and growth prospects of the practice are driven by the culture you create, the people you hire and retain, the client experience you provide, and how you market your practice to the community.
Once you know your practice’s financial performance or profitability, you can use the following mathematical formula to see how a buyer would value it:
Normalized EBITDA x Purchase Price Multiple = Total Practice Valuation
Like we say, valuation is both an art and a science. While the formula part is the ‘science’, the real ‘art’ to valuation is the exact multiple applied to the business. This is where variations in price can occur.
Corporate groups use many factors to assess a veterinary practice and to arrive at a valuation. The chart below outlines some of those characteristics that drive Above Market, Market, or Below Market valuations. Each corporate buyer will weigh these qualities differently, leading to a variety of valuations.
|Practice Characteristic||Below Market Multiple||Market Multiple||Above Market Multiple|
|Annual Revenue Growth||Under 5%||5-10%||10%+|
|Annual Revenues||Under $2 million||$2 to $3 million||$3+ million|
|Geography||Rural / small town. No growth city. Cleveland, Detroit, Omaha, Kansas City||Average growing city or suburb. Minneapolis, NY, Philadelphia||Fast growing / gentrifying areas. Atlanta, Phoenix, Charlotte, Austin, Dallas|
|Demographics / Pricing||Modest or lower income, low pricing. Rural areas and small towns.||Moderate income, average pricing. Tampa Bay, San Antonio||High income, high pricing. NYC, San Francisco, LA|
|DVM Concentration Risk||1 DVM produces 40%+ of revenue||Biggest producer is 25-40% of revenue||No DVM is over 25% of revenue|
|Staff Turnover||High staff turnover||A core of stable, long-term staff||75% of staff are longer-term employees|
|EBITDA Margins||Below 14%, Above 29%||14-19%||Over 19%|
Many practice owners will find that their hospital meets characteristics across various categories in the chart. A practice may have some traits that fall under an Above Market multiple, such as growing at 13 percent over the past two years and being in Austin, TX. Simultaneously, that same practice may have $2.3 million in revenue (Average multiple), and 3 DVMs where one produces 40 percent of revenue (Below Market multiple). In cases like this, some corporate groups will pay a premium for a business, while others will place more weight on other traits. One buyer may view the DVM concentration in the Austin-based practice as a big risk and place a lower multiple on the practice as a result. The way in which buyers measure and assess your business leads to different valuations. It’s why you may see the same practice valued at 16x and 13x EBITDA.
Variations in valuation make it even more critical to market your practice to a wide range of potential buyers. Through a robust sales approach and multiple bidding processes run by professionals, the market will determine the best price and terms for your practice.
Additionally, valuation can depend on the ‘stage’ of the buyer in their investment cycle. Meaning, how long ago did their investor buy the company, and how soon will they exit? Generally, buyers that are close to a Recapitalization Event (Recap) try to accelerate growth as they head into their own sales process. Therefore, they’ll bid more aggressively than any other time in their investment cycle.
Valuation is both an art and a science: combining a formula with the varying weights buyers place on certain characteristics of your practice. On top of this, when you consider where the buyer is in their investment cycle, along with the macro-economic factors at play, you’ll see for yourself that valuations will differ for the same practice at the same time.
Running a robust sales process with an experienced broker is always a good idea: they study the market’s behavior, buyer strategies, and have a pulse on the broader economy. With broker expertise, you can understand the ins and outs of your practice’s worth, negotiate more confidently, and ultimately secure the best deal. Determining the right time to sell should be based on your personal goals, the macro-economic forces, and your practice’s performance. Ask yourself: Will my practice’s current performance help me maximize my value?
At Ackerman Group, we advise hospital owners every day on these decisions based on our intimate market knowledge, depth of experience, and understanding of the buyer community. Contact us to learn more.
 Recap or Recapitalization is when a Buyer (Consolidator) decides to sell their business, typically from one investment firm to another. In a Recap, the management team does not change but a new investor buys out the old investor so all the owners of the Consolidator can cash out some or all of their ownership.