Arriving at Your Veterinary Practice Valuation: A Comprehensive Guide
Why are Veterinary Practice Valuations Important?
Needless to say, veterinary practices are attractive and in-demand investment opportunities. If you’re a practice owner, you can make a pretty penny by selling your clinic, but only if your hospital meets the criteria buyers are looking for. In this guide, our team lifts the veil on veterinary practice valuations: why they matter, what they entail, how to determine your clinic’s worth, and more.
Why Accuracy Matters
Business appraisals vary significantly by sector – there is no “one-size-fits-all” approach, which is why choosing the right person to conduct your clinic’s valuation is crucial. The veterinary industry is a niche, standalone space that requires a unique appraisal methodology. Like our team at Ackerman Group, veterinary practice brokers who specialize in veterinary can make the most out of your practice’s sale. Our team knows how to evaluate assets like intangible goodwill and other value categories through the lens of a veterinary practice buyer, whereas a general business broker or attorney may not have the same insight.
The bottom line: you don’t want any surprises when it comes time to sell. Partnering with an appraiser who has veterinary expertise will give you the most accurate estimate of value for your veterinary clinic.
Veterinary Valuations are More Complicated Than You Think
Every veterinary practice is different, and every practice has countless data points and features that factor into its final price tag. Take into account the ever-changing buyer’s market, and that’s why we don’t recommend using any readymade formulas or cookie-cutter “calculators” to appraise your veterinary practice.
Our Co-CEO, Rich Lester, often says there’s an “art and science” to veterinary practice valuations. This is because your practice’s value is found through a combination of certain attributes (art) and hard numbers (science). Aside from your practice’s profitability, things like practice characteristics, macroeconomic factors, and buyer investment cycles all weigh into the ultimate purchase price multiple applied to your veterinary clinic.
When Should I Get a Veterinary Practice Valuation?
Before we dive into how veterinary practice valuations work, let’s discuss when you should start the initial evaluation process. Timing is just as crucial to your practice sale as the sale itself.
Here’s when you should begin the valuation process:
If you’re 3-5 years from selling. Getting a practice valuation does not mean you need to sell your veterinary practice immediately after. In fact, our team suggests you evaluate your clinic as early as a few years before you plan to sell. We recommend doing this for your benefit: by assessing your practice early, we can identify any areas that are negatively impacting your business’s worth. With that knowledge, you can improve those areas so that when it comes time to sell, you’ve made the proper corrections to capture more value.
If your practice transfers ownership. Aside from a corporate sale, if you allow any Associate DVMs or partners to buy into the practice, you’ll want to have a veterinary practice appraisal for that moment in time.
If your partner leaves, retires, or passes. Should anything happen to your co-owner, you’ll want to ensure the insurance you receive is reflective of your practice’s worth (and ultimately, each owner’s stake) during that period.
If you’re applying for a business or personal loan. Knowing your practice’s value is especially important in potentially offering up if you’re qualifying for a loan.
What Determines My Veterinary Practice’s Sale Value?
If you’re conducting research, you’ve probably come across several approaches (earnings method, asset method, market method, income-based methods, etc.) to find the value of your veterinary clinic.
Our team specializes in veterinary practice sales to the corporate market only, meaning, we primarily use income-based methods to conduct valuations because they measure value from the perspective of the investor. Regardless, we generally advise sellers to avoid the nitty-gritty details of these methods and, instead, focus on the following formula:
Normalized EBITDA x Purchase Price Multiple =
Your Practice’s Value
What is EBITDA?
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. Its measurement represents the cash derived from the day-to-day running of the veterinary practice. It gives investors a sense of how financially successful and operationally efficient the business is currently. Many practice owners tend to overestimate their actual EBITDA, which is why it’s important to measure this figure on a regular basis. “No-lo” practices, or hospitals that have low profitability, will sell for little value if any.
We can think of normalized EBITDA as your practice’s realistic profitability if a corporate group owned it. If a corporate group owned your practice, what changes would they make to your business? What expenses would “go away”? Normalized EBITDA can be found through a series of “add-backs”, or expenses eliminated, that would no longer apply to the practice’s bottom line if it were under corporate ownership. Practice brokers who are experienced in the veterinary industry, specifically in selling to corporate groups, will know which line items to categorize as add-backs.
You can see how a measurement of normalized EBITDA frames value through the lens of an investor. However, it’s only one side of the equation to your veterinary practice appraisal. In the next section, we’ll cover the practice characteristics, economic forces, and other factors that determine your purchase price multiple.
How Is My Multiple Calculated?
During a valuation, veterinary practice appraisers or brokers will assess your clinic’s level of risk associated with a potential investment. From a buyer’s point of view, their questions may be along the lines of:
- Will this risk affect the earnings I expect to make from this investment?
- How greatly will this risk impact the practice’s profitability?
- What factors do I consider “high-risk” and where does this practice land on those factors?
Risk factors have different weights depending on category and buyer priorities, but collectively help to calculate the purchase price multiple applied to your EBITDA. The multiple is essentially the multiplied EBITDA the buyer is willing to pay for your veterinary practice with the expectation that they’ll make money back and then some. For example, if a veterinary practice has a multiple of 10x, the clinic is valued at 10 times the estimated annual EBITDA.
Other factors (which we’ll discuss in the next section) also affect the multiple applied to your veterinary practice. As it relates to risk factors specific to your clinic, we’ve put together a quick guide to the left so you can gauge where you fall on the scale.
What Other Factors Impact My Multiple?
Practice characteristics are the potential risks that affect your multiple on a micro level, but multiples across the veterinary market are also affected by “macro” conditions. The economy, interest rates, financing availability, risk tolerance, and more all factor into your veterinary practice’s multiple.
Buyer investment cycles also come into play. Buyers (corporate groups) tend to step up their acquisitions as they approach recapitalization in an effort to accelerate their growth and thus attract more PE firms. Generally, corporate groups are much more open to buying veterinary practices at this stage than at any other period in their investment cycle.
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Click to enlarge.
How Does Ackerman Group Value Veterinary Practices?
Many factors, both in and out of your control, go into valuing veterinary clinics. Our team works with practice owners to first understand their business’s true profitability through a comparison of prior sales as well as EBITDA normalization. With that process, we also bring:
Knowledge of and access to real-time market changes
How your practice places in the overall market
Experience in accurately evaluating practice characteristics
How your practice’s features contribute to your multiple
A deep understanding of corporate groups and their buying strategies
How buyers will view your practice from an investment and timing standpoint
A focus on both short-term and long-term value
How certain deal structures yield value for you now vs. in the long run
Curious about how much your practice is worth? We offer no-cost, no-obligation veterinary practice valuations for hospitals that generate annual revenues greater than $1.2 million.