We define a single corporate Buyer’s Valuation of a specific veterinary practice as follows:
There are two inputs to a Buyer Valuation
Where Buyer Valuation1 is how Buyer1 values the Practice. By implication, Buyer2 (another potential buyer) may generate a different valuation (Buyer Valuation2) for the same practice with the same information.
This articles provides a 3-step framework for how a buyer might use comparable transactions to determine a veterinary practice valuation multiple. This Buyer Valuation Multiple is a key input into the Buyer’s Valuation.
Note that a single Buyer’s Valuation is not the same as the “True” value of a practice. The Buyer Valuation may be much higher than the purchase price offered. Sellers only see the buyer’s offer price, which may differ from the Buyer Valuation. We discuss the reasons for this in several articles on this site.
Step 1: Evaluate
Buyer gathers relevant, practice level information that impacts valuation. Some key attributes are below:
There are many potential comparable practice attributes
Step 2: Compare
Buyer determines whether the target practice is better, in-line, or worse than other known practice sale comparables along multiple dimensions. Most of the practice sale comparables a buyer has access to will be practices the buyer has purchased. A buyer that has purchased a large number of practices will have many points of comparison. The quality of comparison increases with the number of data points and quality of information on each data point.
Veterinary practice multiples and sale prices are private. Each buyer will have a different set of comparable deals to review. Even if given the same facts about a practice, different buyers will likely determine different valuation multiples. This is one reason why presenting a “list price” for a practice is not a good idea.
A list price approach is commonly used in the housing market. In housing there is a significant amount of comparable information available to the public on sites like Zillow, etc. It is relatively straightforward to find houses that are similar to your own that have sold in your market. In housing, a list price can be supported by data, though this approach can lead to confusion in a hot market.
The buyer reviews the practice factors, and makes an assessment of whether the target practice compares favorably or not. In some cases, such as profit margin, or revenue growth the comparison is a simple as comparing known metrics. In other cases, the comparison must be made on a subjective basis with limited information. The process will always require judgement, and a human element.
Buyer compares practice attributes against the “industry” as he knows it
The end result of this assessment is a multiple, or range of multiples applicable to the practice being valued.
Step 3: Risk Adjust
Information risk is key.
No corporate buyer has perfect, and detailed factors available for every veterinary clinic sale. Also, a buyer is unlikely to have perfect information on the practice he is analyzing prior to submitting a bid. Even after a buyer has established a valuation multiple for a practice there remains residual information risk. Lack of accurate record keeping and sloppy book-keeping will increase the perception of information risk to a buyer.
A buyer may adjust the valuation multiple down depending on how much information risk he feels he is bearing. This adjustment is highly subjective. Generally a buyer that has purchased a large number of practices will be willing to bear more risk.
A major source of information risk is whether any doctors, or key staff are likely to leave after the practice is purchased. Practice owners who do not practice, or who remain at the practice post-sale pose less risk for a potential buyer. Practice owners who really want to retire, but agree to stay with the practice, pose more risk.
From the buyer’s perspective an owner’s stated intentions may contrast with his actual plan, or the plan may change. This risk can be mitigated for the buyer, if the practice seller is fully transparent about her post-sale objectives, and through deal structure.