Veterinary Practice Valuations – The Basics
Who should I engage to complete my valuation and what will I get?
A veterinary practice owner might wonder “How Much is my Veterinary Practice Worth?” in a variety of circumstances. Oftentimes the question is posed as a prelude to a transition or sale. A veterinary practice valuation can provide useful insights to animal hospital owners who are preparing for a practice sale.
Valuation Basics – What is included in a practice valuation?
A veterinary practice business valuation completed to prepare for a transition should estimate what your practice is worth in the market today, what drives that valuation, and how you can increase your value. Having a 3rd party, expert perspective on these questions will help you prepare to sell your practice.
If you plan to exit within the year, your ability to make investments and practice operational changes that increase the value of your practice are limited. If you plan to sell in a few years, you can do many things to increase the value of your practice, provided you know what will make your practice more valuable. (See our blog post: How to Grow Your Veterinary Practice
The particulars of the analysis contained in a valuation will vary from vendor to vendor, but all will have a few common elements.
The analysis will convert your “as reported” income statement and cash flow into “normalized” financial numbers. Once determined, this metric can be used with a market multiple to determine the valuation.
What a valuation will not do, is tell a practice owner how much they should ask for their practice when they do sell. If you want to achieve the best outcome in a sale, you must let the market “discover” the price of your practice.
Many different types of vendors in veterinary services offer practice valuation services, including accountants, practice brokers and practice consolidators. If you are preparing for a practice transition, who should carefully consider who you should hire since what you learn from your practice valuation will be highly dependent on the vendor you choose
A Practice Broker’s main business is to help individual owners buy or sell small animal practices. They typically offer free, or significantly discounted valuations. The relationship the broker builds with the owner by doing a valuation can better position the broker to sell the practice.
The valuation a broker performs may also form the basis for establishing a “list price” for a practice that is transitioning. Brokers are typically paid a fee as a percentage of sale proceeds (up to 10% in veterinary services). All things being equal, this fee structure incentivizes brokers to reach a deal quickly. This incentive will impact the valuation work done by a broker, particularly, if the valuation forms the basis of the practice List Price.
Practice consolidators offer free valuations as well. For a consolidator, offering “free” valuations is a great way to learn more about your practice, your free cash flow and expected future cash flows. Any information you provide to a consolidator will help the consolidator evaluate whether they want to own your practice.
Offering “free” valuations makes sense for the consolidator though I always wonder why veterinarians agree to it. Giving one party preferential access to your practice information today will inhibit your ability to drive competition among buyers when / if you decide to sell your practice in the future.
I recommend that no pet clinic owner preparing for a transition share detailed financial or operating information with a consolidator. Sharing your financials with a consolidator is only appropriate under NDA when you are conducting an auction for your practice. And even then, it must be done with great care.
Accountants often offer valuations and/or veterinary practice appraisals as part of recurring accounting services, or on a stand-alone basis at a wide variety of prices.
Accountants are independent. They do not buy practices, nor collect fees earned for selling practices. This independence frees them to approach valuation objectively. However, accountants lack access to the mergers and acquisition data for similar companies that have been sold.
In some circumstances, such as evaluating a tax claim, or facilitating a buy-out between insiders, the current market can be ignored with limited financial consequence. However, the current market is a crucial input where determining valuation for a near-term transition.
Also, accountants have limited experience interacting with corporate buyers so their understanding of what kind of normalization adjustments are appropriate is not tested in the market. This means that the normalized cash profit an accountant calculates may be significantly lower, or higher than what a corporate buyer would accept in a sale process.
A valuation can help you prepare for a near or medium-term practice sale. Who you choose to complete your valuation will have an impact on the quality of the valuation you receive. You should never use a valuation to form a list price for your practice.