Methods of Veterinary Practice Valuation
From an academic perspective there are two buckets of valuation techniques you can use to value something:
Intrinsic Valuation
Intrinsic valuation uses your accounting statements and projections to calculate expected annual cashflows. Intrinsic valuation, including the Income Method is the work-horse of veterinary practice appraisal
These future cash flows are discounted with a risk adjusted rate to determine present enterprise valuation. This valuation derived from this technique is highly sensitive to the discount rate. The analysis can also be hard to understand for people who do not have a background in finance.
The main weakness, however, is that this valuation technique largely ignores current market factors. While intrinsic valuation might be a nice academic exercise, it will never clearly answer the question most owners are asking – which is: If I sold my practice tomorrow, what would be a good sale price for it?
Market-based Valuation
Market-based valuation in which the valuation of the thing is framed against the observed valuation of other, like, things.
At the core of this technique are valuation multiples, which are widely accepted indicators of relative valuation in veterinary clinic valuation. This technique incorporates the current strength of the veterinary industry market and is relatively easy to understand. To use valuation multiples effectively you need to have access to comparable valuations and the data that under-pin them.
Which valuation technique is better?
Both techniques have flaws. Intrinsic valuation relies on projections while market-based valuation is dependent on the data that under-pins it.
There is an important third flaw that is under-appreciated by practice owners in veterinary services:
Imagine, you are clairvoyant in the sphere of making financial projections for veterinary practices, and you have detailed, accurate transaction information on every veterinary practice sold throughout recorded history. You could produce the finest theoretical intrinsic and market valuations of what that practice should be worth, and what a practice should fetch for a seller in today’s market. These are the best estimates, particularly the latter, of the question “What should I get if I sell my practice today?”
Unfortunately, the estimates would be wrong. The act of selling, or buying a practice has a heavy human element that can have a tremendous impact on final sale price valuation. For the sale of a small business, just as for the sale of a unique art piece, the factors that drive a buyer to pay what she does extend beyond what the numbers say. Valuation to inform a sale, must consider the context of the sale.
If you extend that thinking you end up in a strange place: Your practice is worth simply what the market will pay for it, which you can’t know until you sell it.
Our approach to valuation uses industry standards (i.e. multiples) and industry data, while considering valuation in the context of a sale.
We believe our approach allows us to better estimate the valuation you might receive from a corporate buyer in a sale. However, we would not advise an owner to ask for and settle at the valuation we determine when selling her practice. A potential buyer might be willing to pay much more.