A veterinary practice valuation estimates the economic value of a veterinary business. The valuation can help determine the business’s selling price, and resolve disputes between business partners, or tax purposes.
To make sound decisions when buying or selling a veterinary practice, an appraiser must be familiar with the three main valuation methodologies: discounted cash flow, percentage of sales, and multiple of cash flow.
Discounted Cash Flow
The Discounted cash flow (DCF) valuation method can be used to value veterinary practices and other businesses. To value a veterinary practice using the DCF method, the appraiser must first estimate the practice’s future cash flows. This requires assumptions about the practice’s revenue, expenses, and growth rate. The appraiser then discounts the estimated cash flows at an appropriate rate to arrive at a present value.
Percentage of Sales Method
The percentage of sales method is another common valuation method for small practices, typically with just one veterinarian in-house.
This valuation method provides financial forecasts based on previous and current sales data. Considered a less-complicated method than the multiple of cash flow method, this process studies all business expenses, including inventory and cost of goods.
Multiple of Cash Flow Method
The multiple of cash flow model is based on the premise that a company is worth a certain multiple of its cash flow. The multiple can be derived from comparable companies or the general market. The multiple is then applied to the target company’s cash flow to arrive at an estimated value.
For veterinary practice evaluation, cash flow is defined as earnings before interest, taxes, depreciation, and amortization (EBITDA). EBITDA measures a company’s profitability that strips out the effects of interest, taxes, and other non-operating items. It is important to note that a buyers calculation of EBITDA will be different than a sellers calculation of EBITDA given that each will make their own set of assumptions. A good financial advisor will consider this variability in EBITDA when making valuation recommendations.
Important Things to Know about Veterinary Practice Valuation
A veterinary practice is a business, and like any other business, its value is based on several factors. The most crucial factor is the earning potential of the practice, which can be assessed by looking at the location, the type of practice, the number of veterinarians and support staff, and the mix of services offered.
Another critical factor in practice valuation is the hospital itself. This includes the building, equipment, and inventory. The value of the physical hospital is based on its age, condition, and location.
The intangible assets of a veterinary practice include the goodwill of the practice. Goodwill is the value of the practice’s reputation, its relationships with clients and referral sources, and its standing in the community.
When valuing a veterinary practice, one must consider all these factors. The value of a veterinary practice is not simply the sum of its parts but rather the result of a complex analysis of the many factors that contribute to its overall worth.
Conclusion
Veterinary practice valuation is a process that requires expertise and experience. A veterinary practice appraiser will consider all of these factors and more to determine a veterinary practice’s value. Veterinary practice valuation is a complex process, but you can understand the value of your practice deeper with this.
Need a veterinary practice valuation? Our team at myVETgroup can help you know the value of a practice before buying or selling. We have over 56 years of combined veterinary industry experience as former clinic buyers and owners. Get in touch with us today to learn more!
