How to Value a Veterinary Practice
Determining the value of a veterinary practice is an important step when a veterinarian is considering buying or selling an established practice. The value of a practice is influenced by much more than annual revenue.
Financial performance, cash flow, equipment, inventory, client relationships, staffing, location, real estate, and future growth opportunities can all affect the overall value.
For veterinarians considering veterinary practice financing, understanding the factors that influence valuation can also help when evaluating a potential acquisition.
Revenue Is a Starting Point
Historical revenue provides insight into the size and activity of a veterinary practice.
However, revenue alone does not determine value. Two practices with similar revenue can have very different values because of differences in expenses and profitability.
Profitability Matters
A buyer should review how much revenue remains after operating expenses.
Profitability can provide a clearer picture of the economic performance of the business than gross revenue alone.
Cash Flow Is Important
Cash flow can help show how much money the practice generates through normal operations.
Consistent cash flow can be particularly important when evaluating whether a practice may be able to support acquisition financing.
Review Multiple Years of Financials
A single year may not accurately represent the practice’s performance.
Reviewing several years of financial statements can help identify trends in revenue, expenses, profitability, and client volume.
Client Base
An established veterinary practice may have a substantial base of recurring clients and patients.
The size and stability of that client base can be an important consideration when evaluating the future revenue potential of the practice.
New Client Growth
The number of new clients entering the practice can provide insight into future growth.
Consistent new-client activity may indicate strong demand and opportunities to expand the business.
Service Mix
Veterinary practices can generate revenue from many different services.
These may include wellness care, surgery, dentistry, diagnostics, boarding, emergency services, grooming, and other offerings.
The service mix can affect both revenue and operating expenses.
Equipment and Medical Assets
Equipment can represent a significant portion of a veterinary practice’s assets.
Buyers should evaluate the age, condition, ownership status, maintenance history, and remaining useful life of major equipment.
Inventory
Medications, supplies, food, and other inventory may be included in a transaction.
The buyer should understand what inventory is included and how it is being valued.
Real Estate
Some veterinary practices own the building from which they operate.
Commercial real estate can represent significant value and should generally be evaluated separately from the value of the operating business when appropriate.
Location
The practice’s location can influence client demand, competition, accessibility, operating expenses, and long-term growth.
Population growth and local demographics may also affect the potential market.
Staffing
Experienced veterinarians and support staff can contribute to the continuity of an established practice.
A buyer should review staffing levels, compensation, turnover, and the roles of key employees.
Dependence on the Current Owner
A practice that depends heavily on the selling veterinarian may require additional transition planning.
Buyers should understand how much revenue is generated by the owner and how clients may respond to a change in ownership.
Online Reputation
A practice’s online presence can influence its ability to attract and retain clients.
Reviews, search visibility, website traffic, and other marketing assets may provide additional context when evaluating the business.
Liabilities
Existing loans, equipment financing, leases, contracts, and other obligations should be identified during due diligence.
These obligations can affect the economics of an acquisition and should be understood before determining the overall transaction structure.
Valuation Methods Can Vary
There is no single formula that determines the value of every veterinary practice.
Different valuation approaches may consider earnings, cash flow, assets, comparable transactions, or other financial and business factors.
Purchase Price vs. Practice Value
The final purchase price can differ from an independent valuation.
Negotiations, market conditions, transaction structure, seller financing, and other factors can influence the amount ultimately agreed upon by the buyer and seller.
Get Professional Guidance
Veterinarians may benefit from working with professionals experienced in veterinary practice transactions.
Accountants, attorneys, valuation professionals, and financing specialists can each provide expertise during different parts of the acquisition process.
Final Thought
Valuing a veterinary practice requires an examination of the entire business rather than focusing on revenue alone. Profitability, cash flow, client relationships, services, equipment, inventory, staffing, location, and liabilities can all affect the value of an established practice.
Veterinarians considering an acquisition should complete thorough due diligence and carefully evaluate the financial performance and future prospects of the practice before agreeing to a purchase price.
